NATIONAL LAW UNIVERSITY, DELHI

(2023-24)

RESEARCH PROJECT

CIRP and the PMLA action against the Company

(Insolvency and Business Clinic)

UNDER THE ABLE GUIDANCE OF: SUBMITTED BY:

Dr. Risham Garg Kishor Kumar Panchal

Roll No. 47LLB19

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Table of Contents
Abstract.................................................................................................3
Chapter I: Introduction.....................................................................4
Chapter II: Jurisprudential Development.......................................5
Chapter III: Actions Under the PMLA Should not be Initiated or
Continued during the CIRP...............................................................7
Section 14 bars actions against debtor property...........................8
Actions against debtor property are clearly covered under
Section 14.......................................................................................8
Read Section 14 with 32A.............................................................8
Both laws prohibit actions against the debtor's assets during
CIRP..................................................................................................8
Code provisions, the latter legislation, would prevail................9
If section 5 PMLA proceedings are not barred during the
moratorium period under section 14, underlying aims and
policy concerns will be served.........................................................9
Chapter IV: Conclusion...................................................................10
Bibliography......................................................................................10

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 Abstract
The introduction of the Insolvency and Bankruptcy Code, 2016 in India has prompted
inquiries over its interface with numerous pre-existing legislations within the nation. A
notable area of convergence exists between the Insolvency and Bankruptcy Code of 2016 and
the Prevention of Money Laundering Act of 2002. This article explores the issue of whether
attachment proceedings, as authorized by section 5 of the Prevention of Money Laundering
Act, 2002, should be allowed to take place during the ongoing Corporate Insolvency
Resolution Process, particularly when a moratorium, as stipulated in section 14 of the
Insolvency and Bankruptcy Code, 2016, is in force. Moreover, the authors offer an
examination of recent judicial decisions and evolving legal patterns pertaining to this issue.
The argument put forth is that the initiation or continuation of attachment proceedings against
the debtor's assets during the moratorium period, prior to the approval of a resolution plan,
would contradict the legislative intent of both the Insolvency and Bankruptcy Code, 2016 and
the Prevention of Money Laundering Act, 2002, despite the ongoing development of legal
precedents.

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 Chapter I: Introduction
The correlation between criminal and insolvency laws is resulting in an increasing quantity of
legal conflicts within the Corporate Insolvency Resolution Process (CIRP) regulated by the
Insolvency and Bankruptcy Code, 2016 (referred to as the "Code"). In the present
context, litigation might manifest in two primary scenarios: firstly, when the debtor's assets
are subjected to criminal investigations and enforcement measures before to the approval of
the resolution plan by the Adjudicating Authority, and secondly, when such activities
transpire subsequent to the approval of the resolution plan.

Nevertheless, the inclusion of section 32A in the Code in December 2019 has brought about a
clear provision stating that "no actions can be initiated against the assets of the corporate
debtor for any wrongdoing committed prior to the initiation of the corporate insolvency
resolution process of the corporate debtor, as long as these assets are included in a
resolution plan that has been approved by the Adjudicating Authority under section 31,
resulting in a change in control of the corporate debtor." Furthermore, this safeguard also
encompasses specific individuals as specified. Although this provision effectively deals with
the apprehensions surrounding actions taken against assets subsequent to the endorsement of
a resolution plan or during asset sales in litigation, there exists a dearth of lucidity concerning
actions against the assets of the corporate debtor during the Corporate Insolvency
Resolution Process (CIRP) prior to the approval of a resolution plan, or during the
liquidation process preceding asset sales.

The absence of clear communication might lead to the possibility of legal conflicts in relation
to any investigation, including those carried out under the Companies Act, 2013, and general
criminal law. The probability of legal conflicts increases when a government entity has the
power to implement measures against the debtor's assets, as exemplified by actions conducted
under the Prevention of Money Laundering Act, 2002 (PMLA), which may occur
concurrently with the investigation. This matter assumes significant importance in the context
of the Corporate Insolvency Resolution Process (CIRP) or the sale of a corporate debtor or its
business as a going concern during liquidation. In both cases, the primary objective is to
preserve the debtor's assets as a cohesive unit in order to optimize their worth.

