Introduction
The statutory confrontation between the Prevention of Money Laundering Act, 2002 (PMLA) and the Insolvency and Bankruptcy Code, 2016 (IBC) remains one of the most significant points of friction in the contemporary legal environment of India. This conflict involves a fundamental collision between two distinct public law regimes: the punitive power of the State to attach and confiscate “proceeds of crime” to ensure that economic offenders do not benefit from illegal activities, and the regulatory-economic power of the State to prevent the destruction of corporate value through a time-bound, collective insolvency resolution process.
The core of this dispute manifests when the Enforcement Directorate (ED) seeks to remove assets from commercial circulation through attachment, while the insolvency framework seeks to preserve those same assets to satisfy creditors and revive distressed enterprises.
Conceptual Collision of Objectives and Sovereign Power
The conflict between the PMLA and the IBC is not merely a procedural disagreement but a clash of overarching legislative objectives. The PMLA is designed to combat the menace of money laundering, which has a serious impact on the economic health of the nation, by providing a comprehensive mechanism to trace, attach, and forfeit property derived from criminal conduct. Conversely, the IBC represents a paradigm shift in Indian insolvency law, moving from a “debtor-in-possession” to a “creditor-in-control” model to maximize the value of assets and balance the interests of all stakeholders, including financial and operational creditors.
When a corporate debtor enters the Corporate Insolvency Resolution Process (CIRP), a moratorium is imposed under Section 14 of the IBC, which prohibits the institution or continuation of suits and legal proceedings against the debtor, as well as any action to enforce security interests or recover property. However, the ED frequently argues that “proceeds of crime” never lawfully vest in the corporate debtor and, therefore, cannot form part of the insolvency estate to be managed by a Resolution Professional. This “tainted property” theory suggests that assets derived from criminal activity should be immune to the insolvency process and remain subject only to the penal provisions of the PMLA.
The Supreme Court and various High Courts have had to address whether the IBC’s moratorium extends to criminal attachment proceedings. Historically, the National Company Law Appellate Tribunal (NCLAT) in cases like Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement, Company Appeal (AT) (Insolvency) No. 493 of 2018 and Rotomac Global Pvt. Ltd. v. Deputy Director, Company Appeal (AT) (Insolvency) No. 140 of 2019 held that the attachment of assets under the PMLA relates to “proceeds of crime” and that the moratorium under Section 14 of the IBC does not apply to such criminal proceedings. The rationale was that the PMLA is a purely penal enactment focused on stripping wrongdoers of illicit gains, whereas the IBC is an economic legislation focused on corporate rescue.
Statutory Overriding Effects and Non-Obstante Clauses
A significant challenge in resolving the conflict arises from the fact that both statutes contain sweeping non-obstante clauses. Section 71 of the PMLA states that its provisions shall have effect notwithstanding anything inconsistent contained in any other law for the time being in force. Similarly, Section 238 of the IBC provides that the Code shall have effect notwithstanding anything inconsistent contained in any other law or instrument. When two special statutes with such provisions conflict, courts often examine the legislative intent and the timing of the enactments to determine which should prevail.
Because neither the PMLA nor the IBC can be classified as a general law, the legal principle of lex specialis derogat legi generali (special law overrides general law) is often inapplicable. Instead, judicial interpretation has focused on whether the two statutes operate in distinct spheres. The Delhi High Court in Deputy Director, Directorate of Enforcement, Delhi vs Axis Bank & Ors., 2019 SCC Online Del 7854 clarified that the two laws serve different purposes and thus do not necessarily conflict. The court observed that the IBC protects creditor interests through resolution, while the PMLA deprives wrongdoers of unlawful gains. The court emphasized that a Resolution Professional under the IBC represents creditor interests, and the moratorium under Section 14 does not inhibit the statutory powers of the ED to seize tainted assets.
