The conflict between the Insolvency & Bankruptcy Code, 2016 and The Prevention of Money Laundering Act, 2002 has been a persistent issue in India's legislative landscape for decades, with numerous court rulings, judicial opinions, and academic studies contributing to the integrated application of these laws. The IBC is particularly significant in Indian business law, serving as a critical exception. However, its non-obstante clause continues to spark much debate and controversy.

Since its introduction, the IBC has been in a continuous struggle with other significant central legislations, and one such significant tussle persists with the PMLA. This conflict often centers around the Directorate of Enforcement's attachment to property during the IBC's moratorium period.

In this article, we shall aim to address several pertinent questions on this topic, such as:

• What is the purpose of the IBC and PMLA?
• Does the government act as a creditor when attaching property under the PMLA?
• Does property attachment under the PMLA conflict with the objectives of the IBC?
• What is the impact of Section 32A?
• Is there a final verdict on this legislative conflict?

And many more.

Before diving into the conflict between these two legislations, let's briefly understand the objective and purpose of each law as it will help us to better analyze the conflicts and interactions between the IBC and PMLA.

The IBC was designed to consolidate and amend the laws related to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. Its main aim is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders, including alteration in the order of priority of payment of government dues.

On the other hand, the PMLA aims to prevent money laundering and to provide for the confiscation of property derived from, or involved in, money laundering. The primary goal of PMLA is to combat the menace of money laundering, thus ensuring that the financial system is not misused for illicit activities.

Now that we understand the objectives and purposes of both the IBC and PMLA, at the very first glance, a layman might wonder how there could be any conflict between these two laws, as they seem to address different aspects of business law. The IBC focuses on insolvency resolution and business reorganization, while the PMLA targets the prevention of money laundering and financial crimes. However, only when we delve deeper into the provisions of these legislations, do we find that conflicts do exist, and they quite evidently do.

This conflict between the legislations was first addressed in the matter of Mr. Palaniappan Liquidator of Nathella Sampath Jewelry Pvt. Ltd. Vs. The Joint Director Directorate of Enforcement MA/30(CHE)/2021 In CP/129(IB)/2018 decided on 25-Jan-24 where the Hon'ble NCLT Chennai Bench held that the concept of 'Attachment' made as per Section 5 (1) of the PMLA cannot be a subject matter of proceedings under Section 60(5) of the IBC, in a way making it clear that the Adjudicating Authority under the IBC is not the right 'FORA' to deal with revocation of attachment made under the PMLA. Thereby, making it obvious that a remedy under the PMLA cannot be claimed before the Adjudicating Authority under the IBC.

The conflict between IBC and PMLA arises primarily due to the overlapping powers and objectives of these two legislations.

1. Objective Conflict:
   The IBC aims to provide a time-bound resolution to insolvency and maximize asset value for creditors. In contrast, the PMLA focuses on preventing and penalizing money laundering, which can disrupt the IBC's objective if assets are seized during the insolvency resolution process.
    
2. Moratorium u/s 14 of IBC and Attachment of property by the ED u/s 5 of PMLA:
   The IBC is designed to provide a structured and timely resolution of insolvency, ensuring maximum asset value for creditors through a moratorium period where legal actions against the debtor's assets are suspended. This moratorium is critical for maintaining business operations and achieving an efficient resolution. Conversely, the PMLA empowers the Directorate of Enforcement (ED) to attach properties involved in money laundering, a measure that can be executed even during the IBC's moratorium period.
   
   This creates a direct clash as the attachment of assets under PMLA can disrupt the insolvency resolution process by removing assets from the pool available to creditors. Therefore, this raises the question that when the ED attaches property under the PMLA, it can hinder the distribution of assets under the IBC. This raises the question of whether the government, through the ED, becomes a creditor and how it affects the priority of claims in the insolvency process. The conflict intensifies when assets are financed by lenders, and PMLA authorities aim to seize them based on alleged offenses committed by the owner, falling under the purview of PMLA-listed offenses.
    
3. Jurisdiction and Authority:
   There is ambiguity over which authority has the jurisdiction to adjudicate disputes arising from the conflict. The IBC promotes resolution through the Hon'ble NCLT, while PMLA matters are handled by designated PMLA courts.
    
4. Role of Resolution Professional and Enforcement Directorate:
   The role of the RP and ED intersect in scenarios where assets involved in insolvency are also under investigation for money laundering, necessitating judicial intervention to resolve conflicts and ensure both legislative objectives are met.
   
