The Union Cabinet, on December 24,2019 approved the proposal to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 (Ordinance) to amend the Insolvency and Bankruptcy Code, 2016 (Code). Introduced to further ease of doing business in India, the Ordinance seeks to clarify various issues and streamline the insolvency resolution process. One of the significant changes pertains to the insertion of Section 32A to the Code (Section 32A), by way of which successful resolution applicants will be ring-fenced from the threat of criminal proceedings for offences committed by the former promoters of the corporate debtor.
By way of the said insertion, the legislature has clarified that in cases where the Corporate Debtor is undergoing investigation by the Central Bureau of Investigation, Serious Fraud Investigation Office and/ or the Directorate of Enforcement, such investigations are separate and independent of the Corporate Insolvency Resolution Process (CIRP) under the Code and criminal liability can be imposed on the successful resolution applicant.
Both the statutes, i.e. the Code as well as the Prevention of Money Laundering Act, 2002 (PMLA) contain non-obstante clauses1 (non-obstante clauses) which state that the provisions of the Code/ PMLA shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
The overriding effect of the non-obstante clauses was the subject of judicial determination by the National Company Law Tribunal (NCLT) in Sterling SEZ Infrastructure Ltd. vs. Deputy Director, Directorate of Enforcement 2, where it was held that the Code would have an overriding effect on the PMLA and that if an attachment order of the assets of the corporate debtor is passed, the said order would be a nullity and non-est in law.
The fact that the Code is a latter legislation as compared to the PMLA, in view of the decision of the Supreme Court of India in Solidaire India Ltd. vs. Fairgrowth Financial Services Pvt. Ltd.3, if there arises any inconsistency in the two statutes, both of which contains non-obstante clauses, the latter statute shall prevail.
On the contrary, the High Court of Delhi in The Deputy Director, Directorate of Enforcement, Delhi vs. Axis Ban & Ors.4 held that regulations such as the Recovery of Debts Due to Bank and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, the PMLA and the Code must co-exist and each shall be construed and enforced harmoniously, without one being in derogation of the other. A similar view was taken by the National Company Law Tribunal Appellate Tribunal (NCLAT) in Varrsana Ispat Limited vs. Deputy Director, Directorate of Enforcement5 and Rotomac Global Private Limited, (Through Anil Goel, Liquidator) vs. Deputy Director, Directorate of Enforcement6 whereby it has been held had the PMLA relates to different fields of penal action of 'proceeds of crime' and therefore Section 14 of the Code is not applicable to such proceedings that can be invoked simultaneously with the Code, having no overriding effect of one Act over the other.
A similar issue arose before the NCLAT in the matter of Bhushan Power & Steel Ltd. (Bhushan) whereby the resolution plan had been approved by the NCLT in September, 2019. Subsequent to the approval of the resolution plan, the Directorate of Enforcement attached the immovable properties of Bhushan. The said attachment of the properties of Bhushan after the approval of the resolution plan led to distress amongst resolution applicants.
By way of the insertion of Section 32A, the liability of a corporate debtor for an offence committed prior to the commencement of the CIRP shall cease and the corporate debtor shall not be prosecuted for such an offence from the date on which the resolution plan has been approved by the Adjudicating Authority under Section 31 of the Code. However, the benefit of the said cessation of liability would only be available when the change in the management or control of the corporate debtor is not to a person who was a promoter or in the management or control of the corporate debtor or a related party of such a person. It has been further clarified the person in charge of the management should not be the one with respect to whom any investigating authority has given adverse opinion with respect to the offence committed, and has furnished a report/compliant to relevant statutory authority/court.
Section 32A releases the corporate debtor but continues to hold the following persons liable for offences:
(a) every person who was a "designated partner" as defined in clause (j) of Section 2 of the Limited Liability Partnership Act, 2008
(b) an "officer who is in default", as defined in clause (60) of Section 2 of the Companies Act, 2013
(c) a person who was in any manner in charge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner
(d) a person who was directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority.
It is pertinent to note that the word ''offence" had not been defined in the Code. Therefore, it has been left to the appropriate Tribunal(s)/Court(s), to distinguish between the offences committed by the corporate debtor and those committed by the concerned people in the management or control of the corporate debtor.
Notwithstanding the immunity given, Section 32A makes it mandatory for the corporate debtor and/ or any person who may be required to assist or co-operate with any authority investigating an offence committed prior to the commencement of the CIRP, to provide necessary assistance and co-operation.
The purported immunity given to the corporate debtor and its new management post the resolution process may prove to be appealing to prospective resolution applicants. Whether this desired outcome is achieved in practice or not will depend largely on harmonious interpretation of the applicable provisions of PMLA and Code and its implementation.
1 Section 238 of the Code and Section 71 of the PMLA
2 M.A. 1280/2018 in C.P. 405/2018 (decided on February 12,2019)
4 CRL.A. 143/2018 & CRL.M.A. 2262/2018 (decided on April 2, 2019)
5 Company Appeal (AT) (Insolvency) No. 493 of 2018
6 Company Appeal (AT) (Insolvency) No. 14o of 2019
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