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Given the aforementioned context, this scholarly essay examines the permissibility of
commencing attachment procedures pursuant to section 5 of the Prevention of Money
Laundering Act (PMLA) during the continuation of the Corporate Insolvency Resolution
Process (CIRP) and the imposition of a moratorium as stipulated in section 14 of the Code.
Within this particular context, we aim to clarify and evaluate the evolving body of legal
precedents and patterns in the interpretation of laws pertaining to this subject. Despite the
ongoing development of legal precedents, our contention opposes the allowance of initiating
or maintaining attachment proceedings on the debtor's assets, even before the acceptance of a
resolution plan, specifically inside the moratorium period. The aforementioned position, we
argue, contradicts the original purpose of the legislation when the Code and the PMLA are
examined in conjunction.

Chapter II: Jurisprudential Development

After a Corporate Insolvency Resolution Process (CIRP) begins, section 14 of the Code
imposes a moratorium that lasts throughout the CIRP. This moratorium forbids "the
institution of suits or continuation of pending suits or proceedings against the corporate
debtor, including execution of any judgment, decree, or order in any court of law, tribunal,
arbitration panel, or other authority1." However, the Enforcement Directorate has attempted
asset seizures during CIRP. Insolvency experts and debtor creditors argue that the
moratorium should restrict asset attachment during the CIRP to keep the debtor's assets intact
and speed up the process. The Enforcement Directorate argues that the moratorium should
not prevent the attachment of properties under the Prevention of Money Laundering Act
(PMLA), emphasizing the importance of preserving the State's interests in prosecuting
criminal activity, and that debtors should not use the CIRP to evade money laundering
penalties.

The National Company Law Tribunal (NCLT), the National Company Law Appellate
Tribunal (NCLAT), the Adjudicating and Appellate Authorities under the Prevention of
Money Laundering Act (PMLA), and High Courts have debated whether the Corporate
Insolvency Resolution Process (CIRP) moratorium would prevent or allow PMLA asset
attachment proceedings.

1
Section 14(1) (a) of the Code

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SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited 2 required the
NCLT Mumbai to decide whether Sterling SEZ and Infrastructure Ltd.'s property might be
provisionally attached. The NCLT determined that PMLA property attachment proceedings
are civil processes and forbidden under section 14(1)(a) of the Insolvency and Bankruptcy
Code. Notably, the NCLT considered the objectives and economic aspects of both laws and
found that the Code, which unlocks a debtor's assets in a time-bound process, is preferable to
the PMLA's more time-consuming process, which may undermine assets. The Appellate
Authority under the PMLA (PMLAT) ruled similarly in Bank of India v. Deputy Director3,
Enforcement Directorate and Punjab National Bank v. Deputy Director, Directorate of
Enforcement, Raipur4. Since the Code is later, the PMLAT specifically ruled that its
provisions supersede those of the PMLA. The PMLAT further found that PMLA attachment
proceedings are civil processes and forbidden by section 14 of the Code.

However, the NCLAT takes a different approach. In Varrsana Ispat v. Deputy Director,
Enforcement Directorate,5 the NCLAT considered whether the PMLA Adjudicating
Authority can order a provisional attachment from before the moratorium to be confirmed
during the moratorium. The NCLAT said the moratorium would not apply to a "criminal
proceeding or any penal action resulting from the criminal proceeding or any act associated
with criminal essence or criminal proceeds 6." It concluded that section 14 would not prevent
a PMLA provisional attachment order. Thus, the NCLAT approved attachment procedures
throughout the Corporate Insolvency Resolution Process (CIRP), indicating no contradiction.
The NCLAT applied this approach to liquidation in Rotomac Global Private Limited v.
Deputy Director, Directorate of Enforcement. The intriguing thing is that these verdicts
ignore earlier PMLA attachment processes as civil proceedings. However, the NCLAT may
have proceeded because such actions are 'civil proceedings,' but they are related with
'proceeds of crimes.'

The Delhi High Court addressed this problem in The Deputy Director of Directorate of
Enforcement, Delhi v. Axis Bank & Ors 7. The Enforcement Directorate and creditors-initiated
attachment and debt recovery proceedings under the Recovery of Debts and Bankruptcy Act,

2
5 A. 1280/2080 in C.P. 405/2018 (NCLT Mumbai), decision dated 12-02-2019
3
FPA-PMLA-2173 & 2155/MUM/2018, decision dated 31-10-2018
4
FPA-PMLA-596/LKW/2014, decision dated 19-07-2018
5
Company Appeal (AT) (Insolvency) No. 493 of 2018, decision dated 2-05-2019
6
FPVarrsana Ispat v. Deputy Director, Enforcement Directorate, Company Appeal (AT) (Insolvency) No. 493
of 2018, decision dated 2-05-2019, Para 8
7
(2019) 259 DLT500

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1993 (RDB Act) or the Securitisation and Asset Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act) and insolvency proceedings
under the Code against specific properties and debtors, respectively.

