2025 (7) TMI 707 - AT - IBC

Refusal of the Adjudicating Authority to direct the Directorate of Enforcement (ED) to release the provisionally attached assets of the Corporate Debtor - conflict between Insolvency Bankruptcy Code 2016 and the Prevention of Money Laundering Act 2002 - violation of moratorium by provisional attachment or not - Section 238 of IBC overrides the PMLA in case of inconsistency particularly in the context of resolution processes involving tainted assets or not - jurisdiction of NCLT/NCLAT to issue directions affecting attachment orders passed under the PMLA - doctrine of harmonious construction. Whether the provisional attachment of assets by the Directorate of Enforcement (ED) under the PMLA violates the moratorium imposed under Section 14 of the IBC? - HELD THAT - Section 14(1)(a) of the Insolvency and Bankruptcy Code 2016 provides that upon the commencement of CIRP there shall be a moratorium prohibiting inter alia the institution or continuation of suits or proceedings against the corporate debtor including execution of any judgment or order. The object of the moratorium is to maintain the status quo of the debtor s assets protect the value of the debtor s estate and ensure that Corporate Insolvency Resolution Process can take place without disruption by individual enforcement actions. In the present case while the PAO was passed a few days after CIRP admission the ECIR investigation commenced as far back as 2013. The ED s proceedings were therefore rooted in pre-existing criminal investigation processes and the assets involved were allegedly acquired as proceeds of money laundering taking them outside the regular asset pool as contemplated under IBC. The issuance of the PAO dated 26.12.2017 by ED under the PMLA does not violate the moratorium under Section 14 of the IBC - the issue is answeredin negative. Whether the IBC by virtue of Section 238 overrides the PMLA in case of inconsistency particularly in the context of resolution processes involving tainted assets? - HELD THAT - A conflict may arise when the ED attaches an asset during CIRP rendering it unavailable for resolution. The Appellant contends that such action frustrates the Code s purpose of value maximization. While it is true that the IBC thrives on a free unencumbered asset base to attract resolution applicants. If prime assets are rendered unusable due to attachment the likelihood of resolution reduces. That however is not a sufficient ground to invalidate another statute s valid operation especially when it relates to proceeds of crime - Courts have consistently held that tainted assets are not protected under commercial laws. In Gautam Kundu v. ED 2015 (12) TMI 1133 - SUPREME COURT the Hon ble Supreme Court emphasized the importance of preserving penal provisions in the face of competing laws. Hon ble court observed that Where money laundering is involved courts must be cautious not to allow commercial or procedural mechanisms to defeat the legislative intent of penal enforcement. In the present case the PAO was issued on 26.12.2017 and confirmed on 11.06.2018. The resolution plan was approved only in 2019. This makes Section 32A inapplicable in the present case as the property was already under valid legal attachment before the statutory conditions under Section 32A were met. The doctrine of harmonious construction mandates that both statutes must be read in a manner where they complement each other not destroy each other. Secondly if two special laws operate in different fields neither shall override the other unless they are irreconcilably inconsistent - the IBC cannot be said to override the PMLA merely because the ED s attachment interferes with the CIRP. The ED does not act as a creditor but as a public enforcement agency. The attached assets are not to satisfy creditors but to uphold penal objectives and international obligations under FATF and UN Conventions - the issue is answered in negative. Whether the NCLT/NCLAT have jurisdiction to interfere with confirmed attachments under the PMLA? - HELD THAT - It is absolutely clear from the above Judgement of the Hon ble SC that NCLAT lacks jurisdiction to interfere with the PAO which has been subsequently confirmed by the Adjudicating Authority under the PMLA. The Judgement of Hon ble SC in Kalyani Transco 2025 (5) TMI 268 - SUPREME COURT has settled the law in this regard - the issue is answered in negative. Appeal dismissed.

Summary

The core legal questions considered by the Tribunal are as follows:

(i) Whether the provisional attachment of assets by the Directorate of Enforcement (ED) under the Prevention of Money Laundering Act, 2002 (PMLA) violates the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC);

(ii) Whether the IBC, by virtue of its non-obstante clause under Section 238, overrides the PMLA in case of any inconsistency, particularly concerning resolution processes involving assets alleged to be proceeds of crime;

(iii) Whether the National Company Law Tribunal (NCLT) or National Company Law Appellate Tribunal (NCLAT) possess jurisdiction to interfere with or issue directions affecting attachment orders passed and confirmed under the PMLA.

Issue I: Whether the provisional attachment of assets by the ED under the PMLA violates the moratorium under Section 14 of the IBC

The legal framework centers on Section 14(1)(a) of the IBC, which mandates a moratorium upon commencement of the Corporate Insolvency Resolution Process (CIRP), prohibiting institution or continuation of suits or proceedings against the corporate debtor, including execution of any judgment or order. The moratorium aims to preserve the debtor's assets intact during CIRP to maximize value and facilitate resolution without disruption.

The Appellant, acting as Resolution Professional (RP), argued that the Provisional Attachment Order (PAO) issued by the ED on 26.12.2017-four days after CIRP commenced-constitutes a proceeding prohibited by the moratorium. The attachment of assets allegedly impairs the CIRP by locking assets essential for resolution, thus violating the moratorium.

The Respondent contended that PMLA proceedings are criminal law enforcement actions, distinct from civil or recovery proceedings contemplated under Section 14. The attached assets are alleged proceeds of crime, subject to penal adjudication and confiscation, and thus are not part of the commercial assets protected by the moratorium.

