IBC Moratorium Vs PMLA Attachment Powers: Freezing Of Bank Accounts During Insolvency

The Insolvency and Bankruptcy Code 2016 seeks to protect the corporate debtor through a moratorium under Section 14. The moratorium is intended to maintain calm during insolvency by halting coercive actions and ensuring that the resolution professional has a fair opportunity to revive the business. The Prevention of Money Laundering Act 2002, on the other hand, empowers investigating agencies to provisionally attach or freeze assets believed to be proceeds of crime. Both statutes carry overriding clauses, and neither was designed to yield to the other. In practice, this overlap means that bank accounts can be frozen even after insolvency proceedings commence, often bringing the resolution process to a standstill.

The Moratorium Promise Versus the Power to Attach

The moratorium under the IBC is meant to act as a protective shield around the corporate debtor. It prevents recovery actions, legal proceedings and asset transfers so that the resolution professional can attempt revival without external disruptions. The philosophy of the Code is rooted in value maximisation and time bound resolution.

The PMLA, however, serves a different public purpose. It targets the laundering of illicit funds and authorises the attachment of assets suspected to be linked to criminal activity. When bank accounts are frozen under the PMLA, the corporate debtor may be left unable to function as a going concern, even though insolvency proceedings are meant to preserve business continuity. This tension raises a critical question. Does the insolvency moratorium truly protect the corporate debtor when criminal enforcement steps in, or does it become illusory in the face of investigative powers?

Courts Reject a One Law Trumps All Approach

Indian courts have consistently declined to adopt a rigid hierarchy between the two statutes. Appellate insolvency tribunals have emphasised that the IBC and the PMLA must be read harmoniously. Assets that are ultimately established to be proceeds of crime cannot be treated as part of the corporate debtor's estate. At the same time, if such attachments are lifted or found unsustainable, resolution professionals may seek to bring those assets back into the resolution framework for the benefit of creditors.

Equally significant is the judiciary's recognition of institutional limits. Insolvency tribunals have clarified that they lack jurisdiction to direct investigating agencies to unfreeze bank accounts. Proceedings under the PMLA operate independently, and the insolvency moratorium does not bar criminal investigations or attachment actions. Remedies against such measures lie before special courts or constitutional courts, not insolvency forums.

High Courts Add Nuance to the Debate

High Courts have added an important layer of practical reasoning to this debate. Several decisions have underlined that attachment under the PMLA is a restraint on use rather than a transfer of ownership. Freezing a bank account suspends access but does not erase the underlying rights of creditors.

Courts have also observed that attached property is neither freely available nor automatically part of the insolvency estate. This approach attempts to strike a delicate balance. It respects the public interest in tackling money laundering while acknowledging the IBC's objective of corporate revival. The judicial message is clear. The two statutes must coexist rather than compete.

Supreme Court Draws Clear Jurisdictional Lines

The Supreme Court has reinforced these boundaries by holding that insolvency forums cannot compel investigating agencies to release attached assets. Any challenge to attachment orders must be taken to the appropriate constitutional court or PMLA forum.

The Court has also cautioned that corporate revival cannot come at the cost of nullifying valid criminal proceedings. Unless there is a clear legal or constitutional infirmity, enforcement action under the PMLA cannot be brushed aside merely because insolvency proceedings are underway.

The Real-World Cost to Insolvency Resolution

For resolution professionals and creditors, frozen bank accounts are more than a legal debate. They are a practical nightmare. Operations stall, salaries remain unpaid and resolution applicants factor enforcement risks into their bids. Valuations drop and the promise of time bound resolution under the IBC begins to fade.

Recent coordination mechanisms between insolvency regulators and enforcement agencies attempt to address this impasse. These allow resolution professionals to approach special courts for conditional release of attached funds, subject to safeguards that prevent benefits flowing back to tainted promoters. If lawfully released, such funds can preserve going concern value and improve creditor recoveries.

Drawing the Line Between Enforcement and Resolution

Investigating agencies play a vital role in combating economic crime, but their powers are not without limits. Every freezing order must comply with statutory safeguards and be backed by reasoned justification. Courts have repeatedly cautioned against freezing accounts on mere suspicion without oversight.

For now, the legal position is clear. Proceedings under the PMLA generally survive the insolvency moratorium, but they remain subject to constitutional discipline. As courts continue to refine this balance, stakeholders must navigate an uneasy coexistence between enforcement and resolution. Both laws ultimately aim to preserve value. The challenge lies in ensuring that one does not destroy the purpose of the other.