IBC as a stratagem to evade liability under PMLA

The Prevention of Money Laundering Act (PMLA), 2002 is a special law meant to ensure that proceeds of crime generated from scheduled offences are taken away from criminals and restored to the State or victims. The Insolvency and Bankruptcy Code (IBC), 2016 operates in an entirely different field, aiming to protect the interests of lenders as well as all other stakeholders including debtors.

On the face of it, there is no inconsistency between the PMLA and IBC and it appears that they operate in entirely different spheres. However, in recent times, it has come to the notice of the Supreme Court, the National Company Law Tribunal (NCLT) as well investigation agencies like the Enforcement Directorate (ED) that the IBC is being used strategically to siphon off proceeds of crime already attached under PMLA.

With the passage of time, criminals have started to manipulate the stakeholders in IBC in such a manner so as to defeat lawful attachments done by the ED under the ambit of PMLA by using the Corporate Insolvency Resolution Process (CIRP). The accused ensure that the resolution professional and the committee of creditors are under his control. The resolution plan is framed in such a way so to give the property to an entity seemingly unconnected to the accused. However, this is done so that the accused can avail the benefit of Section 32-A IBC, which says that the liability of a corporate debtor for an offence committed prior to the commencement of the CIRP shall cease. Through this route, the accused can take the property lawfully attached by the ED out of the clutches of the State.

Each stage of the CIRP is strategically utilised by the accused to avoid the consequences of law and to frustrate statutory proceedings. The primary object of attachment under Section 5 of the PMLA, 2002 is to preserve and protect tainted properties from being transferred, concealed, or alienated during investigation and adjudication. However, insolvency proceedings are often invoked as a mechanism to circumvent such attachment proceedings. From the imposition of moratorium under Section 14 of the IBC to the approval and implementation of the resolution plan, various stages of the CIRP are used to delay, obstruct, or defeat the attachment of properties identified as “proceeds of crime”.

In view of the objectives and scope of both legislations, the Supreme Court and several High Courts have, on multiple occasions, examined and clarified the legal interplay between the IBC and the PMLA, particularly to ensure that the insolvency framework is not misused to defeat PMLA proceedings. Recently, the NCLT, New Delhi Bench, in the matter of Directorate of Enforcement v. Alchemist Limited, set aside an admission order passed in 2021. The Tribunal has also cancelled and terminated the CIRP initiated against Alchemist Limited and withdrew the moratorium imposed under Section 14 of the IBC. Further, the appointment of the resolution professional and all actions taken pursuant thereto have been declared null and void. Moreover, the NCLT observed that the CIRP was vitiated by fraud, collusion and malicious intent.

Taking advantage of the moratorium under IBC, accused corporate debtors often argue that proceedings initiated by the ED should also remain suspended during the insolvency process. In several cases, funds are allegedly diverted through related parties, shell companies, or promoter-controlled entities before initiation of CIRP. Once the ED commences attachment proceedings, insolvency proceedings are strategically triggered with the contention that the attached assets are necessary for maintaining the corporate debtor as a “going concern.” The objective of such actions is to secure release of attached properties and weaken the effect of proceedings under the PMLA. However, judicial authorities, including the High Courts and the National Company Law Appellate Tribunal (NCLAT) in Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement and Nitin Jain Liquidator PSL Ltd. v. Enforcement Directorate, have clarified that proceedings under the PMLA are penal in nature and operate independently from insolvency proceedings under the IBC. It has been consistently held that the moratorium under Section 14 cannot ordinarily be used as a shield against attachment or seizure of proceeds of crime.

In certain cases, insolvency proceedings are initiated through “friendly” operational or financial creditors, including shell companies associated with the promoters themselves. Applications under Sections 7 or 10 of the IBC are filed not with the bona fide objective of insolvency resolution, but to create a legal barrier against enforcement proceedings and statutory attachments. The moratorium, intended as a temporary ‘calm period’ for preservation of assets, is thereby converted into a tactical device to obstruct investigations and delay recovery actions. The Supreme Court, in proceedings concerning JSW Steel and Bhushan Power & Steel Limited, strongly deprecated the misuse of litigation and interlocutory proceedings to delay the implementation of approved resolution plans and held that such conduct amounts to abuse of the process of law and undermines the objectives and timelines of the IBC.

Although situations may arise where the provisions of the IBC and the PMLA overlap, the ED does not refrain from restoring attached properties to legitimate claimants, as observed in matters involving JSW Steel and Udaipur Entertainment World Private Limited.

The IBC is still an evolving legislation and its interaction with other statutes is inevitable. In resolving such conflicts, higher courts have consistently undertaken a detailed examination of the objectives and intent of the respective legislations and have sought to harmonise their operation without treating one statute as superior to the other. In furtherance of this approach, the Insolvency and Bankruptcy Board of India, through its circular dated November 4, 2025, advised insolvency professionals to approach special courts under Sections 8(7) and 8(8) of the PMLA for restitution of assets attached by the ED. The circular also introduced safeguards requiring disclosure of attached properties and ensuring that restituted assets are not transferred to persons disqualified under Section 32A of the IBC or named in the Enforcement Case Information Report (ECIR).

Mayank Makhija is currently serving as Assistant Legal Advisor at the Enforcement Directorate Headquarters, New Delhi.

Aditi Singh currently serves as a Consultant with the Enforcement Directorate.