LIABILITY FOR PRIOR OFFENCES UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016
A Corporate Debtor is either a Company or a Limited Liability Partnership or any other body corporate. Such entities are juridical persons having separate legal identity. Legal actions including criminal proceedings can be initiated against such persons.
If Resolution Plan is approved by the Adjudicating Authority and the Corporate Debtor continues to exist in earlier form, such Corporate Debtor will still be liable for criminal offences committed prior to insolvency commencement date. Such prospects could be huge deterrents for a prospective Resolution Applicant.
Insolvency law Committee in its 3rd Report recommended for amendment in the Code to the effect that if resolution of a Corporate Debtor is successful and there has been change in management and control of the Corporate Debtor, it should not be held liable for any offences committed prior to initiation of insolvency commencement date.
Accordingly, Section 32A was inserted into the Code vide Insolvency and Bankruptcy Code (Amendment) Act, 2020, which is reproduced as under:
32A. Liability for prior offences, etc.
(1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not-
(a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or
(b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court:
Provided that if a prosecution had been instituted during the corporate insolvency resolution process against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having fulfilled:
Provided further that every person who was a “designated partner” as defined in clause (j) of section 2 of the Limited Liability Partnership Act, 2008 or an “officer who is in default”, as defined in clause (60) of section 2 of the Companies Act, 2013, or was in any manner in-charge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority, shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor notwithstanding that the corporate debtor’s liability has ceased under this sub-section.
(2) No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the corporate insolvency resolution process of the corporate debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under section 31, which results in the change in control of the corporate debtor to a person, or sale of liquidation assets under the provisions of Chapter III of Part II of this Code 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 a person; or
(ii) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.
Explanation- For the purposes of this sub-section, it is hereby clarified that, –
(i) an action against the property of the corporate debtor in relation to an offence shall include the attachment, seizure, retention or confiscation of such property under such law as may be applicable to the corporate debtor;
(ii) nothing in this sub-section shall be construed to bar an action against the property of any person, other than the corporate debtor or a person who has acquired such property through corporate insolvency resolution process or liquidation process under this Code and fulfils the requirements specified in this section, against whom such an action may be taken under such law as may be applicable.
(3) Subject to the provisions contained in sub-sections (1) and (2), and notwithstanding the immunity given in this section, the corporate debtor and any person, who may be required to provide assistance under such law as may be applicable to such corporate debtor or person, shall extend all assistance and co-operation to any authority investigating an offence committed prior to the commencement of the corporate insolvency resolution process.
Section 32A has two aspects. One aspect is protection of the Corporate Debtor from offences committed prior to commencement of insolvency proceedings. Second aspect is protection of property of Corporate Debtor in relation to offence committed prior to commencement of insolvency proceedings.
PROTECTION OF CORPORATE DEBTOR FROM PRIOR OFFENCES
Section 32A (1) provides protection to Corporate Debtor from any offence committed prior to the insolvency commencement date and protection to Corporate Debtor from prosecution from date of approval of the Resolution Plan.
Such protection is available only if Resolution Plan results in change in management or control of the Corporate Debtor to a person who was not promotor or in the management or control of the Corporate Debtor or a Related Party to such person. Such person should not be a person, against whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence and has submitted or filed a report or a complaint to the relevant statutory authority or court.
If any prosecution against the Corporate Debtor has started for its offences committed prior to insolvency commencement date, the Corporate Debtor will be discharged from the date of approval of the Resolution Plan.
Although Corporate Debtor is discharged since the date of approval of Resolution Plan, criminal liability of the officer in default or person in charge of a Corporate Debtor does not come to an end if such person has been directly or indirectly involved in the offence as per report submitted or complaint filed by investigating authority. Such person will continue to be prosecuted.
PROTECTION OF PROPETY OF CORPORATE DEBTOR
Section 32A (2) provides protection to the property of the Corporate Debtor from any action taken in relation to offence committed by Corporate Debtor prior to insolvency commencement date.
Such protection is available to property of the Corporate Debtor which is covered under Resolution Plan approved by Adjudicating Authority and there has been a change in control of Corporate Debtor or sale of liquidation assets to a person, who was not a promoter or in the management or control of the Corporate Debtor or a Related Party to such person. Such person should not be a person, with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or court.
Under Section 32A (2), the property of the Corporate Debtor is protected against attachment, seizure, retention, or confiscation.
Such protection is not available to a person other than Corporate Debtor. Although the Corporate Debtor is immune against offences committed by it prior to commencement to insolvency commencement date, the Corporate Debtor is required to extend all assistance and co-operation to any authority investigating such offence.
The Constitutional validity of Section 32 A was challenged before the Supreme Court in Manish Kumar1. It was contended that immunity granted to the Corporate Debtors and its assets acquired from the proceeds of crimes and any criminal liability arising from the offences of the erstwhile management for the offences committed prior to initiation of CIRP and approval of the Resolution Plan by the Adjudicating Authority further jeopardizes the interest of the allottees/creditors. It will cause huge losses which is sought to be prevented under the provisions of the Prevention of Money Laundering Act, 2002. Section 32A is arbitrary, ultra vires and violative of Article 300A and Articles 14, 19 and 21.
The Supreme Court negated these contentions and held Section 32A constitutionally valid as under:
257. We are of the clear view that no case whatsoever is made out to seek invalidation of Section 32A. The boundaries of this Court’s jurisdiction are clear. The wisdom of the legislation is not open to judicial review. Having regard to the object of the Code, the experience of the working of the Code, the interests of all stakeholders including most importantly the imperative need to attract Resolution Applicants who would not shy away from offering reasonable and fair value as part of the Resolution Plan if the legislature thought that immunity be granted to the Corporate Debtor as also its property, it hardly furnishes a ground for this this Court to interfere. The provision is carefully thought out. It is not as if the wrongdoers are allowed to get away. They remain liable. The extinguishment of the criminal liability of the Corporate Debtor is apparently important to the new management to make a clean break with the past and start on a clean slate. We must also not overlook the principle that the impugned provision is part of an economic measure. The reverence courts justifiably hold such laws in cannot but be applicable in the instant case as well. The provision deals with reference to offences committed prior to the commencement of the CIRP. With the admission of the application the management of the Corporate Debtor passes into the hands of the Interim Resolution Professional and thereafter into the hands of the Resolution Professional subject undoubtedly to the control by the Committee of Creditors. As far as protection afforded to the property is concerned there is clearly a rationale behind it. Having regard to the object of the statute we hardly see any manifest arbitrariness in the provision.
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1. Manish Kumar Vs. Union of India & Anr; Writ Petition (C) 26 /2020
