Relief for homebuyers, investors as ED sets protocol to handle bankrupt firms’ assets

The conflicting goals of the Prevention of Money Laundering Act (PMLA), a statute to check illicit financial flows and proceeds of crime, and the IBC, a commercial law for the timely resolution of financial distress in companies, have led to several litigations in the past, creating uncertainty for lenders and investors.

The issue has been particularly relevant in the real estate sector, which has traditionally been prone to money laundering concerns and accounts for about 35% of the close to 8,900 companies admitted so far in bankruptcy resolution tribunals.

How the protocol works

“The protocol is based on a combined reading of PMLA and IBC,” said one of the persons quoted above. Assets attached by ED will not be part of the prospectus issued by administrators of bankrupt companies for inviting fresh investments into the company.

“If such assets are to be part of the prospectus, the insolvency resolution professional has to approach a special PMLA court invoking section 8 (8) of PMLA. The special court, if satisfied, will restore the confiscated assets to the claimant with legitimate interest,” said the person who spoke on condition of anonymity. Section 8 (8) of PMLA deals with the restoration of assets to legitimate claimants.

In the case of legacy cases, where bankruptcy resolution has already been approved by NCLT, the issues will be decided on a case-by-case basis.

In these cases, the successful bidder for the bankrupt company could approach the special PMLA court for restoring the assets attached, and where there is no fraud involved, ED will not oppose it. Where there are frauds by erstwhile management or promoters, the agency will continue with PMLA proceedings, the persons said.

ED has, in recent months, released several assets it had attached to the custody of the resolution professionals appointed by lenders to allow bankruptcy resolution.

A key takeaway is that resolution professionals and investors have to go to special PMLA courts, not the National Company Law Tribunal (NCLT), which implements IBC, to restore the assets confiscated under the anti-money laundering act.

ED’s protocol for restoring assets confiscated for illicit financial flows to salvage company bankruptcy resolutions is significant, given the overlap of PMLA and IBC. It has been the subject of multiple cases, including JSW Steel Ltd’s ₹19,700 crore rescue plan for Bhushan Power and Steel Ltd (BPSL) and the ₹66 crore resolution plan of Udaipur Entertainment World Pvt. Ltd, submitted by JVD Life Space, an Indore-based company.

The apex court is currently reviewing its earlier judgement on Bhushan Power and Steel resolution plan that vacated a tribunal stay on ED’s ₹4025 crore asset attachment and annulled the resolution plan.

In the case of Udaipur Entertainment World, the Supreme Court had in April asked the central government and ED how they would protect the interests of flat buyers and ensure that they are given apartments at the agreed-upon rate or at the minimum cost by including the interests they are entitled to.

Based on ED’s response on 11 September, the apex court gave time to the parties to “work out a settlement in terms of the offer made” by ED, showed court documents in Udaipur Entertainment World case.

In this case, 260 home buyers are trying to protect their ₹356 crore of claims, as per court records.

Close to a dozen bankruptcy cases, including BPSL, witnessed litigation on account of asset attachment under PMLA.

“The interests of home buyers and investors are paramount. ED is supportive of the clean slate principle for new investors in distressed companies and restores the attached assets to the legitimate claimants,” the first person quoted above said. “It should be noted that once an asset is attached under PMLA, it is the property of the court. Hence, it cannot be restored without invoking section 8 (8) of PMLA before a special court.”

In multiple cases, NCLT benches had earlier vacated ED’s attachments, leading to escalation of the cases.

This issue also holds significance given that the proposed amendments to IBC pending before Parliament did not address these conflicting matters, as these cases are pending before the Supreme Court.

Queries emailed to ED, the ministry of corporate affairs and Insolvency and Bankruptcy Board of India (IBBI) on 13 September remained unanswered till press time.

Expert speak

Experts said sparing the assets of distressed companies from attachments will help in quick debt resolution.

Asset attachment under PMLA during the bankruptcy resolution process has the potential of disturbing the entire process, said Anoop Rawat, national practice head (insolvency and restructuring) at law firm Shardul Amarchand Mangaldas & Co.

“An attachment during the corporate insolvency resolution process on the ground that the attached asset doesn’t form part of the estate of corporate debtor would be antithetical to the principles enshrined in Section 32A of IBC which discharges a corporate debtor of liability for offences committed prior to commencement of its bankruptcy proceedings in order to facilitate fresh investments and revival,” said Rawat.

“If the requirement of this section is satisfied, the assets of the company should be free from attachments under PMLA. Any proceedings under PMLA could be directed against the promoters and previous management, without involving their assets needed for debt resolution,” added Rawat.

ED’s work is critical for India’s global ranking in effectively addressing the threat of illicit financial flows and terror financing.

Financial Action Task Force, a global agency that develops policies to combat money laundering and terrorism financing, had placed India in its ‘regular follow-up category’ in 2024 after an evaluation, a distinction shared by only four G20 countries, Mint had reported in June 2024.

IBC is one of the flagship regulatory reforms that addresses toxic assets in the banking sector and revives the private investment cycle.