Introduction

The relationship between the Insolvency and Bankruptcy Code, 2016 (IBC) and the Prevention of Money Laundering Act, 2002 (PMLA) has become one of the most significant areas of contemporary financial jurisprudence in India. Both statutes pursue important but distinct public objectives. The main purpose of the IBC is to ensure that the company undergoing insolvency proceedings is revived or liquidated expeditiously within a stipulated timeframe, whereas the objective of PMLA is to identify, attach and confiscate the proceeds of crime arising out of a criminal activity and to prosecute economic offenders.

When these two statutory regimes intersect, particularly in cases involving large corporate frauds, the resulting legal tensions can be complex. In recent years, the challenge has been to ensure that enforcement actions under the PMLA do not unnecessarily frustrate legitimate insolvency resolution processes, while simultaneously preserving the ability of the State to pursue money-laundering investigations and prevent offenders from benefiting from illicit gains.

This article examines the recent developments signalling a policy shift towards a more harmonised approach that recognises that effective insolvency resolution and anti-money laundering enforcement are not mutually exclusive.

The Statutory Framework: the IBC and PMLA

Objectives of the IBC

The IBC was enacted to consolidate India’s fragmented insolvency regime and to introduce a time-bound, creditor-driven process with the goal of maximising the value of assets while balancing the interests of all stakeholders. The preamble of the IBC emphasises the reorganisation and insolvency resolution of corporates in a manner that maximises asset value, promotes entrepreneurship, ensures credit availability and balances stakeholder interests.

At the heart of the IBC is the corporate insolvency resolution process (CIRP), which culminates in either the approval of a resolution plan or the liquidation of the corporate debtor. The resolution plan, once approved by the adjudicating authority under Section 31 of the IBC, becomes binding on the corporate debtor and all stakeholders, including creditors, employees, guarantors and government authorities. This statutory finality is critical since resolution applicants commit substantial financial resources based on the certainty that the approved plan will provide a clean slate and a predictable liability landscape.

The courts in India have, in a plethora of cases, repeatedly reaffirmed this position, holding that the success of the IBC framework depends on said certainty. If resolution applicants remain exposed to unforeseen liabilities or enforcement actions affecting core assets, the incentive to participate in resolution processes would be significantly reduced. Thus, the IBC places considerable emphasis on finality, predictability and value maximisation.

Objectives and enforcement mechanism under the PMLA

The PMLA operates in a fundamentally different domain, being a penal statute aimed at combating money laundering and depriving offenders of the proceeds of crime. The Directorate of Enforcement (ED) is the investigating agency under the PMLA, and is empowered under Section 5 of the PMLA to provisionally attach property believed to constitute proceeds of crime, subject to confirmation by the adjudicating authority.

The attachment mechanism under the PMLA serves a dual purpose – ie, it ensures that:

• suspected tainted assets are preserved pending investigation and adjudication, thereby preventing their dissipation; and
• the attached property remains secured and traceable as material evidence of the alleged money-laundering offence, enabling the ED to establish the trail of proceeds of crime.

The PMLA also provides for eventual confiscation by the central government following prosecution and conviction by the special court under the PMLA.

However, the attachment under the PMLA creates friction when the assets of a corporate debtor undergoing CIRP – which are essential for preserving the going-concern value of the corporate debtor – are simultaneously subject to PMLA proceedings.

Under the PMLA, the adjudicating authority may release the property where a person satisfies the adjudicating authority that their acquisition is bona fide, legitimate and for fair market value paid therefor. A bona fide third party is one who can demonstrate by cogent evidence that they acquired a lawful interest in the property for adequate consideration, or in the case of a financial creditor that it acquired the interest prior to commission of the predicate offence or had no complicity in the money-laundering offence and exercised strict due diligence.

The Statutory Mechanism for Asset Restoration: Deconstructing Sections 8(7) and 8(8) of the PMLA

The PMLA contains an important but underutilised mechanism for the restoration of attached property, provided under Sections 8(7) and 8(8). In situations where the money-laundering trial cannot proceed or be completed – such as in cases of the accused’s death, the accused absconding or other reasons – the special court is empowered to pass appropriate orders for confiscation or release of the property.

