Even with the enactment and introduction of the Insolvency and Bankruptcy Code 2016, the country witnessed a huge cry of deficiency in achieving the objects of the code for maximum credits through resolution process of the non-performing assets. After analyzing various reports and addressing numerous cases, the Parliament amended the code by introducing new concept and provision protecting the corporate debtor that will boost the economy of India and promote ease of doing business. Thus, a new section 32A was brought into the Insolvency and Bankruptcy code which reads that the prior liability or the offence committed by the corporate debtor will be ceased and discharged once the resolution plan is approved by the adjudicating authority if there is change in the management and control of such corporate debtor and will not be prosecuted for such earlier offence of the corporate debtor.
Further, the section also provides that if prosecution of a corporate debtor has been initiated during the resolution plan it will stand discharged. However, every person who is a designated partner as defined in the Limited Partnership Act or an officer as defined in Clause 60 of Section 2 of the Companies Act 2013 who is in charge of the business of the corporate debtor and is directly or indirectly in the commission of such offence as per report or complaint filed by the investigating authority shall continue to be liable and prosecuted for such offence committed by the corporate debtor notwithstanding that the liability of the corporate debtor has ceased. So also it provides for protection of the assets of the corporate debtor in an approved plan.
NECESSITY AND FACTORS IN PROTECTING CORPORATE DEBTOR
It is a prodigious step taken by the Government which will enhance the revival of the stressed assets of corporate debtor as it will attract investments from successful bidders for the resolution plan before Adjudicating Authority and they face no further prosecution by taking over the corporate debtor from the prior clutches of such corporate debtor. A dire scenario substantiates the need of protecting the corporate debtor from its prior offence as even after taking over of a Corporate Debtor through a successful resolution plan, a successful bidder faces prosecution and liabilities before courts and tribunals for the prior acts of such corporate debtor.
Such grievance is relatable in Monnet Inspat & Energy that has been acquired under CIRP (Corporate Insolvency Resolution Process) jointly by AION and JSW, where certain claims used to arise even after a successful bidding. Further, from ongoing case of Bhushan Power Steel Ltd which is under insolvency resolution process, to be acquired by JSW for over Rs.19,700 crore, where the Enforcement Directorate attached assets of Bhushan Power Steel Ltd by alleging that an offence under the Prevention of Money Laundering Act has been committed. In the appeal case of Committee of Creditors versus Directorate Enforcement,1 the apex court stayed the ED attachment order while hearing the petition and the court asked ED to explain whether its money-laundering charges would trump the insolvency proceedings to be heard in forthcoming days.
RECENT OBSERVATIONS AND INTERPRETATION OF SECTION 32A BY THE APPELLATE TRIBUNAL
Emphasizing on the object of the very section, the Appellate Tribunal (NCLAT), vide its judgement dated 17.02.2020 covering 108 pages, made certain observations and interpreted the provisions of the said section while adjudicating and addressing numerous appeals and petitions for the acquisition of Bhushan Power Steel Ltd by JSW Ltd 2 being the Successful Bidder in the CIRP process.
In the very instant cases, the Appellate Tribunal in the light of Section 32A of IBC 2016 (ordinance which came into force on 28th December 2019) addressed the issues raised by Enforcement Directorate for attaching and releasing of the assets of the Corporate Debtor (Bhushan Power Steel Ltd) where the Appellate Tribunal by analyzing, observing the object of the enactment declared and held that the attachment of assets of the corporate debtor by the Enforcement Directorate as illegal and without Jurisdiction. Though various issues were addressed by the Appellate tribunal, a certain issues faced by the Appellate Tribunal are highlighted in this article.
First issue is regarding the retrospective or prospective effect/applicability of the section in the said case. Second notable issue is of any declaration to be made by the successful bidder to be in the scope of Section 32A for immunity after its acquisition of the Corporate Debtor.
