Prevention of Money Laundering Act (PMLA) in IBC proceedings

The apparent conflict between the Insolvency and Bankruptcy Code (IBC) and PMLA, often manifesting itself during insolvency processes, calls for a careful balance between protecting the rights of creditors and preventing money laundering. Recent judgments suggest that a harmonious interpretation is possible, recognizing the importance of Section 32A of the IBC in shielding corporate debtors by providing  for immunity for them and their assets, upon approval of a resolution plan, subject to certain conditions stipulated in that provision.

The conflicting judgments underscore the need for a nuanced approach. The Supreme Court, in the case of Manish Kumar vs. Union of India (2021), upheld the constitutional validity of Section 32A, emphasizing its role in achieving resolution without burdening resolution applicants with additional liabilities.

The judgments suggest that the IBC, particularly Section 32A, holds primacy over conflicting provisions in PMLA. The courts consistently emphasize the need for a strict interpretation of “proceeds of crime” and a clear link to criminal activity.

Valuation Procedures and Consultation Committee Oversight in Insolvency Proceedings

New Sub-Regulations 5, 6, and 7 have been inserted into Regulation 35 on the valuation of assets or business intended to be sold. Where a valuation is undertaken, the liquidator will now facilitate a meeting where registered valuers will explain the methodology being adopted to arrive at a valuation to the consultation committee before the finalization of any valuation reports.

Further, the liquidator should share the valuation reports with the members of the consultation committee after obtaining an undertaking that they will maintain the confidentiality of such reports and will not use them for undue gain or undue loss on behalf of themselves or any other person.

Where there is a deviation of twenty-five per cent in the valuation of an asset class, the liquidator should convene a meeting so the registered valuers can explain the reasons for the difference to the consultation committee.

Lengthy and Time-Consuming Process

By definition, the Insolvency and Bankruptcy Courts are expected to fast-track the resolution process therefore providing a speedier remedy to an insolvency process. Unfortunately, the trend in the National Company Law Tribunal (NCLT) is not very different to India’s traditional courtrooms where pending caseloads have invited sharp criticism.

According to India Ratings, the share of ongoing cases under insolvency for 270 days and above reflects a rising trend in Q1 FY24 compared to Q1 FY23 and FY23. The percentage of ongoing cases under insolvency for 90 days and below was at a three-year low of 10% in Q1 FY24.

In 2023, a report revealed that the NCLT’s time to achieve resolution was on average 643 days (nearly 21 months) compared to the 270-day target deadline (9 months).

The number of companies going into liquidation under the process stands at 45%. The average realisation under liquidation is very low, with the recovery being less than 10% of admitted claims. While the realization of dues for operational creditors has been the highest in three years, for financial creditors the recovery has been much lower than what was achieved during FY21–22.

The Insolvency and Bankrutpcy Board of India (IBBI), the regulator overseeing insolvency proceedings,  claimed half the ongoing liquidation cases have been underway for more than a year. The IBBI said pending appeals regarding demands or penalties, refunds from statutory departments and other instances of litigation are the main causes of delays.

The directors of an entity initiating liquidation should disclose “pending proceedings or assessments before statutory authorities, and pending litigation,” and ensure “sufficient provision has been made to meet the obligations arising, if any, on account of these pending matters,” said the IBBI.

“The proposed amendments would provide requisite clarification to the stakeholders with regard to the initiation of the (voluntary liquidation) process. The new disclosures shall ensure that both the liquidator and the corporate person are aware about the pending issues and the corporate person makes the necessary provisioning for the same,” the IBBI said in a discussion paper.

Applicability of Limitation Law to IBC Proceedings

The Supreme Court, in Dena Bank (now Bank of Baroda) v C Shivakumar Reddy and Anr (2021), while referring to its multiple earlier judgments with respect to the applicability of the limitation law to IBC proceedings, held that an application under the IBC would not be barred by limitation, on the ground that it had been filed beyond a period of three years from the date of declaration of the loan account of the corporate debtor as a non-performing asset, if there was an acknowledgement of the debt by the corporate debtor before expiry of the period of limitation of three years.  In such a case the period of limitation would be extended by a further period of three years.

In Asset Reconstruction Company (India) Limited Vs. Tulip Star Hotels Limited & Ors. (2022) the Apex court held that entries in the accounts/balance sheet of a company can be treated as an acknowledgement of liability in respect of debt payable to a financial creditor. In that case the corporate debtor had acknowledged its liabilities in its financial statements from 2008-09 to 2016-17. Thus, the corporate insolvency application was well within the extended period of limitation.

Applicability of Limitation Law to IBC Proceedings

Prior to the decision in Vidarbha Industries Power Ltd. Vs. Axis Bank (2022), the settled position of law was that a creditor had to demonstrate the existence of debt and default to initiate insolvency proceedings—a standard widely perceived as objective and consistent. This test is similar to the ‘cash flow test’ under English law, where a company is deemed insolvent if it is unable to pay its debts as and when they fall due. In Vidarbha, the Court departed from existing precedent and held that even if debt and default were proved, the National Company Law Tribunal (‘NCLT’) may consider other ‘relevant factors’ in deciding whether to admit the debtor into insolvency proceedings. 

Vidarbha has significantly altered India’s insolvency landscape for the time being. Debtors now have an additional ground of defence before being admitted into insolvency.