IBC vs PMLA: Key points, significance and impact of the historic NCLAT verdict

Why in the news ?

• Recently, the National Company Law Appellate Tribunal (NCLAT) delivered a significant and historic ruling. The court made it clear that if a company has amassed wealth through crime or fraud, it cannot be protected under the Insolvency and Bankruptcy Code (IBC).
• The tribunal stated in very strong terms, "Parliament has not made the IBC a 'holy Ganges' in which a company's criminal acts can be washed away and forgiven."

What is the matter ?

• This entire case involves a company called Siddhi Vinayak Logistics Limited:
• The company's owners (promoters) are accused of fraud, defrauding banks, and misappropriating funds worth approximately ₹1,600 crore
•  In 2017, the Enforcement Directorate (ED) took action and temporarily attached the company's assets under the Prevention of Money Laundering Act (PMLA).
• Shortly thereafter, the company became bankrupt and a moratorium was imposed on it under the IBC.

What is a 'moratorium' ?

• When a company is on the verge of bankruptcy, the court grants it a moratorium (relief period) for a period of time.
• During this period, no new cases can be filed against the company.
• Banks or creditors cannot sell the company's assets to recover their dues.
• Its purpose is to give the company a chance to get back on its feet.

Where did the conflict occur ?

• The liquidator overseeing the company's bankruptcy proceedings argued in court that the Enforcement Directorate (ED) cannot seize or confiscate the company's assets while the moratorium is in effect, as this would result in loss of funds for the banks.

Why the conflict between the two laws (IBC and PMLA) ?

• The objectives of both the laws are completely different from each other :

• When a property is acquired from fraudulent proceeds and the company goes bankrupt, then both the laws come face to face.

What did the NCLAT say in its decision ?

Clearing this conflict once and for all, the NCLAT made the following key points :

• Moratorium only on 'honest' assets: The Insolvency and Bankruptcy Code (IBC) moratorium only protects a company's legal and legitimate assets. It has no jurisdiction over assets earned through fraud or crime.
• National interest paramount: Even if banks or creditors receive a little less money in the insolvency process, the country's national interest against money laundering cannot be compromised.
• ED's action justified: The insolvency process cannot be used as a shield to prevent the ED from seizing scam assets.

Can bankruptcy courts (NCLT/NCLAT) stop ED action ?

• No. NCLAT clarified that bankruptcy courts (NCLT or NCLAT) have no authority to investigate whether ED's attachment is correct or incorrect.
• If anyone has a complaint about ED's action, they will have to approach the PMLA Special Court.

Can bankruptcy courts (NCLT/NCLAT) stop ED action ?

• No. NCLAT clarified that bankruptcy courts (NCLT or NCLAT) have no authority to investigate whether ED's attachment is correct or incorrect.
• If anyone has a complaint about ED's action, they will have to approach the PMLA Special Court.

Conclusion

This NCLAT decision is a major step towards cleaning up India's economic system. The message is clear: incurring business losses (for which the IBC exists) is one thing, but committing crimes and fraud (for which the PMLA exists) is quite another.

FAQ: IBC vs PMLA - Important questions related to the historic NCLAT decision