Ascertaining impact of IBC’s section 32A on criminal proceedings

By Sonam Gupta and Anurag Tandon, Bharucha & Partners
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The Insolvency Law Committee (committee), in its third report, recommended that section 32A be inserted into the Insolvency and Bankruptcy Code, 2016 (code). This granted immunity to the corporate debtor and its property from any action under penal laws following a successful corporate insolvency resolution process (CIRP). This section attempts to balance the code’s goal of value maximization, last mile repayments and the duty of the state to penalise the commission of offences, especially those involving the public interest. The committee believed that, in the absence of such immunity, potential resolution applicants might price their resolution plans lower or be discouraged from proposing a resolution plan.

Sonam Gupta, Partner, Bharucha & Partners
Sonam Gupta
Partner
Bharucha & Partners

Section 32A was inserted in the code in December 2019 and is premised on the fact that a CIRP brings a change in management and control of the corporate debtor, with a clear break from its previous management. It ringfences the corporate debtor and its property from the erstwhile management, and provides that a corporate debtor cannot be prosecuted, and property forming part of the resolution plan cannot be attached, seized, or otherwise dealt with in connection with an offence committed prior to commencement of the CIRP. In effect, section 32A stipulates that on approval of a resolution plan, the corporate debtor’s liability for prior offences ceases, or where prosecution has already been initiated, the corporate debtor shall stand discharged. This protection also extends to any person who acquires property through the CIRP or through liquidation proceedings. While the corporate debtor and its new management are protected from prosecution, they are required to cooperate with, and assist authorities during the investigation.

The constitutional validity of section 32A was challenged before the Supreme Court in Manish Kumar v Union of India, and in other cases in the same hearing, by real estate allottees and financial creditors arguing that the provision jeopardised their interests. The court refused to intervene after considering the code’s statement of objects and reasons, observations in the committee report, the stand taken by the government and the safeguards in the section, which granted immunity only to the corporate debtor and not the management or individuals responsible for the commission of the offences. The court emphasised that section 32A is an economic measure, and that the creation and abolition of criminal liability must be left to the legislature.

Section 32A is only one in a series of measures and decisions that have been taken by the legislature and the courts to ensure successful corporate insolvency resolutions. For example, in Committee of Creditors of Essar Steel India Limited v Satish Kumar Gupta and Ors, the Supreme Court upheld the extinguishment of liability clauses in resolution plans, and in P Mohanraj & Ors v M/s Shah Brothers Ispat Private Limited, directed that proceedings against the corporate debtor under the Negotiable Instruments Act, 1881, be stalled on commencement of the moratorium.

Although section 32A encourages resolution applicants to submit plans, neither the committee nor the Supreme Court considered its impact on criminal trials. For example, it is unclear whether, in light of the protections afforded to the corporate debtor and its property, the assets of the previous management could be attached, seized or confiscated in cases brought under money laundering laws. In addition, the law does not address, and the courts have not as yet had to deal with, a situation where the resolution applicant withdraws its plan after it has been approved and the impact, if any, that this would have on criminal proceedings.

So far, the court has upheld the provision as it is an economic measure. However, it remains to be seen how the implementation of section 32A will be harmonised with the principles of criminal jurisprudence. While clarity on the interplay between the code and the Prevention of Money Laundering Act, 2002, should be provided in the decision in Committee of Creditors v Directorate of Enforcement, conflict between the code and provisions in other statutes will remain until resolved by the legislature or the courts.

Sonam Gupta is a partner and Anurag Tandon is a senior associate at Bharucha & Partners

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