Addressing the first issue raised by the Enforcement Directorate before the appellate Tribunal, the Appellate body in an appreciable manner at para no.43 and 45 in its judgement made clear that the immunity provided under Section 32A is to be applied retrospectively as the ordinance which inserted a provision of immunity of corporate debtor is clarificatory. The said paras are as below:
Para no. 43 reads "A plain reading of Section 32A(1) and (2) clearly suggests that the Directorate of Enforcement/ other investigating agencies do not have the powers to attach assets of a 'Corporate Debtor', once the 'Resolution Plan stands approved and the criminal investigations against the 'Corporate Debtor' stands abated. Section 32A of the 'I&B Code' does not in any manner suggest that the benefit provided thereunder is only for such resolution plans which are yet to be approved. Further, there is no basis to make distinction between a resolution applicant whose plan has been approved post or prior to the promulgation of the Ordinance.3"
Para no. 45 reads "The Union of India had unequivocally stated that after the completion of the 'Corporate Insolvency Resolution Process', there cannot be any threat of criminal proceedings against the 'Corporate Debtor', or attachment or confiscation of its assets by any investigating agency, after approval of the 'Resolution Plan'. In any event, by virtue of Section 238 of the 'I&B Code', the 'I&B Code' has an overriding effect over anything inconsistent therewith in any other law. Accordingly, it is clear that subsequent promulgation of the Ordinance is merely a clarification in this respect. Therefore, it is ex facie evident that the Ordinance being clarificatory in nature, must be made applicable retrospectively4."
While addressing the second issue raised by the Enforcement Directorate w.r.t availing of benefits of Section 32 A, a self-declaration to be made by the Successful Bidder of Corporate Insolvency Resolution Process, the appellate body had taken a broad view that in its judgement, it opined that there is no mandate stated in Section 32A to be declared or made by the Successful bidder of Corporate Resolution process which is to be only decided by the Competent Authority if such issue and allegation is being levelled. In this aspect, the applicable para is:
Para no. 20 of the judgement reads "Aforesaid stand taken by the Directorate of Enforcement cannot be accepted, in absence of any mandate under Section 32A that the 'Successful Resolution Applicant' after approval of the plan is required to give any such declaration as to whether the benefit of Section 32A will be applicable to them or not. Only the competent authority can decide such issue if any such allegation is levelled."5
Therefore, the very intent of the section is to address the aforesaid grievance and problems that a successful bidder in resolution plan faces and also to secure the assets of corporate debtor that such assets should not become stressed with the delay of prosecution before courts. Thus, discharging of corporate debtor will be like a golden handshake favoring the successful bidder to the creditors of a corporate debtor. A supportive expression can be drawn and seen even from the Adjudicating Authority to the legislation of protecting the immunity of corporate debtor "You are going to kill the economy of the country... (You are) playing with fire," the bench headed by NCLAT chairman Justice SJ Mukhopadhyaya told the directorate. "No outsider will come and purchase (distressed companies)... IBC cannot be annulled in this manner. Money laundering is by an individual.6
By analyzing the issues addressed by the Appellate Tribunal, an express opinion can be drawn that the appellate body by preserving the non obstante clause of the said section tends to protect successful bidder in its acquisition process that will achieve the very object of the enactment. Further, adhering to the said enactment, the Appellate body expressed a favoring nature which will help in achieving the very objective of the Code. It is to be noted that even while protecting the successful bidder and the corporate debtor, the appellate body in its judgement wisely interpreted adhering to the said section that the proceedings against the promoters, officers and officials of the corporate by the CBI, SFIO and Enforcement Directorate cannot be interfered and intervened as mentioned in the said section.
Though, the section enshrined in the code provides immunity and protection of prior offence to the corporate debtor, it is vague. One needs to interpret broadly as the new section does not define under which law immunity and protection to the corporate debtor be discharged and of what kind of offences. Some critical outcomes can be elucidated herein.
Firstly, the very section opens with non obstante clause that critical question may arise whether a corporate debtor facing prosecution before a special court involving and investigating agency such as CBI, EOW, Enforcement Directorate will be immune under the very code by its non obstante Clause? Secondly, if the corporate debtor is to be discharge from its prior liability/offence then the real culprit will have washed off his hands from the offensive acts. Thirdly, by triggering the insertion of 32A to the Code, it will be dubious while ascertaining the assets whether such assets of the corporate debtor were obtained lawfully or through an act of white-collar crime. Fourthly, while
reading the review and report of the Company Law committee report of November 2019, it revealed that the decriminalization of corporate debtor is for the procedural and technical offence enshrined in the very Act. However, after a month, the amendment was made and section 32A was inserted to the IBC giving a hope in redeveloping of business structure by acquiring the corporate Debtor through Resolution process. However, a negative viewpoint can be made that it may even lead to frivolous filing of resolution by a corporate debtor for discharging him of its prior offence.
