Section 32A Of Insolvency And Bankruptcy Code, 2016: A Sought After Reprieve For Potential Investors And Bidders

Recently, the Insolvency and Bankruptcy Code (Amendment) Bill, 2020 ("Bill") was passed by voice vote in Rajya Sabha on March 12, 2020. It was approved by the Lok Sabha on March 6, 2020. The Bill replaces an Ordinance promulgated in December 2019. The Bill has been given retrospective effect from the date of ordinance, i.e. December 28, 2019. Section 32A was one of the important provisions that were introduced through the Bill. Section 32A restricts the liability of the corporate debtor for offences committed prior to the commencement of the insolvency process.

What is Section 32A and what are its implications?

As per Section 32A, the liability of a corporate debtor for an offence committed under any law prior to the commencement of the Corporate Insolvency Resolution Process ("CIRP") shall cease and the corporate debtor will not be prosecuted for such an offence from the date, the resolution plan is approved by the adjudicating authority, i.e. National Company Law Tribunal ("NCLT").

There are, however, conditions attached to this benign provision. This exemption under Section 32A can be availed only if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not: (i) a promoter, or in the management or control of the corporate debtor or a related party of such person; or (ii) a person who abetted or conspired for the commission of the offence according to the relevant investigating authority, and where the investigating authority has submitted a report or filed a complaint to the relevant statutory authority or Court. Section 32A also provides that if the prosecution has been initiated during the CIRP, corporate debtor shall stand discharged from the date of approval of the resolution plan.

While the liability of the corporate debtor will be ceased, no immunity will be provided to certain officers of the corporate debtor if they were involved directly or indirectly in commission of the offence, as per the report submitted or complaint filed by the investigating authority under the relevant law. These are: (i) Designated partner of an LLP; (ii) Officer who is in default in case of Company; (iii) Officer in charge of or responsible for conduct of business of the corporate debtor; and (iv) Officer associated with corporate debtor in any manner. These identified officers will continue to be liable to be prosecuted and punished for the offence committed by the corporate debtor even if the latter's liability has ceased.

Section 32A of the IBC also has a direct bearing on Section 14 of the IBC, which provides for a mandatory moratorium period to the corporate debtor from the insolvency commencement date. During the moratorium period, institution of new suits or continuation of the pending suits, against the corporate debtor, are temporarily suspended until the completion of the CIRP. However, an exception was carved out for institution of criminal cases against the corporate debtor.

The above position was made clear in the case of Shah Brothers Ispat Private Limited vs. P. Mohanraj^[1]. In this case, the National Company Law Appellate Tribunal ("NCLAT") held that section 14 is not applicable to the proceedings under section 138 of the Negotiable Instruments Act as they are criminal proceedings. In crux, the NCLAT held that section 14 of the IBC does not affect any criminal proceedings. However, with the introduction of section 32A, the exception for criminal cases is negated.

Tata Steel BSL Limited and Ors. Vs. Union of India and Ors.^[2]

Recently, on March 16, 2020, the Delhi High Court set aside the Serious Fraud Investigation Office (SFIO) complaint against Tata Steel BSL Limited ("TSBL") (formerly known as Bhushan Steel Limited). In the said case, a financial creditor of TSBL (then known as Bhushan Steel Limited) had initiated the CIRP by filing a petition before the NCLT which was admitted on July 26, 2017. Tata Steel Limited ("TSL") had submitted a resolution plan with respect to the petitioner, which was approved by the committee of creditors on March 20, 2018 and the NCLT on May 15, 2018. Thereafter, 72.65% of the petitioner's equity capital was acquired by TSL, thereby, resulting in the takeover of the management of the petitioner company by new promoters.

In the year 2019, the SFIO had initiated an investigation against TSBL and its promoters for allegedly siphoning off company's funds. Subsequently, the trial court took cognizance of the offences under the Companies Act, 2013 and the Indian Penal Code, 1860, and summons were issued. TSBL argued that in terms of Section 32A of the IBC, TSBL was required to be discharged from the SFIO proceedings.

After taking note of Section 32A(1) of the IBC, the Delhi High Court observed that a corporate debtor would not be liable for any offence committed prior to commencement of the CIRP and the corporate debtor would not be prosecuted if a resolution plan has been approved by the NCLT. The Court also observed that, "there is no dispute that a resolution plan has been approved by the Adjudicating Authority (NCLT) and in the circumstances, there is much merit in the contention that the petitioner cannot be prosecuted and is liable to be discharged."

Since the resolution plan by TSL was approved by the NCLT and the alleged offences related to the period prior to commencement of the CIRP, the SFIO's complaint was set aside. The Court also clarified that this will not affect the prosecution of the erstwhile promoters or any officers who may be directly responsible for committing any offences in relation to the affairs of the petitioner company.

Conclusion

The import of Section 32A is to protect third-party successful bidders from the illegalities committed by the earlier management. By ring-fencing the successful bidders of stressed assets from the transgressions of the erstwhile management, Section 32A will definitely help potential bidders by instilling some confidence in the insolvency process. Not only the corporate debtor is protected but there is an incentive for more bidders to come forward, eventually resulting in increased investments in the financially distressed sectors. The potential investors will be able to submit their bids without worrying about facing prosecution or attachment of the stressed assets of the corporate debtor for erstwhile economic offences. It will be interesting to see how this relief further assists in streamlining the insolvency resolution process under the IBC.