Section 32A of the IBC – An amendment with far reaching consequences

On March 13, 2020, the President of India accorded his assent to the Insolvency and Bankruptcy Code (Amendment) Act, 2020 (Amendment Act)[1] which is now the fourth amendment to the Insolvency and Bankruptcy Code, 2016 (Code).

Amongst the various amendments sought to be introduced, is the sweeping Section 32A. Section 32A seeks to provide immunity to a corporate debtor and its assets from any prosecution, action, attachment, seizure, retention or confiscation upon approval of a resolution plan if the resolution plan results in the change in the management or control of the corporate debtor.

The Section appears to have been introduced as a result of the litigation and ambiguity surrounding JSW Steel Limited’s resolution plan for Bhushan Power & Steel Limited.

In the aforesaid corporate insolvency resolution process, JSW Steel’s resolution plan was approved by the Adjudicating Authority with certain modifications on September 5, 2019. Shortly thereafter, on October 10, 2019, the Enforcement Directorate attached certain assets of Bhushan Power under Section 5 of the Prevention of Money Laundering Act, 2002 (PMLA).

The attachment by the Enforcement Directorate was challenged by JSW Steel before the National Company Law Appellate Tribunal (NCLAT).

Whilst JSW Steel’s Appeal was pending adjudication, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was promulgated. As a result, the NCLAT took into account the Ordinance and the proposed Section 32A therein and inter alia called upon the Enforcement Directorate to clarify as to whether or not JSW Steel’s Resolution Plan would be covered under Section 32A. In response, the Enforcement Directorate took a stand that the newly introduced Section 32A would not apply to JSW Steel’s resolution plan for various reasons including its assertion that JSW Steel is a related party to Bhushan Power. Consequently, the Enforcement Directorate took a stand that the benefit of Section 32A (2) would not be available to Bhushan Power’s properties attached by the Enforcement Directorate under the PMLA.

Rejecting the Enforcement Directorate’s arguments, the NCLAT held that the Enforcement Directorate’s attachment was illegal and without jurisdiction. Relying on Section 32A, the NCLAT further held that Bhushan Power’s assets are immune from attachment by the Enforcement Directorate. Whilst parting, the NCLAT clarified that its decision will not come in the Enforcement Directorate’s way to proceed with investigation or to take any action in accordance with law against Bhushan Power’s erstwhile promoters and officers.

NCLAT’s aforesaid order is currently challenged before the Supreme Court of India and is sub-judice (Civil Appeals)[2].

Whilst adjudicating upon the Civil Appeals, the Supreme Court of India may limit its scope of examination to ascertain whether or not the NCLAT correctly applied Section 32A to the JSW Steel matter. Additionally, if a challenge is so presented, it may also adjudicate upon the constitutional validity or otherwise of the amendment itself.

Section 32A is a sweeping amendment in every sense. Not only does it override the PMLA as in the JSW Steel case, but in a given case; has the ability to cease any prosecution, action, attachment, seizure, retention or confiscation against a corporate debtor and its property/assets under any law for the time being in force. Section 32A being a non-obstante provision itself, read with Section 238 of the Code, is arguably the Code’s most powerful and overriding amendment till date.

The question which, therefore, begs to be answered is whether a legislation with primarily civil and commercial consequences, can, in such manner, override any and all other legislations governing their respective individual fields. Pertinently, the NCLAT, has, in Shah Bros. Ispat (P) Ltd.[3] held that criminal proceedings such as proceedings under the Negotiable Instruments Act, 1881 are exempt from the scope of the Code.

Moreover, Section 32A will also have to be tested on whether it can extinguish avenues available to complainants / authorities / enforcement agencies under various criminal statutes in such manner by the mere approval of a resolution plan. This would amount to Section 32A overriding such statutory remedies.

In this context, it is pertinent to note that the Delhi High Court held expressly in Directorate of Enforcement v. Axis Bank [4] that “The objective of PMLA being distinct from the purpose of RDBA, SARFAESI Act and Insolvency Code, the latter three legislations do not prevail over the former. ” and that “The PMLA, by virtue of section 71, has the overriding effect over other existing laws in the matter of dealing with “money-laundering” and “proceeds of crime” relating thereto.”

Absurdities resulting from Section 32A are writ at large. Illustratively, in a given case, Section 32A would bar the attachment of a corporate debtor’s property albeit it being a property acquired through ‘proceeds of crime’. It could even be possible that such property was acquired shortly prior to the commencement of the corporate insolvency resolution process and therefore, the Enforcement Directorate and/or any other authority was unable to conclude its investigation till such time that the resolution plan was approved.

Such instances would result in the assets/properties purchased illegally at the outset, being legalized in the hands of the successful resolution applicant and; as an additional safeguard, provide the successful resolution applicant with immunity against any and all future action against such illegally acquired property. Could such wrongful enjoyment and immunity by and of a resolution applicant be permissible by way of an amendment to the Code ? These and many other far reaching implications of Section 32A will have to be tested judicially.

The Supreme Court of India has listed the Civil Appeals against the NCLAT’s order for hearing on April 17, 2020.

The author Nausher Kohli is a Counsel practicing at the Bombay High Court. He can be contacted on : nausherkohli@gmail.com and @nausherkohli on Twitter.

[1]https://ibbi.gov.in//uploads/legalframwork/d36301a7973451881e00492419012542.pdf

[2] Civil Appeal No(s). 1808/2020 and other connected Civil Appeals.

[3] 2018 SCC OnLine NCLAT 415

[4] 2019 SCC OnLine Del 7854