Further, the special court is empowered to order restoration of property (in whole or in part) to a claimant with a legitimate interest who has suffered a quantifiable loss due to the offence of money laundering. The special court must be satisfied that the claimant acted in good faith, took reasonable precautions and was not involved in the money-laundering offence. The provision thus protects bona fide third parties including financial creditors by allowing restitution of tainted assets, and it may be invoked even during the pendency of the trial.

In the insolvency context, the aforesaid provisions have acquired renewed significance as they provide a statutory pathway through which assets attached under the PMLA may be made available for the benefit of creditors/resolution applicants.

However, a likely hurdle to restitution of assets under Section 8(8) of the PMLA can arise on account of Rule 3A of the Prevention of Money-Laundering (Restoration of Confiscated Property) Rules, 2016. Rule 3A states that, for the special court to exercise power of restoration of property and entertain an application under the second proviso to Section 8(8) of the PMLA, it is mandatory for the charges under Section 4 of the PMLA to have already been framed. Only after the framing of charges is done can an application for restitution be filed – this requirement was recently reaffirmed by the Supreme Court in Nav Nirman Builders & Developers Pvt Ltd v Union of India, 2026 INSC 130.

Considering that trials under the PMLA are often lengthy and a considerable period of time is typically required before the stage for framing of charges is reached, the requirement imposed by the Supreme Court and the PMLA rules mandating the framing of charges as a precondition operates as a significant impediment to the smooth and timely restitution/restoration process envisaged under the PMLA.

Statutory Immunity Under Section 32A of the IBC

Section 32A of the IBC was introduced through the IBC (Amendment) Act, 2020, which came into force on 28 December 2019. As per Section 32A, liability for offences of the corporate debtor committed prior to the CIRP ceases if:

• a National Company Law Tribunal (NCLT)-approved resolution plan is in place; or
• there is a change in management or control to an eligible person.

The immunity under Section 32A only applies if the new person in control is not:

• a promoter or part of the erstwhile management;
• a related party to the former management; or
• suspected by investigators of abetting or conspiring in the offence.

No action can be taken against the corporate debtor’s property for prior offences once the control changes to an eligible person as per Section 32A(2) of the IBC. Such action includes attachment, seizure, retention or confiscation of property under such law applicable to the corporate debtor.

The provision represents a legislative attempt to strike a balance – ie, while the corporate debtor and its assets receive protection post-resolution, individual wrongdoers (including promoters and officers responsible for the misconduct) remain fully liable to investigation and prosecution.

From Collision to Coexistence: the BPSL Landscape

The pre-existing uncertainty

It is crucial to understand how the courts and tribunals historically grappled with the IBC-PMLA conflict. Both statutes contain non-obstante clauses, in Section 238 in the IBC and Section 71 in the PMLA, leading to a complex tug-of-war situation.

The early consensus heavily favoured the supremacy of the PMLA in matters involving tainted assets. Various courts in India observed that the moratorium under the IBC does not apply to criminal proceedings or penal actions under the PMLA. The National Company Law Appellate Tribunal (NCLAT), in Rotomac Global Private Limited v Deputy Director, Company Appeal (AT) (Insolvency) No 140 of 2019, held that the PMLA can be invoked simultaneously with the IBC, with neither having an overriding effect over the penal actions of the other. Later, the NCLAT in Kiran Shah, RP of KSL and Industries Ltd v Enforcement Directorate, Company Appeal (AT) (Insolvency) No 817 of 2021 held that the NCLT fundamentally lacks the jurisdiction to handle issues falling under the purview of the PMLA.

The Delhi High Court in Rajiv Chakraborty RP of EIEL v Directorate of Enforcement WP(C) 9531/2020 held that Section 32A acts as the terminal point, since authorities under the PMLA would cease to have power to attach or confiscate when a resolution plan has been approved or where a measure towards liquidation has been adopted. The constitutional validity of Section 32A was upheld by the Supreme Court in Manish Kumar v Union of India, (2021) 5 SCC 1, while noting that protecting the corporate debtor’s assets post-resolution is critical to economic revival and ensuring that new investors are not haunted by the sins of the erstwhile management.