   The RP upon appointment takes over the management of the debtor's affairs, business, and assets. The RP invites, receives, and assesses resolution plans from prospective applicants ensures compliance with all legal requirements, and regularly reports to the Hon'ble NCLT. Once a resolution plan is approved by the CoC and the Hon'ble NCLT, the RP oversees its implementation.
   
   The ED is responsible for investigating cases related to money laundering and has the authority to provisionally attach properties suspected to be involved in money laundering activities. The ED is tasked with tracing and recovering proceeds of crime derived from money laundering activities.
   
   Effective coordination between the RP and the ED is essential to ensure that the insolvency resolution process is not unduly hampered by simultaneous money laundering investigations and asset attachments.
    
5. Section 32A of IBC:
   Section 32A was introduced in December 2019, and protects the CD from further prosecution after a resolution plan is approved giving the entity a clean slate. But the exception to this is that even though the CD is protected from post-resolution actions under other laws it preserves the liability of promoters and directors implicated in PMLA offenses. Hence, this ensures that those involved in financial crimes must face consequences. Various courts have favoured IBC over PMLA. It has been held by Courts that the IBC Moratorium u/s Section 14 doesn't prevent the authorities from exercising their powers under Sections 5 and 8 during a CIRP. The government, under PMLA, is not considered as a creditor who is seeking debt repayment, but the aim is to take away ill-gotten gains.
    
6. Non-obstante clauses:
   Both legislations contain non-obstante clauses u/s 238 of IBC and u/s 71 of PMLA, which state that their provisions will apply despite any inconsistencies with other laws. This creates a direct clash when both laws are invoked simultaneously. Where two statutes contain a non-obstante clause and there is a conflict between their provisions, the year of enactment can be a crucial factor in determining the predominance of the respective statutes.
   
   The Hon'ble Supreme Court, in the case of Solidaire India Ltd. vs. Fair Growth Financial Services Ltd. & Ors.(2001), observed that when two special statutes both contain a non-obstante clause, the statute enacted later in time generally prevails. This is based on the presumption that the legislature was aware of the earlier statute when enacting the subsequent one. However, this principle is not universally applicable, and other factors, including the objectives of the statutes, also play a significant role in resolving conflicts between their provisions. In the context of the conflict between the IBC and the PMLA, this principle alone is insufficient for resolution.
   
   While the IBC was enacted later (2016) compared to the PMLA (2002), the conflict cannot be settled merely by considering the enactment dates as the objectives and purposes of both laws are vital in determining how they interact.

The conflict underscores a fundamental tension between the objectives of preventing financial crimes and ensuring efficient insolvency resolution, necessitating a harmonized approach to balance both legal frameworks effectively. Understanding these conflicts is crucial for anyone navigating the complexities of Indian business law.

The Judicial jurisprudence has also intertwined into this interplay between the IBC and PMLA as it remains a complex legal issue. Under the PMLA, two concurrent processes take place: the Directorate of Enforcement (ED) attaches and seizes property, while the session court prosecutes the accused for criminal offenses. However, several provisions of the IBC conflict with these attachment procedures. This conflict raises a critical legal question i.e., which legislation takes precedence?

The first judicial jurisprudence, take, was that the goals of the two legislations are distinct and the court needs to allow for a reasonable interpretation of the relevant clauses, this was delivered by the Hon'ble High Court of Delhi in the case of Deputy Director Directorate of Enforcement Delhi and Ors. vs. Axis Bank and Ors (2019).

But in the aftermath of this case, there was a pool of cases where the conflict between both the legislations became very evident. This was seen in the cases of Rotomac Global Private Limited v. Deputy Director, Directorate of Enforcement (2019), M/s Bhushan Power and Steel v. Deputy Director, Directorate of Enforcement (2020) where it was held that PMLA constituted criminal actions and that IBC does not apply to it.

The discrepancy between the IBC and the PMLA was eventually resolved through intervention by the Ministry of Corporate Affairs. To address the conflict, Section 32A was inserted into the IBC where it clarified that once a Resolution Plan is approved by the adjudicating authority under the IBC, all attachments, seizures, and other legal actions against the assets of the corporate debtor will cease to have effect. This provision ensures that the assets of the debtor are protected and can be utilized for the resolution process.

The insertion of Section 32A in IBC meant that the ED's attachment of properties under the PMLA would no longer interfere with the insolvency resolution process once the Resolution Plan is approved. This ensures that the assets are available for distribution to creditors as per the approved plan or aid in reviving the Corporate Debtor.

