Kartik Bhatnagar
The recent Insolvency and Bankruptcy Board of India (IBBI) circular allows restitution of corporate debtor’s assets attached by the Directorate of Enforcement (ED) through an application. Kartik Bhatnagar, a lawyer and insolvency professional, has more than a decade of experience and took part in the Jet Airways insolvency case in the Supreme Court. He explains this recent development.
Q1. What is the significance of the circular for the corporate insolvency resolution process (CIRP)?
The Insolvency and Bankruptcy Code, 2016 (IBC), is prospective and remedial seeking to maximise corporate debtor’s assets’ value for stakeholders. Whereas, the Prevention of Money-Laundering Act, 2002 (PMLA), is retrospective and punitive, designed to trace, attach, and confiscate the proceeds of crime. The circular harmonises them establishing a standardised framework and mechanism, whereby attached assets can be restituted/restored for legitimate use in insolvency resolution or liquidation proceedings.
It transitions the insolvency regime from a stage of paralysing conflict to one of managed co-ordination, by prescribing a predictable and transparent procedure through which assets attached under the PMLA may, under judicial supervision, be temporarily restored to conduct CIRP or liquidation, while also preserving the ED’s lawful interest in safeguarding the proceeds of crime.
Q2. What were the issues that arose from previous attempts to address the problems?
Under the PMLA, the ED can provisionally attach and ultimately confiscate any property that is deemed as proceeds of crime. However, this frequently intersected with proceedings under the IBC, particularly where the corporate debtor’s assets stood attached by the ED.
These assets formed part of the insolvency estate and could enhance the debtor’s going-concern value or liquidation proceeds, but remained effectively frozen and inoperable, leading to diminution of recoveries and impairment of the resolution process.
Prior to the circular, resolution professionals (RPs) had to file ad hoc applications, resulting in inconsistent judicial outcomes, procedural delays, and avoidable litigation. RPs also refrained from seeking restitution owing to apprehensions of potential personal liability or perceived complicity, should the restituted assets confer indirect benefit on accused promoters or contravene safeguards.
Even when limited use of such assets was permitted previously, the absence of a codified operational framework led to ambiguities about permissible utilisation of restituted property, reporting and oversight obligations, prevention of diversion/misuse, and inter-agency co-operation.
Q3. To what extent will the circular address the issues? Do you foresee any challenges?
The standard undertaking in the circular affirms that any restituted asset will be utilised solely for the benefit of creditors and no advantage shall accrue to the accused or promoters. This is intended to reduce judicial hesitation and create a predictable, transparent process, replacing the earlier ad hoc approach with a codified route.
RPs will also maintain continuous reporting and compliance safeguards, including periodic disclosures to the special court, the ED, and IBBI, addressing concerns of preservation of proceeds of crime and duty of co-operation and document production to the ED.
The circular’s effect is procedural, and the court has discretion to grant or deny restitution and/or impose conditions. Tensions may persist between confidentiality of commercially sensitive data and the ED’s investigatory powers, potentially causing operational delays.
Additionally, post-restitution obligations impose heightened compliance burdens, increasing administrative cost. The economic utility of restitution may also be diluted if the asset’s value has eroded over time.
Importantly, where the restituted asset is later adjudged as proceeds of crime, it remains subject to confiscation, preserving inherent legal risk.
Q4. What kinds of companies undergoing CIRP had their properties seized by the ED? What’s the magnitude of the issue?
- Real-estate developers that collected large sums from homebuyers but failed to deliver have had their assets attached. An example is when the ED attached INR8.2 billion of assets in total of Ramprastha Promoters and Developers for defrauding more than 2,600 homebuyers and collecting INR11 billion (USD124 million).
- Companies involved in major bank-loan frauds or fund diversions owe large debts to banks or financial institutions, are admitted to CIRP or liquidation, and concurrently the ED attaches assets for alleged money laundering or fraudulent fund diversion. An example is where Sunstar Overseas was allegedly involved in a INR12.47 billion fraud and the ED attached INR2.9 billion worth of its assets.
- Industrial/special-purpose vehicles with alleged shell entities have large scale project financing and where diversion of funds is alleged, the ED attaches assets. An example is when the ED attached Bhushan Steel’s INR3.67 billion in assets.
The scale shows that the PMLA attachments are large-ticket and intersect significantly with insolvent companies, especially in real estate and bank-fraud contexts.
