India’s bankruptcy process to get smoother with ED’s new asset protocol

Currently, lenders face a big challenge when the Enforcement Directorate (ED) seizes assets linked to financial crimes, which comes in the way of the bankruptcy rescue process.

To get the resolution process moving, lenders typically move the National Company Law Tribunal (NCLT) to release these assets, where they face off against ED's lawyers, triggering a long-drawn process that winds through courts.

A new protocol prepared by the ED will make it easier for lenders to release assets and complete bankruptcy rescue, two people aware of the matter said.

Under this, the successful bidder, where a resolution plan has already been approved, will approach a special Prevention of Money Laundering Act (PMLA) court instead of NCLT to get the assets released. Where no fraud is detected, ED will not oppose the release; else, the agency will continue with PMLA proceedings, the persons said on the condition of anonymity.

In future cases, the assets confiscated by ED will not form part of the prospectus issued by the insolvency resolution professional for inviting fresh investments. If they wish to include those assets too, they have to approach the special PMLA court to get those released.

The move promises to be a relief for bankruptcy resolution across sectors, but particularly in real estate, where homebuyers often find themselves in limbo. It also provides clarity over cases such as the resolution of Bhushan Power and Steel Ltd, where the Supreme Court first scrapped, and later decided to review, a rescue plan approved years ago following ED intervention.

The roots

At the heart of the matter is the opposing goals of the Prevention of Money Laundering Act (PMLA), a statute to check illicit financial flows and seize proceeds of crime, and the Insolvency and Bankruptcy Code (IBC), a commercial law for the timely resolution of financial distress in companies. The conflict has led to much litigation in the past, creating uncertainty for lenders and investors. The issue has been particularly relevant in real estate, 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.

“The (new) protocol is based on a combined reading of PMLA and IBC," said one of the persons quoted above. The ED plan envisages the insolvency professional moving the PMLA court under Section 8 (8) of PMLA to release the assets. "The special court, if satisfied, will restore the confiscated assets to the claimant with legitimate interest," the person said.

Once the assets are released, the professional can add them to the prospectus listing assets of the bankrupt company, and invite bidders.

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. Here, the successful bidder could approach the special PMLA court for restoring the attached assets, 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.

Easing up

In recent months, ED has released several attached assets to the custody of the resolution professionals to allow bankruptcy resolution.

The new ED 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 asked the central government and ED in April 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.

Attachment issues

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.

The 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.