NCLAT holds a resolution applicant immune from liability for past offences of a corporate debtor

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NCLAT holds a resolution applicant immune from liability for past offences of a corporate debtor

Introduction

On 17 February 2020, the National Company Law Appellate Tribunal (NCLAT) passed a judgment on seven appeals filed in relation to the corporate insolvency resolution of a major steelmaker (Corporate Debtor). The most significant issue was raised in the appeal filed by one of the resolution applicants.

The NCLAT discussed the legality of attaching property of a corporate debtor post the approval of a resolution plan. In cases where there is a change in control and management of the corporate debtor pursuant to a resolution plan, the NCLAT ultimately held that the property of the corporate debtor could not be attached in such cases.

Background

Various resolution applicants submitted their resolution plans for taking over the management of the Corporate Debtor. On 5 September 2019, the National Company Law Tribunal, Delhi (NCLT) approved the resolution plan in favor of the successful resolution applicant.

Subsequently, on 10 October 2019, the Directorate of Enforcement, New Delhi passed an order attaching the assets of the Corporate Debtor under the Prevention of Money Laundering Act, 2002 (Order).

Aggrieved, the successful resolution applicant challenged the Order before the NCLAT. The NCLAT was of the view that the question of ‘whether the property of a corporate debtor can be attached post the approval of the resolution plan’, was a matter to be settled between the relevant government authorities. The NCLAT accordingly adjourned the matter.

On 28 December 2019, the central government promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 (Ordinance).

Ordinance

In its judgment, the NCLAT predominantly relied on section 32A of the Insolvency and Bankruptcy Code, 2016 (IBC), introduced pursuant to the Ordinance. The section essentially provides that in case of change in management or control of the corporate debtor pursuant to a corporate insolvency resolution process (CIRP):

The corporate debtor shall not be liable for offenses committed prior to the commencement of CIRP: in this regard, the corporate debtor shall:

  • not be prosecuted for such offenses from the date of approval of the resolution plan; and
  • stand discharged of any proceedings initiated during the CIRP from the date of approval of the resolution plan.

No action shall be taken against the property of the corporate debtor in relation to an offense committed prior to the commencement of CIRP, where the property is covered in the resolution plan.

Summary of key findings of NCLAT

> Section 32A does not require a declaration by the successful resolution applicant

The Directorate of Enforcement alleged that a declaration by the resolution applicant was required to be furnished by such applicant to avail the benefit provided under section 32A. The NCLAT found that section 32A of the IBC does not require the resolution applicant to submit any such declaration. The NCLAT reasoned that since there was no requirement in the relevant section, no requirement for self-declaration could be imposed.

Section 32A can apply retrospectively

(a) The NCLAT found that there was no basis to distinguish between a resolution applicant whose plan has been approved prior or post the promulgation of the Ordinance.

(b) The NCLAT also took into consideration the objective of the Ordinance which clearly states that it was enacted to provide immunity against prosecution of the corporate debtor, to prevent action against the property of such corporate debtor and the successful resolution applicant.

(c) The NCLAT further noted that the Ordinance was passed pursuant to the direction of the NCLAT to the central government in light of the facts in the instant case.

(d) Considering the above, the NCLAT found that section 32A of the IBC can apply retrospectively. That means a corporate debtor in respect of whom the resolution plan has been approved prior to the promulgation of the Ordinance, can avail the benefit of section 32A of the IBC.

Eligibility under Section 32A:

(a) Section 32A of the IBC specifies the eligibility criteria for a corporate debtor to be granted immunity for past offenses. The section provides that the benefit granted thereunder shall not be available if transfer of management or control is to a person who:

  • was a promoter of the corporate debtor, or in the management or control of the corporate debtor, or a related party of such person; or
  • the relevant investigating authority has, on the basis of material in its possession, reason to believe that the person had abetted or conspired for commission of the offense and submitted or filed a report or a complaint to the relevant statutory authority or court.

(b) Allegations were raised by the Directorate of Enforcement that the successful resolution applicant was ineligible to the benefit of section 32A of the IBC as it was a related party of the promoter of the Corporate Debtor. NCLAT found that two companies do not become related parties of each other by investing in the same joint venture company.

(c) The NCLAT also found that the investigating authority must assess whether the resolution applicant has abetted or conspired for commission of an offense of the corporate debtor, on the date the confirmation of the investigating authority is requested.

(d) Since the Directorate of Enforcement did not have any basis to believe the successful resolution applicant abetted or conspired for commission of an offense at the time its confirmation was requested, the NCLAT held that the successful resolution applicant cannot be said to be ineligible under section 32A of the IBC.

Conclusion

The judgment passed by the NCLAT comes as a relief to resolution applicants. The applicants need not remain in fear of attachment, seizure, confiscation, etc. of its newly-acquired asset post acquisition.

Further, the NCLAT expressly clarified that the immunity granted to a corporate debtor for past offenses, does not extend to the erstwhile promoters, officers and others of the corporate debtor — that is, the investigating authorities may proceed against them as they see fit.

Section 32A of the IBC also clarifies that designated partners and officers in default involved in commission of an offense by a corporate debtor, shall continue to be liable to be prosecuted notwithstanding that the corporate debtor’s liability has ceased.