Further, without prejudice and appreciating the decisions of courts and authorities, the very section bears an ambiguity for its interpretation by a layman and even to an extent by the professionals that though the code has a vast and wide scope in the process of resolution, the adjudicating authority and the courts vary in passing verdicts decisions and observations. Such can be relatable from the case of Bank of Baroda vs. Rotomac Global (p) Ltd 7 where the NCLAT observed IBC (Insolvency Bankruptcy Code) and PMLA (Prevention of Money Laundering Act) exercise simultaneously. A similar aspect can be drawn and create doubts in mind when the apex court asked the Enforcement Directorate whether money laundering will triumph over IBC. The hon'ble Supreme Court in the case of Solidaire India Ltd. Vs. Fairgrowth Financial Services Pvt. Ltd.8 has held that where two statutes contain non-obstante clause, latest statute would prevail. A critical note to be seen while narrating and reading the Judgement of the Appellate Tribunal that has been passed recently which leaves a doubt in arriving to a satisfactory conclusion as the Appellate Tribunal leaves out to determine the discharging of the corporate Debtor due to pendency of appeals and petition before other courts. Hence, it is not clear whether the new section 32A will be applicable in the cases before special court where the corporate debtor is facing trials and criminal prosecution on the complaint lodge by CBI, EOW, Enforcement Directorate, though the reading of the very section has a retrospective effect as the Appellate Tribunal triggers a green signal in protecting the corporate debtor through its recent judgement.
Keeping all the aforesaid assumption of doubts, the final interpretation now rests with the apex court for the applicability of section 32 A of the code to the prosecution faced by the corporate debtor involving investigating agencies of government in discharging and ceasing the prior liability and offence of the corporate debtor being in the ambit of approved resolution plan before adjudicating authority.
The concept of corporate liability emerges when the corporates are held liable for causing harm or injury to person, public in any form and act. However, this recent legislation seeks to protect the corporate debtors from prosecution which is a new trend adopted and enacted by the parliament. In this aspect, it is a changing era as the country aims to boost the economy by enabling investments in the stressed assets of a corporate debtor and removing obstacles faced by successful bidders in the resolution of a corporate debtor. Such a step will not only boost the economy but will also lead to encouragement of entrepreneurship in the country. To sum up, in the case of Assistant Commissioner vs. Velliappa Textiles Ltd9, the Supreme Court held that in any case a Corporation cannot be imprisoned, it can also be not prosecuted for the offence that is punished with imprisonment under Indian Penal Code (IPC), and this is very much appreciated while studying the protective enactment of the corporate debtor. Therefore, it is concluded that once this legislation is in practice, an ambiguity may arise in case of some private enterprises and parties.
1 Petition(s) for Special Leave to Appeal(c) no.29327-29328 of 2019
2 Company Appeal (AT) (Insolvency) No. 957 of 2019
3 Company Appeal (AT) (Insolvency) No. 957 of 2019
4 Company Appeal (AT) (Insolvency) No. 957 of 2019
5 Company Appeal (AT) (Insolvency) No. 957 of 201
6 Saloni Shukla, Sachin dave ET Bureau dated 09 December 2019 IBC to be amended to protect new owners of bankrupt companies https:// economictimes.indiatimes.com/industry/banking/finance/ibc-to-beamended-to-protect-new-owners-of-bankrupt-companies/ articleshow/72431790.cms?utm_source=contentofinterest&utm_ medium=text&utm_campaign=cppst
7 Company Appeal (AT) (Insolvency) No. 140 of 2019
8 Solidaire India Ltd v. Fairgrowth Financial Services Pvt. Ltd., (2001) 3 SCC
9 MANU/SC/0721/2003 The Assistant Commissioner, Assessment-II, Bangalore and Ors. vs. Velliappa Textiles Ltd. and Ors. (16.09.2003 - SC) : MANU/SC/0721/2003
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