Successful Resolution Applicants Granted Immunity against Criminal Liability
(Constitutionality of Section 32A of Insolvency And Bankruptcy Code, 2016 (‘IBC’) Upheld)
(By Advocate Pooja Upadhya)
The provision under challenge, i.e. Section 32A seeks to grant immunity post approval of Resolution Plan in the following ways:
- Liability of a Corporate Debtor for an offence committed prior to the commencement of CIRP proceedings shall cease to exist;
- Corporate Debtor shall not be prosecuted for an offence committed prior to the commencement of CIRP proceedings;
- Bar against taking action against the property of the Corporate Debtor.
In Manish Kumar v. Union of India (2021) ibclaw.in 16 SC, decided by the Supreme Court on 19th January 2021 (‘impugned judgment’), the Hon’ble Court while hearing several clubbed petitions filed by home owners/allotees’ calling in question various provisions of IBC; also decided on the constitutionality of Section 32A of the Insolvency and Bankruptcy Act, 2016.
In which, the Petitioner’s principle argument came to be that “Section 32A is arbitrary, ultra vires and violates Articles 14, 19, 21 and 300A due to:
a. Immunity granted to the acts of the Corporate Debtor:
The Apex Court held that even though the Corporate Debtor is freed from the liability of any offence committed prior to the commencement of CIRP proceedings, the statutory immunity is not extended to the person/s in charge of the assets of the Corporate Debtor. The people in charge continued to be criminally liable and no bars were placed against law enforcement agencies to pursue investigations against them.
b. Immunity granted to the Property/ies acquired with proceeds of crime:
The Petitioners argued that, this section confers an undeserved immunity for the ‘Property acquired with the proceeds of crime’ and urged the Hon’ble Supreme Court to examine Section 32A in relation to the provision of Prevention of Money Laundering Act, 2002 (‘PMLA’). They argued that prohibiting creditors from proceeding against such properties shall affect the interest of stakeholders.
To the aforementioned, the Apex Court wholly invalidated the Petitioners arguments and held as follows:
- That in view of the following considerations, such as, the object of the Code, experience of the working of the Code, interests of all stakeholders, need to attract resolution applicants who offer fair and reasonable value as part of the resolution plan; the Apex court held that ‘the wisdom of the legislature was not open to judicial scrutiny’;
- That the extinguishment of criminal liability of a Corporate debtor is apparently important to the new management to make a clean break with the past and start on a clean slate;
- That it must not be overlooked, that the impugned section is part of an economic measure;
However, the Apex Court confirmed that various pre-conditions must be met before such immunity is granted, such as:
- A Resolution Plan must be approved by the Adjudicating Authorities;
- A change in the control of the Corporate Debtor must be effected [such a new management selected must be a disguised avatar (sic) of the old management];
- The new management must not have abetted or conspired in the commission of the offence resulting in becoming the subject matter of the investigation;
It was observed that, when an action is against the ‘Property of Corporate Debtor’ and is seen from a lens of achieving the object of the Code, the Court felt that maximization of the value of the assets (which is to be achieved at the earliest point of time) should not become subjected to judicial review on grounds of Article 14.
The impugned judgment is a welcome step, inspiring confidence in favour of Resolution Applicants who can confidently submit resolution plans in debt ridden Corporate Debtors facing criminal charges or liabilities. Through this judgement, the Supreme Court has sought to resolve a long standing ambiguity prevailing between PMLA & IBC, which is, ‘whether the Enforcement Directorate is empowered to attach Corporate Debtor’s assets if the said property/ies were acquired with the proceeds of crime, to the detriment of a successful Resolution Applicant?.’ The Apex Court has answered the above confusion with a “No” and has clearly ring- fenced all criminal liabilities in so far as a Corporate Debtor and its assets are concerned in support of successful Resolution Applicants.