Despite these clarifications, the physical release of assets remained a significant procedural bottleneck. This was exemplified in Anil Kohli v Directorate of Enforcement, Company Appeal (AT) (Insolvency) No 389 of 2018 when the NCLAT reiterated that PMLA attachments validly made prior to the CIRP could not be undone merely because the insolvency process was ongoing. This persistent friction set the stage for the pivotal BPSL litigation, which ultimately necessitated a shift towards the current model of structured co-operation.

The pivotal point

The Supreme Court’s decision in Kalyani Transco v Bhushan Power and Steel Ltd, 2025 INSC 1165 and Kalyani Transco v Bhushan Power and Steel Ltd, 2025 INSC 621 (BPSL) serves as the definitive pivot point as it exposed the ongoing friction between the anti-money laundering mechanisms and CIRP efforts.

BPSL was one of the “dirty dozen” – ie, the 12 major corporate defaulters identified by the Reserve Bank of India (RBI) for immediate resolution. The CIRP commenced in July 2017. After extensive bidding and negotiations, JSW Steel Limited (JSW) emerged as the successful resolution applicant (SRA) with a resolution plan of INR19,350 crores, which the NCLT approved on 5 September 2019.

However, in parallel with this, in April 2019 the Central Bureau of Investigation (CBI) filed a First Information Report (FIR) alleging large-scale siphoning and diversion of funds by BPSL’s erstwhile promoters. Thereafter, the ED registered an Enforcement Case Information Report (ECIR) and started proceedings under the PMLA. The ED issued a provisional attachment order under Section 5 of the PMLA on 14 October 2019, attaching BPSL’s assets worth over INR4,000 crores. The issue arose when the assets that JSW was attempting to acquire and revive were suddenly frozen and completely inaccessible, stalling a recovery for the financial creditors. Faced with the prospect of the entire resolution collapsing, JSW challenged the ED’s attachment before the NCLAT, which stayed the attachment in October 2019.

In the meantime, a major legislative shift occurred. The government introduced the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, inserting Section 32A into the IBC, which acts as a “clean slate” mechanism and grants immunity to the corporate debtor and its property from prior offences once a resolution plan is approved.

Relying heavily on this new Section 32A, the NCLAT delivered its judgment in February 2020. The NCLAT declared that the ED lacked the power to attach the assets once the resolution plan was approved, ruling the ED’s attachment to be illegal and without jurisdiction.

This was also challenged before the Supreme Court, and the core issue was whether the NCLAT had the authority to quash an order passed by the ED. In its May 2025 judgment, the Supreme Court drew a firm line in the sand. It clarified that the NCLT and NCLAT are products of company law, whose jurisdictions are strictly circumscribed by the IBC. They do not possess the power of judicial review over decisions made by statutory authorities operating in the realm of public law such as the ED under the PMLA. The Court held that the NCLAT’s decision to declare the ED’s attachment illegal was beyond its authority.

While the Supreme Court protected the jurisdictional integrity of the PMLA, it acknowledged the financial reality. If the attached assets were not released, JSW could not implement the resolution plan, and the recovery of INR19,350 crores of public money would fail. Furthermore, the newly enacted Section 32A could not be applied retrospectively to automatically make the ED’s 2019 attachment void.

To bridge this deadlock, the ED filed an affidavit suggesting that, under the peculiar circumstances of the case, JSW be permitted to take control of the attached properties by treating the handover as restitution under Section 8(8) of the PMLA, read with Rule 3A of the Prevention of Money Laundering (Restoration of Property) Rules. The Supreme Court accepted this mechanism, directing the ED to immediately hand over control of the unencumbered assets to JSW, thereby unlocking the stalled resolution plan.

