(MENAFN- Live Mint) New Delhi: India's bankruptcy regulator has stepped in to break a gridlock between insolvency and money-laundering laws that has often stalled revival of companies. The Insolvency and Bankruptcy Board of India (IBBI) has offered guidance on how administrators of bankrupt firms could go about reviving the company when its assets are attached by the Directorate of Enforcement (ED) for financial crimes.

In an order issued on Tuesday, the bankruptcy rule maker said resolution professionals running bankrupt businesses have to move the special courts handling Prevention of Money Laundering Act (PMLA), rather than the National Company Law Tribunal (NCLT) dealing with bankruptcy cases, to unfreeze those assets for debt resolution. Reviving bankrupt companies entails bringing new investors on board through competitive bids, for which assets have to be freed.

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Mint had first reported on 16 September that a new protocol for resolving the contradicting overlap between the Insolvency and Bankruptcy Code (IBC) and PMLA has been prepared by ED.

Result of discussions

The latest circular from IBBI is the result of discussions with the ED about ensuring that the two statutes operate smoothly where they intersect.

The IBC offers a clean slate to a distressed company once it is acquired by a new investor under a process monitored by NCLT-that is, the company will not be prosecuted for any financial crimes by the previous management, only individuals responsible for them will be. However, any assets attached by the ED under the PMLA will go through the PMLA process of restitution to the rightful owners under the supervision of special PMLA courts.

This, however, adds another layer of regulatory and judicial process that creditors of the bankrupt firm and its new owner tend to resist and had led to conflicting judicial pronouncements in the past over which statute would prevail.

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It is advised that in cases where assets of the corporate debtor are attached by the ED under PMLA provisions, the insolvency professional running the company on behalf of lenders may file an application before the special court under sections of the PMLA for restitution of such assets, the IBBI said, referring to section 8 of the law dealing with release of assets.

“With a view to facilitate the expeditious disposal of such applications by the special courts, the IBBI, in consultation with the ED, has formulated a standard undertaking to be furnished by the Insolvency Professional along with the application for restitution of assets,” the IBBI said.

The insolvency professional has to state that the assets restored under this process by the PMLA court will not be sold or given to the previous shareholders, anyone in the previous management or related party or to anyone who has abetted in such financial crimes. The resolution professional also has to give periodic updates to the PMLA court and cooperate with the ED's investigation.

Step towards harmonization

Experts said the circular represents an important step toward harmonizing the IBC with PMLA.“Permitting Insolvency Professionals to seek restitution of assets attached by the ED, has the potential to materially enhance the value of the corporate debtor's estate, thereby improving recovery prospects and supporting a more comprehensive resolution outcome,” said Yogendra Aldak, executive partner at Lakshmikumaran and Sridharan attorneys.

“The standardized undertaking prescribed under the circular may also facilitate uniformity in applications before Special Courts, thereby reducing procedural ambiguity and, in some cases, expediting restitution,” said Aldak.

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However, the circular does not curtail the ED's powers to attach assets in the first instance under the PMLA, explained Aldak.“Consequently, while it may streamline the process of restitution once attachments have occurred, it does not prevent the initiation of such attachments-a critical factor that often delays the insolvency process. Moreover, the extensive reporting, disclosure, and cooperation obligations imposed on insolvency professionals may increase administrative burden and, in practice, could lengthen corporate insolvency resolution timelines,” he said.

The true impact of this circular on speeding up resolutions will depend on how the special courts and NCLT interpret and operationalize these provisions in tandem, balancing due processes under both statutory frameworks, Aldak added.

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