Do Sections 32A and 60(5) of IBC Override PMLA
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In cases where insolvency proceedings intersect with enforcement actions, IBC override PMLA becomes a critical principle. The Insolvency and Bankruptcy Code, 2016 (IBC) is a comprehensive legislation enacted by the Government of India to consolidate and amend laws relating to the insolvency and bankruptcy resolution of corporate persons, partnership firms, and individuals in a time-bound manner. In certain insolvency cases, the Prevention of Money Laundering Act, 2002 (PMLA) also comes into play, leading to jurisdictional conflicts. This conflict typically arises when the Enforcement Directorate (ED) attaches the assets of a corporate debtor under the PMLA for alleged offences committed prior to the commencement of the Corporate Insolvency Resolution Process (CIRP), potentially obstructing the effective implementation of a resolution plan. To address this, Section 32A of the IBC provides statutory immunity to the corporate debtor and mandates the release of attached assets upon approval of a resolution plan, while Section 60(5) empowers the National Company Law Tribunal (NCLT) to adjudicate all matters arising out of or in relation to the CIRP, including issuing directions to the ED for the release of attached properties. Together, these provisions reinforce the primacy of the IBC framework and ensure that insolvency resolution is not frustrated by parallel proceedings under the PMLA.
Section 32A of IBC – Immunity to the Corporate Debtor
Section 32A of the IBC was inserted by the IBC (Amendment) Act, 2020. This provision grants immunity to the corporate debtor and its property from criminal liability for offences committed prior to the commencement of the CIRP upon approval of a resolution plan by the NCLT or the conclusion of a liquidation sale. This immunity extends to actions such as attachment, seizure, retention, or confiscation of the corporate debtor’s property related to such offences. However, this protection does not extend to persons in default – those who were in charge of the affairs of the corporate debtor or directly involved in the commission of the offence – as they continue to bear criminal liability, while the new management and the corporate debtor itself are shielded. Its key objective is to give a “clean slate” to resolution applicants and prevent fear of prosecution post-resolution.
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Section 60(5) of IBC – Jurisdiction of NCLT
Section 60(5) of the IBC grants the NCLT exclusive jurisdiction to decide any question of law or fact arising out of or in relation to the insolvency or liquidation proceedings of a corporate debtor or corporate person, including claims by or against its Indian subsidiaries. The jurisdiction is established by a non-obstante clause, which means it overrides any other law for the time being in force, thereby creating an overriding authority for the NCLT in all insolvency-related matters. However, this broad residuary jurisdiction is limited to disputes that genuinely arise from or relate to the insolvency process, and the NCLT cannot usurp the legitimate jurisdiction of other courts or tribunals for matters that are dehors of the insolvency proceedings. Further, section 238 of the IBC confirms that the IBC overrides other laws in case of inconsistency.
Conflict with of the IBC with PMLA
The PMLA allows the ED to attach property derived from proceeds of crime, a power distinct from debt enforcement under the IBC. During the insolvency or liquidation process, such attachments can obstruct resolution plans and the distribution of assets to creditors. The key question that arises is whether PMLA proceedings can continue once the IBC resolution is underway. The Appellate Tribunal (under the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976) in the State Bank of India v. The Enforcement Directorate ruled that the IBC moratorium under section 14 does not bar PMLA attachment, affirming ED’s independent authority during CIRP. However, immunity under section 32A of the IBC, which protects assets from PMLA actions, only applies after a resolution plan is approved by the adjudicating authority, not during the CIRP.
Judicial Precedents
The Supreme Court in Manish Kumar v. Union of India upheld constitutional validity of Section 32A, affirming its role in providing protection to the corporate debtor and its assets after the approval of a resolution plan. This protection ensures a “clean slate” for the corporate debtor, enabling economic revival by shielding it from past liabilities, while preserving accountability for individuals responsible for prior offences. The National Company Law Appellate Tribunal (NCLAT) in Varrsana Ispat Ltd. v. Deputy Director, Directorate of Enforcement held that attachments under the PMLA, relating to proceeds of crime, are not subject to the moratorium under section 14 of the IBC and thus do not override IBC proceedings. The Tribunal emphasized that the PMLA and the IBC are distinct legal frameworks operating in different domains, and the PMLA’s attachment of assets prior to the initiation of the CIPR renders section 14 inapplicable. The NCLAT clarified that once a resolution plan is approved under the IBC, the ED cannot attach the assets of the corporate debtor, as section 32A of the IBC provides immunity from prosecution and attachment for the corporate debtor and its assets. This ruling was later set aside by the Supreme Court, which held that the NCLAT lacked jurisdiction to interfere with ED’s asset attachment under PMLA, as such matters fall under the purview of PMLA courts, not insolvency tribunals.
Hence, the NCLAT and the Supreme Court have consistently reaffirmed that section 32A of the IBC, introduced by the 2020 Amendment, grants immunity to the corporate debtor and its assets from liabilities arising from offences committed prior to or during CIRP, provided the resolution plan results in a change of management. However, this protection does not extend to individuals who were in charge of the corporate debtor’s affairs or involved in the commission of the offence, who remain personally liable under relevant laws, including PMLA.
Practical Implications
- For Resolution Applicants: A resolution applicant is assured of acquiring a company free from past liabilities, as the approved resolution plan extinguishes all pre-existing claims against the corporate debtor, and the successful applicant steps into the corporate debtor’s shoes with a fresh slate.
- For Creditors: Assets are safeguarded from being permanently locked under PMLA, ensuring they remain available for distribution under the IBC’s waterfall mechanism, as confirmed by the ED’s recent protocol for handling tainted assets of bankrupt businesses.
- For Enforcement Agencies: Enforcement Agencies can continue action against promoters and directors for their past liabilities, including criminal prosecution, but not against the corporate debtor or its assets post-resolution.
Conclusion : IBC Override PMLA
Sections 32A of the IBC provides a “clean slate” for corporate debtors post-resolution, shielding them from prosecution for pre-CIRP offences, thereby encouraging investment and facilitating revival without legacy risks. This provision, upheld as constitutional in Manish Kumar v. Union of India, ensures that new management is not burdened by past misconduct. Section 60(5) reinforces this primacy by ousting the jurisdiction of PMLA adjudicating authorities, affirming the NCLT’s authority over insolvency matters. Together, these sections establish that the IBC’s objectives of resolution and asset preservation take precedence over conflicting provisions in laws like the PMLA, ensuring a structured path for corporate revival. Judicial precedents and the 2020 Amendment strikes a balance between insolvency resolution and accountability for financial crimes.
FAQ Section
Q1. What protection does Section 32A of IBC provide?
Section 32A provides immunity to a corporate debtor and its assets from prosecution and asset management for pre-insolvency offences, and protects the property from actions like seizure or confiscation, provided a resolution plan results in a change of management or control to a person not involved in the prior offences.
Q2. Can PMLA override IBC proceedings?
Yes, PMLA proceedings can override IBC proceedings when assets are attached under PMLA as “proceeds of crime”.
Q3. Does Section 60(5) allow NCLT to decide PMLA disputes?
No, section 60(5) of the IBC does not empower the NCLT to decide disputes arising from actions taken by the ED under the PMLA, as such matters fall within the realm of public law and are beyond the NCLT’s jurisdiction.
Q4. Why was Section 32A of IBC introduced?
Section 32A was introduced to protect new owners and investors from being held liable for the past illegal actions of a company’s previous management after a successful resolution plan is approved, thereby encouraging investment in struggling companies.
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