Liquidation Process


The Insolvency and Bankruptcy Code, 2016 (“IBC”), an umbrella legislation, has successfully envisaged the process of speedy resolution or liquidation of a corporate entity and has proved to be a milestone in the Indian legal framework. By bringing IBC in force, the legislature has sought to maximise the value of the assets of the debtor, and to adopt a fair and transparent procedure for the disposition of the assets while balancing the interests of all stakeholders.

While IBC has been around for more than half a decade, its interplay with legislature’s creation — the Prevention of Money Laundering Act, 2002 (“PMLA”) — has been analysed by various courts in distinct contexts. Recently, in Nitin Jain Liquidator PSL Limited v. Enforcement Directorate[1], the Delhi High Court (“Court”), resolved the complexity associated with the reconciliation between the IBC and the PMLA solely on the anvil of Section 32A of IBC (Liability for prior offences, etc.). The authors by way of this article have analysed the facts and findings of the case and assessed the implication of the judgment passed by the Court.

Brief facts of the case have been enumerated as below:

  • The petitioner (“Liquidator”) was appointed by the National Company Law Tribunal (“NCLT”) to take over the control and management of M/S PSL Ltd (“Corporate Debtor”);
  • The Liquidator had approached the Court upon receiving summons from the respondent who was investigating the affairs of the Corporate Debtor under the provisions of the PMLA;
  • When the Court took up the petition for consideration on March 17, 2021, it noted that no provisional order of attachment had been issued against the Corporate Debtor, although the investigations were being undertaken by Enforcement Directorate (“ED”) as per the provisions of PMLA;
  • Accordingly, the Court allowed the Liquidator to continue with the liquidation process and ordered to place the amount received from the sale of any assets in a separate account, and further file an affidavit before the Court concerning the sale and the amount received;
  • An order of provisional attachment was issued post the sale of the assets of the Corporate Debtor.

It is in this background, the issue – whether PMLA would retain the jurisdiction or authority to proceed against the properties of a corporate debtor once liquidation measure had come to be approved in accordance with IBC, came to be dealt by the Court. Summarily, the Court held that once the adjudicating authority (NCLT herein) approved the measure to be implemented in the liquidation process, power vested by PMLA on ED, stands foreclosed.

Section 32A of the IBC and its significance

Section 32A of the IBC has been divided into three parts consisting of sub-sections (1) to (3).

  • Sub-section (1) of Section 32A begins with a non-obstante clause, and states that the liability of a corporate debtor, for offences committed prior to the commencement of the Corporate Insolvency Resolution Process (“CIRP”), will stand extinguished from the date a resolution plan is approved by the adjudicating authority or sale of liquidation assets, subject to certain conditions being fulfilled. This immunity under Section 32A is applicable once the approved resolution plan mandates a change in the management of the corporate debtor, if such persons (1) were not directly or indirectly related to the old management of the corporate debtor; or (2) have not abetted or conspired for the commission of such an offence committed by the corporate debtor.
  • Sub-section (2) seeks to extend warranty in respect of the properties of the corporate debtor upon approval of the resolution plan or sale of liquidation assets while providing assurance against liability.
  • Lastly, sub-section (3) obligates any such persons to aid any enforcement authority investigating under any applicable law.

Prior to the insertion of Section 32A, a successful resolution applicant faced prosecution and liabilities for prior acts of the corporate debtor. The Committee Reports and the Scheme of Arrangement alluded the need to address this issue, initially recognised in JSW Steel Ltd v. Mahender Kumar Khandelwal & Ors.[2] and subsequent to which Section 32A was implemented.

Further, while upholding the constitutional validity of Section 32A, the Supreme Court in Manish Kumar v. Union of India[3], also reiterated the principle objective of maximisation of value of assets of the corporate debtor under the IBC. This principle objective would be in jeopardy if the successful resolution applicant was made to face various unspecified liabilities for the prior acts of the corporate debtor. Thus, the introduction of Section 32A seeks to mitigate such apprehensions and subserves to assure the resolution applicant that once its offer is accepted, the corporate debtor can be taken over on a fresh slate, while additionally insulating the resolution applicant from the prospect of such prosecution.

