Introduction

  • Insolvency and Bankruptcy Code (IBC) was enacted on May 28, 2016 to effectively deal with insolvency and bankruptcy of corporate persons, partnership firms and individuals, in a time bound manner. It has brought about a paradigm shift in laws relating to insolvency resolution to promote entrepreneurship, maximize value of assets, providing a robust insolvency resolution framework and differentiating between impropriety and business debacle. The predominant object of the Code is resolution of the Corporate Debtor.
  • IBC is a transformational piece of legislation and has been amended four times to resolve problems hindering objectives of the Code.
  • Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019, introduced Section 32A IBC to provide Resolution Applicant, a fair chance to revive Corporate Debtor without imposing additional liabilities on Resolution Applicant arising from malafide acts of prsma

  • Section 32A

    • Prior to insertion of section 32A, a successful Resolution Applicant faced the hassle of prosecution and liabilities before courts and tribunals for prior acts of Corporate Debtor. Thus, there was a clamant need to protect Corporate Debtor from its prior offences and to revive the Corporate Debtor by removing obstacles faced by successful Resolution Applicant.
    • Section 32A provides that Corporate Debtor shall not be prosecuted for an offence committed prior to commencement of Corporate Insolvency Resolution Process (CIRP) once Resolution Plan has been approved by Adjudicating Authority (AA).
    • The section further provides that no action shall be taken against property of Corporate Debtor covered under such a Resolution Plan. However, 32A continues to hold liable every person who was a

    'designated partner' or an 'officer who is in default' or was in any manner in-charge of, or responsible to Corporate Debtor for conduct of its business or associated in any manner and who was directly or indirectly involved in commission of such offence.

Judicial pronouncements revolving around section 32A

  • NCLAT i n Shah Brothers Ispat Pvt. Ltd. v. P. Mohanraj & Ors.1 held that section 14 of IBC does not bar criminal proceeding.
  • Delhi High Court in Deputy Director Directorate of Enforcement Delhi & Ors. v. Axis Bank & Ors.2 has held that PMLA and Insolvency Code must co-exist and enforced in harmony.
  • NCLAT in JSW Steel Ltd. v. Mahender Kumar Khandelwal & Ors.3 has held that that once Resolution Plan is approved, criminal investigations against Corporate Debtor will stand abated. Further, Section 32A has a retrospective effect and does not make a distinction between a Resolution Applicant whose plan has been approved post or prior to promulgation of Ordinance. In instant case Enforcement Directorate while conducting investigation under PMLA was free to deal with or attach personal assets of erstwhile promoters and other accused persons.

Conclusion

  • IBC has evolved to strengthen insolvency framework for India and to provide successful Resolution Applicant a clean slate to attain a positive economic outcome for the Corporate Debtor, without fear of prosecution for past misdeeds of the erstwhile promoters/directors. Section 32A envisages that once Resolution Plan is approved by the Adjudicating Authority after completion of CIRP, there cannot be attachment or confiscation of assets of Corporate Debtor, as otherwise same will defeat objects of the Code. It is to be noted that 'investigating authority' has not been defined under Code but from purview of Section 32A it may be any authority carrying out investigation under prevailing statutes, in relation to an action against property of Corporate Debtor for an offence or an action against property of a promoter or a person in management or control of Corporate Debtor or a related party of such a person who had abetted or conspired for commission of offence.

Footnotes

1 Company Appeal (AT) (Insolvency) No. 306 of 2018

2 VAD (Delhi) 345

3 Company Appeal (AT) (Insolvency) No. 957 of 2019

Originally published 29 June, 2020

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