Introduction
In pursuance of the objective of providing a greater ease of doing business and with a view to making the insolvency process more robust, the cabinet on December 28, 2019 promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019. One of the key aspects of the ordinance is the insertion of a new section 32A in the Code which restricts the liability of the corporate debtor for offences committed prior to the commencement of the insolvency process.
The intriguing case of Bhushan Power and Steel Limited (BPSL)
The need to shield the successful bidders from criminal proceedings against offences committed by former promoters came to the forefront in the case of BPSL.
The insolvency proceedings of BPSL were admitted by the NCLT, Principal Bench in 2017 on a plea of the Punjab National Bank. The NCLT while approving the resolution plan of JSW Steel, which emerged as the highest bidder, refused to grant immunity to the company from the ongoing criminal investigations.
Thereafter, on the 10th of October 2019 the Enforcement Directorate (ED) attached assets worth over Rs 4,025 crores of BPSL in connection with its money laundering probe linked to an alleged bank loan fraud by the former promoters of BPSL. The said order of the ED came as a blow to the plans of JSW Steel Ltd of buying the bankrupt BPSL as it created a risk of it getting dragged into litigation.
JSW Steel Ltd moved to the NCLAT seeking immunity from ongoing criminal proceedings against BPSL and informed the tribunal that in the absence of protection from the attachment of assets and liabilities that may arise from criminal proceedings, it would not be able to implement the resolution plan for BPSL.
The NCLAT while staying the transfer of payment by JSW Steel Ltd to the creditors of BPSL till the completion of the investigation in the alleged fraud committed by its previous owners, restrained the ED from attaching the properties of BPSL and directed it to release the already attached properties in the favour of the Resolution Professional. The order of the NCLAT came as a vindication for JSW Steel Ltd which had sought immunity from attachment of assets of the corporate debtor.
Scheme of Section 32A
Section 32A provides that in cases where the resolution plan results in a change in the management or control of a corporate debtor then in such cases, the corporate debtor will not be liable for any offences committed prior to the commencement of the insolvency resolution process.
The liability of the corporate debtor will cease from the date the resolution plan is approved by the tribunal and the property of the corporate debtor will be immune from actions such as attachment, confiscation or liquidation.
The ordinance provides that the immunity against prior offences will be available only to persons who were not promoters or in the management or control of the corporate debtor. The person seeking immunity should not be a related party of any person who was in the management or control of the corporate debtor. Further, the investigating authorities should not have submitted or filed a complaint against the person and must not have reasons to believe that the person abetted or conspired to commit the offence.
While ongoing investigations against original promoters will continue, the new promoters would be required to extend all assistance and cooperation to the investigating authorities investigating an offence committed prior to the commencement of the corporate insolvency resolution process (CIRP).
Purpose of the Amendment
The CIRP aims to create an ecosystem for smoother settlement of insolvency cases by providing for the handing over of the assets of the corporate debtor to a bona-fide resolution applicant.
For effectuating the purpose of the Code, it is necessary that any threat of attachment of assets of the corporate debtor and any threat of proceedings by investigating agencies against the corporate debtor for the wrongdoings of the previous management are done away with.
Only when protection from litigation arising out of the past liabilities of the former owners is given, the potential investors will feel comfortable in acquiring the assets.
Impact of the Amendment
The Amendment brought in by the ordinance is in consonance with the government’s much celebrated aim of increasing the ease of doing business in India. A swift resolution of distressed assets such as those of BPSL is in line with the government’s effort to free up bank capital, resolve the predicament of increasing non-performing assets and revive credit growth. By insulating the successful bidders of stressed assets from the wrongdoings of the earlier management, the ordinance aims at boosting the confidence of the potential bidders in the insolvency process.
This move will not only help in safeguarding the corporate debtor but will also attract more bidders to come forward, thereby spurring investments in the financially distressed sectors. The potential investors will be able to submit their bids without worrying about facing prosecution or attachment of the stressed assets of the company under revival for erstwhile economic offences.
The move will ensure in bringing about finality to the cost and litigation risks associated with a corporate debtor thereby removing hurdles being faced in many of the high value insolvency cases. This will result in streamlining the CIRP and will pave the way for better realization of assets for all the stakeholders.
Conclusion
The Amendment focuses on a timely admission and completion of the insolvency process and has come as a much needed succour for the potential buyers of stressed assets. The decision to protect third-party successful bidders from the illegalities committed by the earlier management will avoid a repeat of cases like Bhushan Power & Steel and will go a long way in restoring the spirit of the Code.
About the authors: Pallav Gupta and Devarshi Mohan are undergraduate law students of the Gujarat National Law University, Gandhinagar.