The Tribunal examined the timeline: CIRP commenced on 22.12.2017; PAO was issued on 26.12.2017; confirmation of attachment occurred on 11.06.2018. Although the attachment followed CIRP initiation, the underlying investigation and ECIR dated back to 2013, evidencing a pre-existing criminal inquiry.

Precedents such as the Supreme Court's ruling in Alchemist ARC v. Hotel Gaudavan Pvt. Ltd. established that the moratorium covers all legal proceedings but primarily addressed civil recovery suits. The Embassy Property Developments v. State of Karnataka decision clarified that NCLT lacks jurisdiction over public law or criminal law matters outside the IBC's scope. The Tribunal also relied on its own earlier ruling in Varrsana Ispat Ltd. v. ED, which held that confirmed PMLA attachments based on prior investigations are not subject to IBC interference.

The Tribunal concluded that Section 14's moratorium is intended to preserve lawful, unencumbered assets for resolution, but does not extend to assets identified as proceeds of crime under a penal statute. The PMLA's independent adjudicatory mechanism governs such assets. Therefore, the provisional attachment by the ED does not violate the moratorium under Section 14.

Issue II: Whether the IBC overrides the PMLA under Section 238 in case of inconsistency, especially regarding tainted assets

Section 238 of the IBC contains a non-obstante clause granting the Code overriding effect over inconsistent laws. The Appellant argued that since IBC is a later enactment with a non-obstante clause, it must prevail over the PMLA where provisions conflict, particularly to ensure the effectiveness of the insolvency resolution process.

The Respondent countered that the PMLA and IBC operate in distinct legislative domains: the PMLA is a penal statute aimed at tracing and confiscating proceeds of crime, while the IBC is a commercial statute focused on insolvency resolution. Assets alleged to be proceeds of crime are not legitimate corporate assets and thus do not fall within the resolution estate under IBC.

The Tribunal analyzed the nature and objectives of both statutes. The PMLA provides a self-contained code for investigation, attachment, adjudication, and confiscation of tainted assets, serving public and international interests in combating money laundering. The IBC facilitates time-bound revival of financially distressed companies by maximizing asset value for creditors.

Case law such as Deputy Director, ED v. Axis Bank (Delhi High Court) and Gautam Kundu v. ED (Supreme Court) supports the view that tainted assets are excluded from the insolvency resolution process and that penal statutes must be given due effect despite overlapping commercial laws.

The Tribunal noted that Section 32A of the IBC, introduced in 2020, grants immunity from prosecution and attachment post-approval of a resolution plan and transfer of management to unrelated parties. However, this provision is prospective and conditional. Since the attachment in this case occurred before approval of the resolution plan, Section 32A does not apply.

Applying the doctrine of harmonious construction, the Tribunal held that the IBC and PMLA operate in different spheres and no irreconcilable inconsistency exists. Section 238 does not override the PMLA where the latter deals with penal enforcement of proceeds of crime. Valid and confirmed PMLA attachments cannot be set aside merely because CIRP is ongoing.

Issue III: Jurisdiction of NCLT/NCLAT to interfere with confirmed attachments under the PMLA

The Appellant contended that the application under Section 60(5) of the IBC seeking release of attached assets was a legitimate step to ensure successful CIRP and did not amount to forum shopping. The Respondent relied on Supreme Court authority in Embassy Property Developments, which held that NCLT lacks jurisdiction over public law or criminal matters outside the IBC's scope, and that special statutory forums must be approached for such matters.

The Tribunal examined the Supreme Court's recent ruling in Kalyani Transco v. Bhusan Power and Steel Ltd., which explicitly held that NCLAT does not possess judicial review powers over decisions of statutory authorities under the PMLA. The judgment clarified that NCLT and NCLAT's jurisdiction is circumscribed under the Companies Act and IBC, and they cannot interfere with public law decisions such as attachment orders under the PMLA. The proper remedy lies before the PMLA Appellate Tribunal under Section 26 of the PMLA.

The Tribunal observed that the PAO in the present case was confirmed by the PMLA Adjudicating Authority, conferring finality on the attachment. The Appellant's failure to challenge the confirmation before the PMLA appellate forum precludes interference by NCLT/NCLAT. The Supreme Court's ruling renders the NCLAT's prior interference in such matters as without jurisdiction (coram non judice).

Accordingly, the Tribunal held that NCLT/NCLAT lack jurisdiction to entertain challenges to confirmed attachment orders under the PMLA.

Significant Holdings:

"The issuance of the Provisional Attachment Order dated 26.12.2017 by the Directorate of Enforcement under the PMLA does not violate the moratorium under Section 14 of the Insolvency and Bankruptcy Code."

"The PMLA and the IBC operate in distinct legislative spheres, with no irreconcilable inconsistency. Section 238 of the IBC does not override the PMLA in proceedings involving proceeds of crime."

"The National Company Law Tribunal and the National Company Law Appellate Tribunal do not have jurisdiction to interfere with attachment orders passed and confirmed under the PMLA. The appropriate forum for such challenges is the Adjudicating Authority and Appellate Tribunal constituted under the PMLA."

"Section 32A of the IBC, which grants immunity from prosecution and attachment post-approval of a resolution plan, is prospective and conditional, and does not apply retrospectively to attachments made prior to approval."

"The moratorium under Section 14 of the IBC is intended to preserve lawful assets for resolution and does not extend to assets identified as proceeds of crime under a penal statute."

In conclusion, the Tribunal dismissed the appeal, affirming the validity of the ED's provisional attachment under the PMLA, the non-applicability of the moratorium to such attachment, the non-overriding nature of the IBC over the PMLA in this context, and the lack of jurisdiction of NCLT/NCLAT to interfere with confirmed attachment orders under the PMLA.