New Delhi: India’s bankruptcy regulator has stepped in to break the stalemate between insolvency and money-laundering laws that have often hampered corporate recovery. The Insolvency and Bankruptcy Board of India (IBBI) has offered guidance on how trustees of insolvent firms could go about reviving a company when its assets are seized by the Financial Crimes Enforcement Directorate (ED).
In an order issued on Tuesday, the bankruptcy rulemaker said that resolution professionals running bankrupt businesses must move special courts that deal with the Prevention of Money Laundering Act (PMLA) rather than the National Company Law Tribunal (NCLT), which deals with bankruptcy cases, to unfreeze those assets for resolving debts. Reviving bankrupt companies means bringing new investors on board through competitive bids that need to free up assets.
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Mint first reported on September 16 that the ED had prepared a new protocol to address the conflicting overlap between the Insolvency and Bankruptcy Code (IBC) and the PMLA.
The result of the discussions
The latest IBBI circular is a result of discussions with the ED to ensure smooth functioning of the two statutes where they overlap.
The IBC offers a clean slate to a distressed company once it is acquired by a new investor under a process monitored by the NCLT – meaning the company will not be prosecuted for any financial crimes by the previous management, only individuals will be held accountable. However, all ED-linked assets under PMLA will go through the PMLA restitution process to the rightful owners under the supervision of PMLA Special Courts.
But that adds another layer of regulatory and judicial process that creditors of the bankrupt firm and its new owner tend to resist, and in the past has led to conflicting court rulings about which statute will take precedence.
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It is recommended that in cases where the assets of a corporate debtor are attached by the ED under the provisions of the PMLA, the insolvency practitioner managing the company on behalf of creditors may file an application in a special court under sections of the PMLA for the restitution of those assets, IBBI said, citing Section 8 of the Release of Assets Act.
“To facilitate expeditious disposal of such applications by special courts, IBBI in consultation with ED has formulated a standard undertaking to be furnished by the Insolvency Practitioner along with the application for restitution of assets,” IBBI said.
The Insolvency Practitioner must declare that the assets recovered in this process by the PMLA Court will not be sold or transferred to previous shareholders, any previous management or related party or anyone involved in such financial crime. The problem solver also has to provide regular updates to the PMLA court and cooperate with the ED investigation.
A step towards harmonization
Experts said the circular represents an important step towards harmonizing the IBC with the PMLA. “Allowing insolvency professionals to seek restitution of ED-related assets has the potential to substantially increase the value of a corporate debtor’s assets, thereby improving recovery prospects and promoting a more comprehensive resolution outcome,” said Yogendra Aldak, managing partner of Lakshmikumaran & Sridharan Attorneys.
“The standardized bond prescribed in the circular may also facilitate uniformity of applications in special courts, thereby reducing procedural ambiguity and in some cases speeding up restitution,” Aldak said.
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However, the circular does not curtail the powers of the ED to attach property in the first instance under the PMLA, Aldak explained. “As a result, while it may streamline the restitution process once a garnishment occurs, it does not prevent the initiation of such garnishment – a critical factor that often delays the insolvency process. In addition, the extensive reporting, disclosure and cooperation obligations imposed on insolvency professionals may increase the administrative burden and, in practice, could lengthen the time it takes to resolve a company’s insolvency,” he said.
The actual impact of this circular in speeding up resolution will depend on how the special courts and the NCLT interpret and operationalize these provisions in tandem, balancing due processes under both statutory frameworks, Aldak added.