When studying case law, we see three methods. The National Company Law Tribunal
(NCLT) and the Prevention of Money Laundering Appellate Tribunal (PMLAT) support the
first approach, which states that Section 14 of the Insolvency and Bankruptcy Code (the
Code) prohibits PMLA attachment proceedings and takes precedence. The second
perspective, taken by the National Company Law Appellate Tribunal (NCLAT), is that the
Code's moratorium does not apply to criminal proceedings, resulting in no conflict, and
PMLA attachment processes are unaffected. The Delhi High Court's third approach
emphasizes a harmonious reading of both laws. The Corporate Insolvency Resolution Process
(CIRP) allows PMLA attachment actions, but third parties' lawful rights must be protected.
PMLA attachment actions can continue throughout CIRP, albeit the law is still evolving.

Chapter III: Actions Under the PMLA Should not be Initiated or

Continued during the CIRP
In this section researcher will present a persuasive argument against the initiation or
continuation of attachment proceedings under the Prevention of Money Laundering Act
(PMLA). The prevailing nature of the Code's provisions over those of the PMLA, coupled
with the unequivocal restriction outlined in section 14, effectively prohibits any proceedings
against the debtor's property.

Section 14 bars actions against debtor property

Start with the second argument: Section 14 of the Code forbids all 'legal processes' against
the corporate debtor, including attachment proceedings. We also contend that this is clear by
reading section 14 and the Code as a whole.

Actions against debtor property are clearly covered under Section 14

Section 14 prohibits actions against corporate debtors. Despite its wide language, the NCLAT
has ruled that section 14 does not include crimes or crimes-like activities. Thus, it would not
cover debtor property attachment8.

8
Gunwant Lal Godawat v. Union of India and Anr., (2018) 12 SCC 309; The Deputy Director of Directorate of
Enforcement, Delhi v. Axis Bank & Ors.,259(2019)DLT500

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Considering the proceeding's goal, this NCLAT interpretation doesn't consider that actions 13
against assets must be civil. Attachment proceedings under PMLA are civil because they
impair civil rights and are permitted by the executive, whose confirmation is left to a quasi-
judicial authority, not the criminal court. This undercuts the NCLAT's decision. However,
even if this is not the case, the NCLAT interpretation contradicts section 14's stated phrasing,
which doesn't prevent criminal processes that result in asset forfeiture, and the moratorium's
aim.

Read Section 14 with 32A

Since Section 32A was passed, provided certain circumstances are followed, a corporate
debtor cannot be prosecuted for any offense or have their property taken.

Because CIRP corporations were prosecuted for pre-CIRP offenses, Section 32A was created.
The issue was that prosecuting the company or its assets could affect other parties who had
saved or bought the company in good faith. Long prosecution or asset actions may make
company rescue or sale impossible. This would hurt employees and creditors. This is
concerning because many companies undergoing CIRP stress bank balance sheets, and the
Code was intended to provide a time-bound resolution process.

Both laws prohibit actions against the debtor's assets during CIRP
Section 14 cannot be read to allow the continuation of actions against assets through
legislations like the PMLA, as discussed above, and the PMLA does not make an explicit
exception for the moratorium under the Code, so a conflict must be resolved.

Code provisions, the latter legislation, would prevail

Both the Code and PMLA are special laws with overriding provisions. The Supreme Court
has established that when a law is enacted, the Legislature is deemed to be aware of all
previous laws. As stated in multiple decisions, the judiciary may determine such a
contradiction based on the policy underpinning the enactments, the language employed, the
intended goal, or mischief sought to be repaired. Courts usually value later enactments above
earlier ones. Since the Code is the latter statute, the legislative goal was to supersede the
PMLA. If it weren't the case, the Code would have allowed it to coexist with it. Thus, if the
legislature intended for the PMLA and Code to operate simultaneously, the Code would have
incorporated special provisions recognizing the PMLA's continuous applicability. Quite the
contrary9.
9
KSL & Industries v. Arihant Threads Ltd. & Ors., (2008)9SCC763

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If section 5 PMLA proceedings are not barred during the moratorium
period under section 14, underlying aims and policy concerns will be
served.
The Code moratorium should be given weight based on the goals of both laws. Provisional
attachment under the PMLA protects property while money-laundering is adjudicated. This
goal is achieved under the Code because regulated insolvency professionals protect the
corporate debtor's property10.

