Conundrum around the Section 32A of Insolvency and Bankruptcy Code, 2016

Saurabh Agrawal*

In the era of the modern world, the regime of IBC introduces two facets under which a corporate debtor can undergo, the Corporate Insolvency Resolution Process (“CIRP”). The Committee of Creditors (“CoC”) can either accept a resolution plan submitted by a resolution applicant by fulfilling necessary requisites. Or can reject the plan and go for liquidation. The CoC can come up with plans to either restructure the loan, modify repayment, liquidate assets, sell the business of the debtor as a going concern, et cetera. Alternatively, if the CoC is unable to reach a consensus as to resolution within the stipulated deadline, the adjudicating authority will order the liquidation of the assets of the debtor.The National Company Law Appellate Tribunal (“NCLAT”), in the case of Binani Industries Limited v. Bank of Baroda, noted that the first and foremost objective of the Insolvency Bankruptcy Code, 2016 (hereinafter “IBC”) is “resolution”, the second is “maximization of value of assets”, and the third is “promoting entrepreneurship, availability of credit and balancing the interests”, in that exact in the same order. Strengthening a similar view, the Supreme Court noted in Swiss Ribbons that the preamble of the Code does not refer to liquidation in any manner and that it should be a remedy of the last resort. It further states that only in cases where, either there is no resolution plan, or the ones submitted one being rejected on the ground of not meeting a minimum required standard, should liquidation be considered as an option. Regulations 32 and 32A of the IBBI (Liquidation Process) Regulations, 2016 also support such a position. The sale of the corporate debtor as a going concern is contemplated by Regulation 32(e). Regulation 32A places a premium on such a sale over other options. With the 2019 amendment, Regulation 32A was added., endorsing the stance and object of the IBC, which is to maximize value by keeping the business of the debtor as a going concern, unless limited by feasibility.Section 32A of the Insolvency and Bankruptcy Code (Amendment) Act of 2020 was added to the Code. This section discusses the corporate debtor’s liability for prior offences. The Section of the code has first been reviewed by the courts, most notably in the case of Bhushan Power Steel, where its applicability to a specific resolution applicant was challenged. The validity of the Section has never been questioned. It aimed to give a clean slate to successful resolution applicants from the erstwhile management by protecting them and immunizing them from prosecution and liabilities for offences that may have been committed prior to the commencement of the CIRP. Before the addition of Section 32A, a resolution applicant needs to face prosecution and liabilities before the court for the prior offences of corporate debtors as a result, there is an immediate need to protect the Corporate Debtor from its previous offences and to bolster the Corporate Debtor by removing the roadblocks that Resolution Applicant is facing. However, 32A is still held liable to a designed partner, or any officer who is in default or was looking after for the conduct of corporate debtor for its business or being in connection with the person who was in default even directly or indirectly in the commission of the offence.Section 32A protects the interests of successful resolution applicants by absolving an insolvent corporate debtor of prior liability under the principle of disregard for corporate personality. The benefit of this Section is available to a debtor who will undergo a control and management overhaul. As a result, the principle of corporate criminal liability loses ground to economic considerations, and a wrongdoing corporate escapes criminal liability.In the case of Arcelor Mittal court defined the two words separately with respect of their usage in IBC separately. According to the Companies Act of 2013, the term “management” refers to the company’s de jure management, which includes the Board of Directors, “managers,” and “officers.” And ‘control’ is defined as “the right to appoint a majority of directors or to control management or policy decisions.” Section 32A establishes a dilemma and requires to change either control or management but not both. A firm interpretation of the Section would result in the interpretation that even a change in the Company’s Board of Directors following the approval of the resolution plan would entitle the company to seek refuge under Section 32A. The disjunctive requirement creates an easy way out for a controlling shareholder to simply change the company’s management after the insolvency process has begun. Furthermore, the company is owned by its shareholders, who are the ultimate beneficiaries of any financial gains it makes.The addition of section 32A to the IBC has provided a safety valve for genuine resolution applicants. It seeks to nullify threats of attachment or sale of the corporate debtor’s assets and to incentivize bidders of distressed businesses. As a result, the acquirers would benefit from a blank slate. The CoC can devise plans to restructure the loan, modify repayment, liquidate assets, sell the debtor’s business as a going concern, and so on. Alternatively, if the CoC is unable to reach a resolution within the specified deadline, the adjudicating authority will order the liquidation of the debtor’s assets.Moreover, the Supreme court recently, in Manish Kumar v. Union of India dismissed a petition challenging the validity of Section 32A of the IBC on the ground that Section 32A is arbitrary and violates the Articles 300A, 14, 19 and 21 of the Constitution of India. Respondent i.e. (Union of India) in this case urged before the SC that in the case of Essar Steel case stated that section 32A was created to give such an objective statutory basis to the successful resolution applicant. The Supreme Court held that the “absolving the criminal liability of the corporate debtor is the most important or the new management to completely detach from the past and start on the clean flooring court observed that the legislature ought to be given the freedom to experiment” The Supreme Court declared that it is needed to give a successful resolution applicant a fresh beginning. All though all the cases decided by the Apex court are binding to all the subordinate courts, tribunals and we expect this decision will also be implemented by all of these courts in letters and Spirit. It will be enthralling to know whether the regulating authorities still continue to issue notices to resolution applicants or revive corporate debtors for the offences that occurred prior to execution of the resolution plan.

Conclusion

The aim of the amended provision is to save the interest of many bidders who were earlier afraid of the criminal liabilities of the corporate debtors. It is likely that the amendment may also make strides in improving the ease of doing business in India, taking it further up on the World Bank’s Ease of Doing Business rankings. Section 32A states that once the Adjudicating Authority approves the Resolution Plan following the completion of the CIRP, the assets of the Corporate Debtor cannot be attached or confiscated, as this would defeat the Code’s objectives. However, the focus should be on the boundaries that can and cannot be crossed in order to achieve economic efficiency. The Code was amended to include Section 32A in the backdrop of the CIRP of BPSL. The insolvency of BPSL is one of the biggest yet with claims amounting to a total of Rs. 47,158 crores. Although inserting is not compulsive in nature as the resolution plan is yet to be approved, the very purpose behind the inclusion should not be overlooked and should be compiled in true spirit.

*The author is a third-year student at Chanakya National Law University, Patna.