It was believed that this change by the Ministry of Corporate Affairs would provide a clear legal framework that shall support the primary objectives of both the legislations that would promote a smooth and efficient insolvency resolution process while still addressing the concerns of money laundering and financial crimes. But the judicial jurisprudence on this subject was still not in peace.

Basically, this section invented the Clean Slate Theory which means that the successful Resolution Applicant who acquires rights in the CD ought to be able to enjoy the assets free from any obligations and encumbrances. This theory acquired support from various landmark cases like Ghanshyam Mishra and Sons V. Edelweiss Asset Reconstruction Company (2021), JSW Steel Ltd. v. Mahender Kumar Khandelwal (2020), Punjab National Bank V. Deputy Director, Directorate of Enforcement, Regional Office (2019), Syndicate Bank, Jaipur V. The Joint Director Directorate of Enforcement, Jaipur (2019). The cases supported the Corporate Insolvency Process for the benefit of all stakeholders instead of the Attachment Order of ED.

There were two contradicting cases in the same year of 2021 for section 32A where the constitutional validity of Section 32A was upheld by the Hon'ble Supreme Court in Manish Kumar vs. Union of India (2021). It was held that this Section acts like a shield for the CD and its assets as it prohibits actions under any other law which includes PMLA. Whereas in the case of P.Mohanraj & Ors. Vs. Shah Brothers Ispat Private Limited (2021), the Hon'ble Supreme Court held that section 32A does not throw any light on the true interpretation of section 14(1)(a) of IBC as the introduction of section 32A had nothing to do with any moratorium provision. It also held that section 32A is inelegantly drafted.

But the PMLA yet again saw its support from the case of Nitin Jain, Liquidator of PSL Limited Vs. Directorate of Enforcement (2021), where the Hon'ble Delhi HC held that moratorium u/s 14 of IBC cannot come in the way of the statutory authority conferred by PMLA on the enforcement officers for depriving a person of the proceeds of crime. It also held that the objective of PMLA is distinct from other enactments and that there is no inconsistency. Therefore, it rejected the prevalence of IBC or other laws over PMLA.

The case that again brought into light the never-ending scuffle between the two legislations was Rajiv Chakraborty RP of EIEL Vs Directorate of Enforcement (2022) where the Hon'ble Delhi High Court observed that the ED under PMLA is entrusted with the authority to attach a CD's assets perceived to be "proceeds of crime" given that the embargo within the ambit of Section 32A of IBC is not attracted. The purpose of a moratorium is clearly distinct from the purpose and objectives of attachment action taken under the PMLA. The Court in this case firmly rejected any subordination of PMLA to the moratorium under the Code, thereby asserting their distinct purposes.

The Hon'ble HC drew a line for ED and noted that the effect of ending PMLA proceedings only triggers in two cases:

1. When the Resolution Plan is approved; or
2. When the assets of the CD are sold to a person other than the ex-management.

In the recent judgment of Shiv Charan v. Adjudicating Authority (2024), the Hon'ble Bombay High Court has made it clear that once a resolution plan is approved under the IBC, the corporate debtor's assets cannot be attached under the PMLA. The court also determined that, upon the approval of a resolution plan, the Hon'ble NCLT may order the ED to release any properties of the corporate debtor that have been attached.

Therefore, it can be said that the debate has been settled: the PMLA is subservient to the IBC once a resolution plan under the IBC has been approved. This ensures that the insolvency resolution process is not disrupted by conflicting actions under the PMLA, supporting the IBC's goal of orderly and efficient insolvency resolution.

The determination of whether properties attached under PMLA can be protected by the IBC moratorium hinges on judicial interpretation and the specifics of each case. This ongoing legal debate underscores the need for a harmonized approach that accommodates the aims of preventing financial crimes and ensuring efficient insolvency resolution.

The correct way to tread on this narrow path filled with conflicts is through following the principle of harmonious construction and interpretation, which as has been observed lately is the route being taken by the Courts in various recent judgments. The need of the hour is to avoid outright tussle and promote the co-existence of the various statutes that have been enacted for the country's betterment.

Recent trends indicate that the judiciary tends to prioritize the IBC over the PMLA once a resolution plan is approved. The Hon'ble Supreme Court's decision at this point is crucial to provide clarity and ensure fair treatment for shareholders nationwide. Until then, judicial trends suggest that the IBC will take precedence over the PMLA following the approval of a resolution plan by the Hon'ble NCLT.