Fresh Start Or Loophole? Understanding Section 32A Of The IBC

Introduction

In India, Insolvency and Bankruptcy Code 2016 (hereinafter referred as "IBC") was introduced with the objective of revival of companies. But over the years, this revival was conditional. The fact that the company can change the owners when it goes down but still the company can be dragged for frauds and investigations attached to its name in the past. Due to all this, the main question arose that once the company starts sinking due to criminal liabilities and government investigations, how can business be truly revived if its new owners can be tried for the offences of the past. The purpose of IBC was resolution and value maximization, but after few years, the investors were reluctant to invest in the companies due to controversies attached to the company they had no role in it.

The turning point came in the case of JSW Steel Ltd. v. Mahendra Kumar Khandelwal¹, where the Enforcement Directorate (hereinafter referred as "ED") under Prevention of Money Laundering Act, 2002 (hereinafter referred as "PMLA") attached the properties of the corporate debtors even when the resolution was pending. When the bid was done, it was argued by JSW that since they were not involved with the company when the fraud happened, they should not be burdened with the criminal investigation. The National Company Law Appellate Tribunal (hereinafter referred as "NCLAT") initially took narrow view citing that resolution cannot override criminal laws, which caused panic among the investors. It is because of all these questions, the parliament amended IBC by adding Section 32A² in the year 2020, which allows companies to have a "fresh start" once the wrongdoers are held to be liable. This is based on the concept that the companies and their owners are separate juristic persons and the companies should not be held liable for something its owners have done.

Section 32A of IBC brought huge change in resolution procedure which has three parts a.) Immunity to the company b.) Liability of wrongdoers c.) Protection of assets. A key factor involves is that the company gets immunity once the resolution plan is approved and the new management takes over. Because of this, the company itself cannot be prosecuted for the old cases but the previous management of the company will still be investigated thoroughly. Furthermore, the ED cannot attach the properties of the corporate debtor. The assets are protected once the resolution is approved and the buyer has acquired the property in good faith. Provided this provision is not used as a loophole by shady owners to buy back their own company and escape accountability for their wrongdoings. While the provision was made, many questions arose about its validity and possible conflict with the PMLA.

Judicial Validation of Section 32A

Under PMLA, 2002, Section 5 empowers the ED to provisionally attach the property if it is suspected to be proceeds of the crime, and Section 8(3) of the same act empowers adjudicating authority to confirm the attachment and continue it during the trial. Moreover, Section 71 of the act states that PMLA has an overriding effect over any other law. In contrast, Section 238 of IBC also gives IBC an overriding effect over any other laws. Because of these two laws, the validity of Section 32A was questioned in the court in the case of Manish Kumar v. Union of India³. The judgment of this case affirmed the validity of Section 32A and emphasized that Section 32A is necessary as it encourages revival while making sure that wrongdoers are punished. This view was taken because there is larger good involved, as it maximizes the value and protects the employment of thousands of people. Following the judgement of Supreme Court, NCLAT applied the reasoning of the Apex Court and in the case of JSW Steel Ltd. v. Enforcement Directorate⁴, the NCLAT made it clear that ED cannot attach the property of corporate debtor once the resolution is confirmed under Section 32A, but they can investigate against owners separately.

Moreover, recent cases like Alchemist Infra Realty Ltd.⁵, the NCLAT that ED-attached assets must be released once resolution plan is approved. Similarly, Bombay High Court upheld Section 32A and emphasized that it provides immunity to the corporate debtor⁶. In the case of Dunar Foods Ltd. it was held that the companies get protection from criminal proceeding post resolution while the wrongdoers remain accountable⁷. Through all these, it is quite clear that in cases where there is smallest of chance of revival of company, IBC can override PMLA and not vice versa.