This perspective was further refined by the Supreme Court in Kalyani Transco v. M/s Bhushan Power and Steel Ltd., 2025 INSC 621 where the court established that while criminal prosecution can proceed against individuals, the ED’s power of confiscation must eventually yield to the insolvency framework once the resolution process is initiated to protect the corporate entity’s viability. This creates a “legal quarantine” where insolvency law governs the corporate assets, and criminal law governs individual culpability.
The Evolution of the Tainted Property Doctrine
The interaction between the PMLA and the IBC depends heavily on the classification of the property involved. In the Axis Bank decision, the court drew a distinction between property directly derived from criminal activity (tainted property) and property of equivalent value that might be attached if the actual proceeds of crime are untraceable (untainted property). If an asset is a direct proceed of crime, it must vest in the government, and even a bona fide third party may not be able to escape confiscation.
However, if untainted property of equivalent value is attached to satisfy a forfeiture requirement, a bona fide creditor who acquired rights in that property before the commission of the offense and for lawful consideration may seek its release. In such instances, the PMLA attachment “takes a back seat,” allowing the creditor to enforce their interest first. This nuanced approach attempts to balance the public interest in fighting money laundering with the private rights of legitimate lenders who have financed corporate operations in good faith.
Despite this, the NCLAT in Directorate of Enforcement v. Manoj Kumar Agarwal, Company Appeal (At)(Insolvency) No.575/2019 took a different position, holding that it is impermissible for PMLA authorities to exercise the power of attachment once an IBC moratorium has come into effect. The tribunal reasoned that even if property has been attached under the PMLA, it should become available to fulfill the objectives of the IBC if a CIRP is initiated. However, a larger Bench of the NCLAT in Kiran Shah v. Enforcement Directorate, 2022 SCC OnLine NCLAT 2 eventually settled the issue by stating that there is no inherent repugnancy between the two statutes and that Section 14 of the IBC does not hinder PMLA proceedings.
Section 32A and the Statutory Clean Slate Principle
To address the persistent uncertainty regarding corporate assets, the Indian Parliament introduced Section 32A into the IBC via the Insolvency and Bankruptcy Code (Amendment) Act, 2020. This provision acts as a legal reset button, granting immunity to the corporate debtor and its assets from prosecution for offenses committed before the commencement of the CIRP, provided a resolution plan is approved and there is a genuine change in management. The immunity is conditional upon the fact that the new management or the resolution applicant was not involved in the original commission of the offense and had no nexus with the previous promoters.
The Supreme Court upheld the constitutional validity of Section 32A in Manish Kumar v. Union of India, Writ Petition(C) No.26 of 2020 noting that the provision is critical for the success of the resolution process. The court emphasized that without such protection, potential resolution applicants would be deterred from investing in distressed assets for fear of future criminal consequences arising from the actions of previous management. This “clean slate” theory ensures that once an adjudicating authority approves a resolution plan, the revived entity can function without being burdened by the “ghosts of the past”.
Recent judicial developments in 2025 have further reinforced this principle. For instance, the Delhi High Court in February 2025 quashed money laundering proceedings against Bhushan Power and Steel Limited (BPSL), affirming that a company that has undergone a successful resolution under the IBC cannot be prosecuted for pre-insolvency offenses. The court highlighted that Section 32A specifically protects the corporate debtor post-resolution, while ensuring that the liability of erstwhile officers and promoters remains unaffected.
Judicial Precedents of 2025 and 2026 on Asset Restoration
The jurisdictional boundaries between the NCLT and PMLA authorities have seen significant clarification through rulings in late 2024 and early 2026. In the case of Directorate of Enforcement vs V Hotels Limited, Criminal Appeal No. 2925 of 2025 the Supreme Court in early 2026 confirmed the restoration of attached assets to the Successful Resolution Applicant (SRA). The court noted that the legislative intent behind Section 8(8) of the PMLA is to ultimately return attached assets to genuine claimants entitled to them in law. This ruling followed a historic shift in the ED’s stance, where the agency occasionally chose not to oppose the restoration of assets to ensure the success of a resolution plan.
