IBC v. PMLA: NCLT Affirms Jurisdictional Limits, Declines to Unfreeze ED-Attached Bank Account

Introduction

The intersection of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and the Prevention of Money Laundering Act, 2002 (‘PMLA’) has long been a subject of legal debate, particularly regarding the scope of moratorium under s. 14 of the IBC. In a recent decision in an application in Shimping Technology Private Limited[i], the National Company Law Tribunal – Delhi (‘NCLT’) addressed a critical issue – whether the NCLT under the IBC possesses jurisdiction to direct the Directorate of Enforcement (‘ED’) to defreeze the bank account of the corporate debtor (‘CD’) undergoing insolvency resolution.

The case, filed by the Resolution Professional (‘RP’) under s. 60(5) of the IBC sought directions to lift the debit freeze imposed by the ED on the CD’s bank account. The NCLT, relying on established precedents, held that the jurisdiction to adjudicate matters related to money laundering vests exclusively with the authorities designated under the PMLA. This decision reinforces the distinction between the objectives of the two statutes and further clarifies the limited scope of the moratorium under the IBC.

Brief Facts

• The corporate insolvency resolution process (‘CIRP’) was initiated against the CD, and the moratorium was imposed under s. 14 of the IBC. Accordingly, the RP was appointed and took control over the CD’s bank accounts, including the ICICI bank account. During the 3rd meeting of the committee of creditors (CoC), the RP informed that all CIRP-related costs would be deducted from the ICICI bank account, which had a balance of Rs. 19 lakhs.

• Subsequently, a cheque issued from this account was dishonoured, leading the RP to inquire with the bank, which revealed that the account had been frozen on the ED’s directions. The ED had initiated an investigation under the PMLA following a first information report (FIR) lodged by the Cyber Crime Police, Dehradun, and had frozen the bank account under s. 17(1A) of the PMLA, citing its connection to alleged money laundering activities. The RP sought the ED’s response regarding the freeze but was informed that the account could only be unfrozen through appropriate legal directions.

• The RP approached the NCLT, arguing that the moratorium under s. 14 of the IBC should override the freeze, and that the CD’s funds were essential for the insolvency process. The ED opposed the application, contending that the IBC’s moratorium does not apply to proceedings under the PMLA and that the NCLT lacks jurisdiction to direct the release of assets frozen under the PMLA.

Held

• The NCLT, following the precedents laid down by the Supreme Court and the National Company Law Appellate Tribunal (‘NCLAT’), dismissed the RP’s application, upholding the ED’s authority to freeze assets under the PMLA, irrespective of the insolvency proceedings under the IBC. It held that the IBC moratorium does not extend to money laundering proceedings and that the appropriate forum to challenge the freeze is the Adjudicating Authority under the PMLA (‘AA’).

• It was held that NCLTs do not have the jurisdiction to entertain a challenge against actions taken under the PMLA. It heavily relied on the Supreme Court’s ruling in Embassy Property Developments[ii], wherein it was held that the NCLT lacks jurisdiction over matters falling under public law. It further heavily relied on the NCLAT’s decision in Varrsana Ispat Ltd.[iii], wherein it was held that the IBC and PMLA operate in distinct fields and that the PMLA, being a penal statute aimed at confiscating proceeds of crime, is not overridden by the moratorium under IBC.

• The NCLT observed that s. 14 of the IBC is applicable only to civil proceedings against the CD and does not extend to criminal or quasi-criminal proceedings under statutes like the PMLA. This observation was consistent with the NCLAT’s ruling in Kiran Shah[iv]. Further, the NCLT noted that once an asset is attached or frozen under the PMLA as proceeds of crime, the CD cannot claim any right over it under the IBC. The RP’s only recourse is to challenge the freeze before the AA. It emphasized that if the RP wishes to contest the debit freeze, the correct approach would be to move the appropriate forum under the PMLA rather than seeking directions from the NCLT under the IBC.

Our Analysis

This decision brings to the forefront the fundamental distinction between the objectives of the IBC and the PMLA. While the IBC primarily aims to facilitate the CIRP and protect creditors’ interests, the PMLA is focused on tackling money laundering and confiscating proceeds of crime. The two statutes serve distinct purposes – whereas the IBC functions as an internal economic framework, the PMLA has a broader penal and regulatory scope, often fulfilling international anti-money laundering commitments.

Notably, in Embassy Property Developments (supra), the Supreme Court expressly held that a decision taken by the government or a statutory authority in the realm of public law cannot, by any stretch of imagination, be brought within the ambit of the phrase ‘arising out of or in relation to the insolvency resolution’ under s. 60(5)(c) of the IBC. The Court further clarified that when a CD has to exercise a right that falls outside the IBC’s purview, particularly in the sphere of public law, it cannot bypass the appropriate forums and seek relief before the NCLT through the RP.

This ruling is also in line with the NCLAT’s previous judgment in Varrsana Ispat Ltd. (supra), where it was expressly held that since the PMLA pertains to penal actions involving proceeds of crime, it operates concurrently with the IBC, without one overriding the other. Additionally, it was reaffirmed that s. 14 of the IBC does not apply to criminal proceedings, penal actions, or measures related to proceeds of crime.

Thus, this decision serves as a reminder of the jurisdictional limitations of the NCLT and prevents the misuse of the insolvency framework as a shield against anti-money laundering measures. Acceptance of the RP’s argument could have created a loophole allowing proceeds of crime to be funnelled through insolvency proceedings, thereby undermining the PMLA’s enforcement mechanism.

End Notes

[i] IA No. 4689/2023 in IB-102(ND)/2022, Order dated: 11.02.2025.

[ii] Embassy Property Developments (P) Ltd. v. State of Karnataka, [2019] 112 taxmann.com 56 (SC).

[iii] Varrsana Ispat Ltd. v. ED, [2019] 108 taxmann.com 96 (NCLAT).

[iv] Kiran Shah v. ED, Company Appeal (AT) (Insolvency) No. 817/2021.

Authored by Srishty Jaura, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.