Thus, the Court noted that the legislature in its wisdom under the aegis of Section 32A has aimed to protect the corporate debtor and its properties against the offences committed prior to the commencement of the CIRP.

Battle of Primacy: IBC and PMLA

While the judgment in Nitin Jain emphasised on the import of Section 32A of the IBC, the issue before the Court also pertained to the scope of ED’s power to attach the properties of the corporate debtor as conferred by Section 5 of the PMLA, once Section 32A is applicable.

PMLA was enacted by the legislation to deal with offence of money laundering, to provide for confiscation of property derived from or involved in the crime of money laundering and has been premised on the expression ‘proceeds of crime[4]. Under the PMLA Act, the competent authority (ED) has power to provisionally attach such property for specified period, if it has reason to believe that person in possession of such proceeds of crime may conceal / transfer / deal with the same to frustrate the proceedings. Such provisional order attachment can thereafter attain finality once the adjudicating authority confirms the provisional order that the property was involved in money-laundering. Upon establishment of the offence of money laundering, such property is confiscated by the Union Government and thereafter vests absolutely with the Union Government, free from all encumbrances.

Although, the powers of ED and the ambit of PMLA has been made clear by the legislature and further clarified by the judiciary, the Court was required to deal with the issue of primacy with IBC (statute primarily concerned with the subject of restructuring of indebted corporate debtor), as both the statutes employ non obstante clauses on their overriding effect over any other law in force[5].

However, with Section 32A to the IBC (which was inserted in 2020)[6], a trigger event was introduced imposing a statutory bar on taking any action against the corporate debtor’s property in relation to an offence committed prior to the commencement of CIRP, once the measure to be implemented in the liquidation process has been approved by the adjudicating authority. Such property ought to be covered under a resolution plan approved by the adjudicating authority. The instant such a trigger event has occurred, the power to attach assets of the corporate debtor under Section 5 of the PMLA would cease to be exercisable once any liquidation measure[7] is adopted and approved by the adjudicating authority. This also becomes relevant to protect the corporate debtor and its bona fide purchasers and their property, who ought not to be held liable for the offences committed prior to commencement of insolvency, although assistance must be provided to the enforcement authorities to investigate offences committed prior to the commencement of CIRP.

Notwithstanding the above, it is pertinent to note that the trigger event for statutory bar imposed by IBC on taking any action against property of the corporate debtor, does not apply or extend to the persons in charge of the corporate debtor or involved in money-laundering. In other words, the authorities under the IBC and PMLA ought to continue to discharge their obligations and duties within the demarcated spheres of the statutes per which the Enforcement Directorate may continue to investigate under the PMLA subject to the protection accorded to the resolution applicant under the IBC.


The Legislature by virtue of Section 32A has chosen to step in and introduce a specific provision for cessation of liabilities and prosecution under the IBC. Neither the resolution nor the liquidation process set in motion ought to be hindered by any unforeseen or unexpected claims or events. Enforcement authorities such as the Enforcement Directorate under the PMLA, therefore, will now have to limit its actions beyond the trigger event pursuant to which the IBC shall protect the corporate debtor and its bona fide purchasers and their property. While IBC may have imposed such a restriction, it cannot in anyway be said to have curtailed the powers of the enforcement authorities to take actions against the persons in charge of the corporate debtor or involved in money-laundering.

[1] W.P. (C) 3261/2021 dated December 17, 2021

[2] Company Appeal (AT) (Insolvency) No. 957 of 2019

[3] (2021) 5 SCC 1

[4] Section 2(1)(u) of PMLA which defines ‘proceeds of crime’ as means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad

[5] Please note that while the Delhi High Court in the case of Directorate of Enforcement v. Axis Bank[5]  had held that IBC could not prevail over PMLA and there was no inconsistency between both the statutes, for which the purpose, the text and context are different, the same was decided prior to the insertion of Section 32A of the IBC.

[6] Insolvency and Bankruptcy Code (Amendment) Act, 2020 dated March 13, 2020.

[7] Measures are specified in Regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016