The Supreme Court further clarified that while the corporate debtor stands discharged under Section 32A, the prosecution against former directors and abettors will continue unabated. This ensures that corporate revival does not become a tool for individual impunity. Furthermore, in Electrosteel Steel Ltd. v. Ispat Carrier (P) Ltd., 2025 INSC 525 the Supreme Court held that an arbitral award passed regarding a claim that was already extinguished by an approved resolution plan is null and unenforceable. The court reasoned that once a claim is legally extinguished via the resolution plan, the arbitral tribunal lacks the jurisdiction to adjudicate a non-existent claim. This reinforces the supremacy of the IBC resolution process over other legal proceedings.
In January 2025, the court in CBI v. M/s Monnet Ispat & Energy Ltd., CBI-39/2024 also directed the cessation of criminal liability for the corporate debtor following its successful resolution, explicitly referencing the constitutional validity of Section 32A as upheld in Manish Kumar. These cases collectively demonstrate that by 2026, the Indian judiciary has moved toward a more definitive “terminal point” for PMLA powers over corporate assets, specifically at the point where a resolution plan is approved or liquidation measures are adopted.
The Jurisdictional Exclusion of the Benami Act
A landmark development in February 2026 involved the interaction between the IBC and the Prohibition of Benami Property Transactions Act, 1988 (Benami Act). The Supreme Court upheld an NCLAT judgment which held that an attachment under the Benami Act can only be challenged before the statutory authorities provided under that specific Act and not before the NCLT under the IBC. The bench, consisting of Justice PS Narasimha and Justice Atul Chandurkar, dismissed appeals by liquidators who had attempted to invoke Sections 32A or 60(5) of the IBC to bypass the Benami Act’s appellate hierarchy.
The Supreme Court emphasized that the Benami Act is a self-contained code and that the IBC does not provide an indirect route to challenge sovereign acts undertook under penal statutes. This ruling is pivotal for the PMLA-IBC conflict because it underscores the principle that insolvency tribunals lack the jurisdiction to sit in appeal over decisions of special authorities governed by other penal laws. The court noted that the Benami proceedings are not in the nature of debt recovery but rather a statutory forfeiture of property held illegally, and thus the IBC moratorium does not act as an automated stay against such proceedings.
The court further clarified that only assets “beneficially owned” by the corporate debtor form part of the liquidation estate. If a property is held benami, it is excluded from the estate, and its status must be determined by the Benami Act authorities. This creates a high hurdle for Resolution Professionals who seek the release of attached funds or property, as they must now address the specific adjudicatory and appellate framework of the penal statute in question rather than relying on the general jurisdiction of the NCLT.
Proposed Reforms in the Insolvency and Bankruptcy Code (Amendment) Bill, 2025
The Indian legislature has responded to the various interpretational challenges and procedural delays identified in the insolvency process by introducing the Insolvency and Bankruptcy Code (Amendment) Bill, 2025. Introduced in the Lok Sabha on August 12, 2025, this Bill is regarded as the most comprehensive reform since the Code’s inception in 2016. The Bill seeks to address issues like the status of government dues, the duration of resolution approvals, and the complexities of group and cross-border insolvency.
One of the most critical proposals in the 2025 Bill is the clarification that statutory dues, such as government tax claims, do not have the status of “secured creditors”. This amendment effectively seeks to reverse the impact of the Rainbow Papers judgment, where the Supreme Court had previously held that government claims could be treated as “secured” if state laws created a first charge, thereby upsetting the distribution waterfall mechanism. By clarifying that government dues are unsecured, the Bill aims to restore the priority of financial creditors, which is essential for maintaining credit flow to businesses.
The Bill also introduces the Creditor-Initiated Insolvency Resolution Process (An analysis of asset attachment conflicts under PMLA and the IBC, examining judicial trends, statutory interpretation, and priority of claims in India.), which allows for the out-of-court commencement of insolvency proceedings by select financial institutions. In this model, the debtor remains in control of the company, and the process must conclude within 150 days. This is intended as a preventive measure to resolve distress before significant value erosion occurs. Furthermore, the Bill expands the moratorium under Section 14 to the liquidation stage and mandates stricter timelines for the NCLT to pass orders, requiring a record of reasons for any delay beyond 14 days in admitting an application.
