Govt plans changes to bankruptcy code to resolve clashes with money-laundering law

Mint

11 hours ago

The Indian government is preparing amendments to the Insolvency and Bankruptcy Code (IBC) to streamline its interplay with the Prevention of Money Laundering Act (PMLA) after asset attachments by the Enforcement Directorate (ED) highlighted conflicts between the statutes, two people informed about discussions in the government said.
Close to a dozen court orders with conflicting interpretations of the immunity from prosecution and asset protection granted under IBC to an unrelated new management of the bankrupt company necessitated these legislative amendments, they added. The idea is to ensure that the two laws work cohesively, they said, adding discussions are underway at the highest levels of government about the legislative changes needed for this.
'Officials of the ministry of corporate affairs, the revenue department and the regulators have already held discussions on the matter. The government is attempting to bring a bill in the current session of Parliament, but if the necessary approvals take longer, it may be introduced in the winter session," said one of the two people cited above, adding that the specifics of the legislative changes would be finalised soon.
Clarity needed
A dozen or so court orders since 2018, including the 2 May Supreme Court order in the case of Bhushan Power and Steel Ltd, have raised questions about the interplay of the two laws and an urgent need for more clarity, said the other person cited above.
On 2 May the Supreme Court said the National Company Law Appellate Tribunal's (NCLAT's) stay on the ED's ₹4,025-crore asset attachment was invalid as NCLT and NCLAT could not review public law actions. That order also annulled JSW Steel's ₹19,300-crore debt resolution plan for Bhushan Power and Steel. The court, however, left open the interpretation of the IBC provision that protects assets from attachment by law enforcement agencies such as ED for pre-debt resolution offences, subject to riders. But on 31 July the Supreme Court recalled its judgement, terming it a case fit for review.
Another ongoing case in the Supreme Court—committee of creditors vs Directorate of Enforcement—is considering questions on the primacy of IBC Section 32A over PMLA and NCLT's jurisdiction, said the first person quoted above.
Section 32A of the IBC offers immunity from prosecution to the new, unrelated management of a bankrupt company and protects its assets from being attached for violations under the previous management. The idea is to encourage investor participation in distressed assets and give such companies the best possible chance of a revival by offering a clean slate. It took effect in December 2019 with the aim of furthering the government's goal of accelerating debt resolution and improving the health of the corporate and financial sectors.
Subodh Dandawate, associate director - regulatory services at Nexdigm said, 'To uphold the IBC's objective and ensure legal clarity, it is essential to amend Section 32A, reinforcing its supremacy over conflicting statutes such as the PMLA during the bankruptcy resolution process."
The 'clean slate' principle enshrined in the provision is vital to attract resolution applicants, he added. 'However, conflicts between the IBC and the PMLA – both containing overriding clauses – have led to inconsistent judicial interpretations. Courts have even held against the jurisdiction of NCLT and NCLAT in PMLA-related matters, creating uncertainty around Section 32A's application," Dandawate said.
Queries emailed to Insolvency and Bankruptcy Board of India, the ED, the ministry of corporate affairs and the finance ministry remained unanswered.