The PMLA also recognizes legitimate third-party property rights. Third parties may claim
that they have a legitimate interest in the property and that the temporary attachment 22
should not be approved by the Adjudicating Authority under the PMLA provided they meet
specific criteria. Thus, the PMLA recognizes third-party rights11.

Preventing actions against firm assets during the moratorium permits the CIRP to continue
undisturbed. As noted in SREI Infrastructure Finance Limited v. Sterling SEZ and
Infrastructure Limited12, the CIRP's efficient and effective conduct recognizes creditors'
legitimate interest in the company's property and provides a more efficient mechanism for
money-laundering victims to receive restitution.

While the CIRP prohibits proceedings against the debtor's assets, the State and other money-
laundering criminal victims can still prosecute crimes. The moratorium doesn't preclude
authorities from taking action against third parties' assets, including those accountable for the
corporate debtor at the time of the alleged infraction during the CIRP. Thus, these assets can
compensate money laundering victims. The embargo is temporary as long as the prior
management, which may have committed money laundering, isn't in charge. Section 32A
doesn't apply if the CIRP ends proceedings and the previous corporate debtor management
takes control. Authorities may seize the business debtor's assets and prosecute them. Thus,
the State's right to prosecute offenses is protected.

The researcher argues that the moratorium under section 14 of the Code bars acts under
section 5 of the PMLA.

10
Kavitha Pillai v. Joint Director, 2017 SCCOnline Ker 10118
11
Punjab National Bank v. The Deputy Director Directorate of Enforcement, FPA-PMLA596/LKW/2014,
decision dated 19-07-2018
12
SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited, M.A. 1280/2080 in C.P.
405/2018 (NCLT Mumbai), decision dated- 12.02.2019

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 Chapter IV: Conclusion
After conducting an analysis of the Code, it becomes apparent that Section 14 of the Code
has been formulated with the intention of prohibiting coercive measures targeting the assets
of the corporate debtor, as well as any activities that may result in the initiation of judicial
processes with contradictory outcomes. This pertains to the execution of measures targeting
assets as stipulated by legislation such as the Prevention of Money Laundering Act (PMLA).
Although a disagreement exists between the requirements of the Code and the PMLA, it is
worth noting that the Code is a comparatively newer and more specialized legislation. In
addition, the moratorium implemented by the Code serves to secure the assets of the debtor,
uphold the lawful rights of third parties possessing attachable assets under the Prevention of
Money Laundering Act (PMLA), and also takes into account the protection of those who
have fallen victim to money laundering offenses. Concurrently, it guarantees the preservation
of the state's interests in the pursuit of criminal prosecutions, even in cases when limitations
are imposed on measures targeting the debtor's assets. Based on the aforementioned factors, it
becomes apparent that the provisions of the Code hold primacy, and the moratorium
stipulated in Section 14 of the Code prohibits the commencement or continuation of such
procedures throughout the Corporate Insolvency Resolution Process (CIRP).

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 Bibliography
Relevant Legislations and Statutes

 Prevention of Money Laundering Act, 2002

 Insolvency and Bankruptcy Code, 2016

Journal Articles

 Misha & Shreya Prakash “PMLA Actions against Company Property during the CIRP” Journal of
Corporate Affairs, Volume 1, Issue 1

Case Laws

 5 A. 1280/2080 in C.P. 405/2018 (NCLT Mumbai), decision dated 12-02-2019

 FPA-PMLA-2173 & 2155/MUM/2018, decision dated 31-10-2018
 FPA-PMLA-596/LKW/2014, decision dated 19-07-2018
 Company Appeal (AT) (Insolvency) No. 493 of 2018, decision dated 2-05-2019
 FPVarrsana Ispat v. Deputy Director, Enforcement Directorate, Company Appeal (AT) (Insolvency)
No. 493 of 2018, decision dated 2-05-2019, Para 8
 2019) 259 DLT500
 Gunwant Lal Godawat v. Union of India and Anr., (2018) 12 SCC 309; The Deputy Director of
Directorate of Enforcement, Delhi v. Axis Bank & Ors.,259(2019) DLT500
 KSL & Industries v. Arihant Threads Ltd. & Ors., (2008)9SCC763
 Kavitha Pillai v. Joint Director, 2017 SCCOnline Ker 10118
 Punjab National Bank v. The Deputy Director Directorate of Enforcement, FPA-PMLA596/LKW/2014,
decision dated 19-07-2018
 SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited, M.A. 1280/2080 in
C.P. 405/2018 (NCLT Mumbai), decision dated- 12.02.2019

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