However, subsequently in May 2025, the Supreme Court set aside the resolution plan, taking into consideration certain technical aspects. Being aggrieved by the May 2025 judgment, review petitions were filed before the Supreme Court by JSW (being the successful resolution applicant) and others.

The Supreme Court took into consideration that the corporate debtor was running into substantial losses which had become profitable, and thousands of employees had been earning their livelihood on account of the corporate debtor running as an ongoing concern due to the resolution plan. Therefore, the Supreme Court ultimately allowed the resolution plan to continue while upholding the objectives of the IBC.

The trajectory of the BPSL litigation is crucial for asset-tracing as it maps the evolution of the legal framework. The Supreme Court confirmed that, while insolvency tribunals cannot strong-arm the ED into releasing assets, the PMLA’s own internal mechanism can be actively used to bring proceeds of crime back into the corporate rescue ecosystem. This specific breakthrough in the BPSL case served as the direct catalyst and legal foundation for the recent Insolvency and Bankruptcy Board of India (IBBI) and ED circulars, which have now institutionalised this restitution process as a standard operating procedure for all future insolvency cases.

Institutional Harmonisation: a Standardised Protocol for Resitution

A major policy development occurred with the release of the IBBI Circular dated 4 November 2025, and the press release dated 5 November 2025 by the ED. Both of these steps collectively established a standardised mechanism through which insolvency professionals may seek restitution of assets attached under the PMLA during CIRP or liquidation.

The solution achieved in the BPSL case highlighted the need for a systemic, standardised approach. Recognising this, the IBBI and the ED issued said co-ordinated directives in November 2025.

The IBBI issued a circular advising insolvency professionals that, in cases where assets of a corporate debtor are attached by the ED, insolvency professionals should formally file an application before the special court under Sections 8(7) or 8(8) of the PMLA for the restitution of those assets. Simultaneously, the ED released a press release affirming its proactive support for IBC resolutions, declaring that strict enforcement under the PMLA and value maximisation under the IBC are not conflicting objectives.

To expedite these applications, the IBBI formulated a mandatory standard undertaking to be filed by insolvency professionals before the special court. This undertaking imposes strict compliance safeguards, including:

• usage of restituted assets – the insolvency professionals must guarantee that the restituted assets are not sold or transferred to anyone ineligible under Section 29A of the IBC, nor can they benefit any person accused in the ED’s proceedings;
• periodic reporting – the insolvency professional is required to submit quarterly status reports to the special court, detailing the usage, monetisation and distribution of the assets;
• co-operation and disclosures – the insolvency professional must extend full co-operation to the ED, proactively reporting preferential, undervalued, fraudulent or extortionate (PUFE) transactions, and sharing detailed information regarding the Committee of Creditors and the SRA; and
• document production – while non-commercially sensitive documents must be provided immediately, commercially sensitive data (such as valuation reports) are protected and only shared once the ED acknowledges their sensitivity in writing.

By institutionalising this process, the circular and press release respect the Supreme Court’s boundary set in BPSL as they keep the jurisdiction to release assets firmly within the special PMLA courts, avoiding overreach by the insolvency professionals and providing a clear, lawful pathway to access frozen assets.

Conclusion

The co-ordinated response by the IBBI and ED reflects a broader policy recognition. It recognises the prolonged conflict between insolvency and PMLA proceedings and that this ultimately harms the public interest. In large corporate frauds, the principal financial creditors are often public sector banks. Therefore, delays in resolution or uncertainty can significantly erode asset value and undermine creditor recoveries, which ultimately affects banks and the public exchequer.

However, as highlighted above, such restitution may be permissible under the PMLA Restitution Rules, which allows for consideration of applications under Section 8(8) PMLA only after framing of charges in the trial initiated by the ED. Practically speaking, in some cases the stage of framing of charges may take years, in which case the introduction of this co-ordinated protocol may fall victim to the substantive delays in investigation and criminal trials. While the new framework directly addresses uncertainty surrounding attached assets as one of the major sources of delay, further consideration may be required to resolve the issues that could arise in its implementation.