Group and Cross-Border Insolvency Frameworks
The 2025 Amendment Bill introduces a globally aligned cross-border insolvency framework, providing for the recognition of foreign insolvency proceedings and cooperation between Indian and foreign courts. This is a significant step toward modernizing the Code and enhancing investor confidence, as it allows for the coordinated resolution of multinational group insolvencies. Large business groups often operate through multiple interlinked entities, and the lack of group insolvency provisions has historically led to fragmented and inefficient resolutions.
Under the proposed Bill, the Central Government will have the power to frame rules for cross-border and group insolvency, allowing for a more holistic approach to managing the assets and liabilities of distressed conglomerates. This is particularly relevant in the context of money laundering investigations, which often involve the layering of funds across various group entities and international boundaries. A coordinated framework would theoretically allow Resolution Professionals and enforcement agencies to better manage the complex web of assets that may be subject to simultaneous insolvency and penal proceedings.
The Role of Information Utilities and Judicial Discretion
The 2025 Amendment Bill also aims to curb the judicial discretion of the NCLT regarding the admission of insolvency applications. Following the Supreme Court’s judgment in Vidarbha Industries Power Ltd. v. Axis Bank Ltd., Civil Appeal No. 4633 of 2021, the NCLT had been granted discretion to reject applications even when debt and default were proven, allowing debtors to delay proceedings through unnecessary litigation. The Bill reverses this position by clarifying that the NCLT “shall” admit an application if the twin test of debt and default is established and no disciplinary proceedings are pending against the Resolution Professional.
To expedite this process, the Bill introduces an explanation that the production of a record of default from an Information Utility (IU) is sufficient to establish default. This move toward a more mechanical and time-bound admission process is intended to restore the speed and predictability that the Code originally promised. By reducing the burden of backlogs and litigation at the entry point of the insolvency process, the legislature hopes to facilitate more timely resolutions and prevent the erosion of asset value that occurs during prolonged delays.
Conclusion
The dynamic interplay between the Prevention of Money Laundering Act, 2002 and the Insolvency and Bankruptcy Code, 2016 represents a complex negotiation of sovereign priorities. The legislative introduction of Section 32A and its subsequent constitutional validation have provided a much-needed bridge between the two regimes, allowing for a “fresh start” for corporate entities while maintaining the path of prosecution for individual offenders.
Recent rulings in 2025 and 2026, particularly the Supreme Court’s stance on the Benami Act and the restoration of assets in the V Hotels case, have further delineated the jurisdictional boundaries of the NCLT and NCLAT, confirming that while they are powerful forums for commercial resolution, they cannot supersede the adjudicatory mechanisms of penal statutes until the resolution process reaches its finality.
The Insolvency and Bankruptcy Code (Amendment) Bill, 2025, represents the next phase of this evolution, seeking to eliminate procedural bottlenecks and restore the supremacy of the creditor-in-control model by clarifying the status of government dues and streamlining the admission of insolvency cases.
As India continues to address the challenges of sophisticated corporate crime and financial distress, the continued push toward a harmonious interpretation of these statutes will be vital for maintaining investor confidence and ensuring the robust health of the national economy. The goal remains a balanced approach where corporate assets are returned to productive use and criminal proceeds are effectively forfeited to the State, without allowing one process to frustrate the other.
The evolving framework under the IBC (Amendment) Bill 2025: India’s New Rules further informs the ongoing conflict analysis of corporate assets under the Prevention of Money Laundering Act and the Insolvency and Bankruptcy Code, particularly in relation to priority and asset control during insolvency proceedings.Conflict of Assets Under PMLA and IBC in IndiaConflict of Assets Under PMLA and IBC in India