Criticisms and Concerns

While Section 32A is encouraged for giving another chance to revive companies and protect bona fide investors, there are some challenges that can disrupt its objectives. One concern is that it can overstep in terms of protecting the innocent companies, which can reduce the vigilance by the new management. Since the company gets immunity once the resolution plan is confirmed, the new management may not thoroughly investigate the past transactions or contracts of the company. These transactions may not be criminal in nature but it can be hidden liabilities left by the previous owners that may not be know at that time but can create problem in future, raising the possibility of hampering the reviving the company. Another problem is that, the investors may invest in the company for their asset value rather than with genuine motive to revive the companies. This can be done with the motive of making profits in the short terms without thinking about the long-term stability of the company which undermines the legislative intent.

Another concern is that, this provision can cause unnecessary delay of justice and relief to the victims of fraud, creditors and stakeholders. While the previous promoters will be held liable for their wrongdoings, the ultimate aim of the bankruptcy laws is to provide relief to the creditors. The creditors, stakeholders who suffered due to company's malpractices will face difficulties in getting even their principal amount back because the company's assets are protected. But even if they are given new opportunity, that does not change the fact that company took money from various creditors and it has to be returned back with the adequate compensation, which becomes difficult because of this provision.

While Section 32A was brought with the intention of separating the company and their owners, this exists only in papers. In real world, the companies, their owners and various other companies are so intertwined with each other that it can be impossible to separate them. There is a possibility that the old promoters can bring back their own people in new management without technically violating the law. Moreover, there can be off-the-record deals where the new management colludes with the old promoters, benefitting from the immunity. Lastly, the companies can make use of Section 32A to strategically time their resolution applications to benefit from the protection shielding away from scrutiny temporarily. While the law is made to revive companies, it can also create manipulation opportunities. This is where the judiciary steps up, and depending upon the facts and circumstances, it has to exercise their power efficaciously and judicially.

Conclusion and Way Forward

Section 32A was brought with a transformative approach to give a chance to companies to revive rather than going in liquidation, but its right use has to be ensured because, with its immunity, it can provide a path for manipulation and escaping accountabilities. The immunity given has to be accompanied by robust governance, and the investigative agencies have to monitor these companies vigilantly. Moreover, courts, regulators and resolution professionals have to come together to ensure that the immunity is used in positive way and not for unfair collusions.

After the immunity is provided, an approach can be mandatory audits of these companies by the independent and government agencies to make sure that they are in compliance with the laws and to assess their financial and operational integrity. Through this, it can be ensured that the purpose of revival actually benefits the creditors and the employees and not just the owners. Moreover, judiciary can also play a vital role in this by bringing an approach or guidelines that can differentiate the companies that are genuinely on the pathway of revival from that of companies with mala fide intention.

In essence, Section 32A indeed gives a new chance to the company but it also requires a balance of legal liability and corporate governance. Although the provision has been brought, its use depends upon the oversight and vigilance of regulatory authorities, the government and the judiciary which prioritizes that long term stability and revival of the company. If properly implemented, this can change the landscape India's corporate environment, where every company can be given a chance to sustain and grow irrespective of the past records and without compromising justice, benefitting both the sides.

Footnotes

1. JSW Steel Ltd. v. Mahendra Kumar Khandelwal, 2020 SCC OnLine NCLAT 431

2. Insolvency and Bankruptcy Code, 2016, §32A.

3. Manish Kumar v. Union of India, 2021 (5) SCC 1

4. JSW Steel Ltd. v. Enforcement Directorate, Civil Appeal No. 3362 of 2020, decided on May 2, 2025.

5. Vantage Point Asset Pte. Ltd Vs. Gaurav Misra, RP of Alchemist Infra Reality Ltd. in IA No. 6625 & 7235 of 2024 in Company Appeal (AT) (Insolvency) No. 1495 of 2024.

6. Shiv Charan v. Adjudicating Authority, WP (L) No. 9943 of 2023 & WP (L) No. 29111 of 2023, decided on March 01, 2024.

7. Rebecca Samervel, Co accused in NSEL scam discharged under IBC clause granting immunity, The Times of India (May 24, 2025, 10:45 IST), https://timesofindia.indiatimes.com/city/mumbai/co-accused-in-nsel-scam-discharged-under-ibc-clause-granting-immunity/articleshow/121374514.cms .

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.