Recently, the High Court of Delhi, reinforced the application of Section 32A of the Insolvency and Bankruptcy Code, 2016 ("IBC"). Section 32A of the IBC states that the liability of a corporate debtor ("CD") for an offence committed prior to commencement of the corporate insolvency resolution process ("CIRP") shall cease and the CD shall not be prosecuted for such an offence from the date the resolution plan ("Plan") has been approved by the adjudicating authority ("AA"). Banks and similar entities cannot be compelled to reclaim siphoned funds from the former promoters of the CD. Once approved by the AA, the Plan becomes binding on the creditors and the CD, regardless of their consent.
In the case of Aryan Constructions through Mr. Amit Singh Yadav (Proprietor) v. Punjab National Bank Limited through its CMD and Ors., the petitioner was the CD's operational creditor ("OC") and filed a writ petition under Article 226 of the Constitution of India. The AA finalised Rs.350 crores in the Plan after a haircut of 52.31% and the said amount was ordered to be disbursed to the OCs. However, the resolution professional's original claim, submitted to the National Company Law Tribunal ("NCLT"), was Rs. 47,000 crores for financial creditors ("FCs") and Rs. 620 crores for OCs.
The grievance of the petitioner was that right from the beginning, the respondents had been deliberately committing arbitrary and illegal omissions, thereby causing direct and tangible losses to the creditors of the CD, and in this regard, the attention of the Court was invited to issue appropriate directions to the respondent-banks under Section 35A (a), (aa) and (b) of the Banking Regulation Act, 1949.
The petitioner also alleged that the respondent banks failed to take timely action to recover assets worth over Rs. 4,000 crores siphoned off by the former promoters of the CD. The enforcement directorate ("ED") had attached these assets under the Prevention of Money Laundering Act, 2002 ("PMLA") on October 10, 2019. The petitioner argued that the respondents should have pursued these assets for the benefit of the creditors.
The petitioneralso contested the applicability of Section 32A of the IBC, which was introduced on December 28, 2019. It was the petitioner's contention that there existed no provision in the IBC by which attachment of properties of the CD by the ED could have been saved and there being neither any express not implied condition that the amended provision was retrospective, Section 32A could not have been applied to the Plan of the CD, which already had been approved on September 5, 2019. The petitioner further alleged that the successful Plan was inapplicable because the successful resolution applicant (SRA) and CD are related as per Section 5(24) of the IBC.
Punjab National Bank challenged the maintainability of the writ petition, pointing out that the Plan stood approved upto the Supreme Court and the same could not be questioned by the petitioners, particularly when personal insolvency proceedings had been initiated against the promoters/directors of the CD.
Counsel for the State Bank of India urged that the issues with regard to whether or not the SRA is a related party and whether the Plan would provide no ground for interference by the ED, was pending before the Supreme Court in a bunch of matters.
The Delhi High Court dismissed the writ petition, holding that the petitioner's claims were legally unsustainable. The Court clarified that even assuming for the sake of convenience that the OCs of the CD are the 'victims' of illegal actions of the erstwhile management, the said provision would come into play only at a post-conviction stage. Once the CIRP proceedings are initiated and 'resolution plans' are approved, the adjudication of the claim of creditors could only be in accordance with the IBC. The committee of creditors acts on behalf of all the creditors and their task is to attain a balance between the twin goals of the CIRP process, i.e., maximization of the value of the assets of the CD and also a planned course for revival of the CD.
Emphasising the importance of a fresh slate, the Court examined the judgment, Manish Kumar vs. UOI1, wherein, it was held that "successful resolution applicant cannot be faced with undecided claim after its resolution plan has been accepted. The object is to ensure that a successful resolution applicant starts off on a fresh slate."
The Court also relied on P. Mohanraj v. Shah Brothers Ispat Private Limited2 and observed that an SRA cannot be faced with undecided claims after the Plan is accepted as that would amount to a hydra head popping up which would throw into uncertainty, the amounts payable by a prospective resolution applicant, which would be counterproductive to taking over the business of the CD.
In the aforesaid judgement, it was held that "Section 32-A(1) operates only after the moratorium comes to an end. At the heart of Section 32-A is the IBC's goal of value maximisation and the need to obviate lower recoveries to creditors as a result of the corporate debtor continuing to be exposed to criminal liability."
The Court emphasised that once the Plan is approved under the IBC, the assets of the CD in the hand of the 'resolution applicant' stood shielded from criminal prosecution and attachment. The Court also clarified that Section 32A of the IBC, although introduced after the approval of the Plan, is merely clarificatory and does not alter the legal position regarding the protection of the CD's assets post-resolution.
The Court further noted that the petitioner failed to provide substantial evidence to support the claim that the resolution applicant was a 'related party' of the CD and, thus, ineligible under Section 29A of the IBC. The High Court upheld the decisions of the NCLT and the National Company Appellate Tribunal (NCLAT), which had previously addressed these concerns, and found no merit in the petitioner's arguments regarding the alleged inaction by the respondent banks.
It is clear from the above that Section 32A of the IBC protects the resolution applicant from any liability arising from the actions of the previous management, thereby facilitating the revival of the CD. This provision is different from the moratorium period. In the moratorium period, criminal liability is not extinguished entirely. It comes to a standstill for the said period. Once it ends, the protective measures are lifted, and criminal proceedings can resume. On the other hand, criminal liability ceases entirely under Section 32A of the IBC.
Footnotes
1. (2021) 5 SCC 1
2. (2021) 6 SCC 258
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