INTRODUCTION:
This article aims to evaluate the aftereffect of the approval of a resolution plan upon pending criminal proceedings against the corporate debtor. It further discusses the intent of the legislature while inserting section 32A by way of an amendment dated 28.12.2019. By way of a recent order, the Hon’ble National Company Law Tribunal, Ahmedabad Bench held that approval of a resolution plan does not entail automatic waiver of legal proceedings against Corporate Debtor. The aforementioned preposition is in letter and spirit of section 31(4) of the Insolvency and Bankruptcy Code, 2016. Thereafter, with reference to various precedents, the article has discussed the interplay of section 31 and newly inserted section 32A with an attempt to provide clarity to the intention of the legislature. It becomes significant to point out that approval of a resolution plan results in change of management and subjecting the new management to pending proceedings will create an embargo over the positive outcomes of a resolution process. One must understand that finding a resolution for a corporate debtor should not be the only objective rather the same should be done with purpose to achieve its ultimate objective i.e. to make the corporate debtor come out of its financial woes. Further, it may not be out of place to mention that with the insertion of section 32A in the Insolvency and Bankruptcy Code, 2016, the legislature by no means has provided a leeway to the persons who are facing criminal proceedings against them rather the amendment is intended only with respect to the corporate debtor and there is no restriction whatsoever to proceed against any individual/person. The second proviso of section 32A further provides the clarity with respect to pending complaint or investigation against an individual or person. The article has also discussed the preposition set forth by the Hon’ble National Company Law Appellate Tribunal in JSW Steel judgment.
MAIN BODY:
The Indian Insolvency legislation i.e. The Insolvency & Bankruptcy Code, 2016 (‘I&B Code, 2016’) has undergone numerous amendments since its implementation in 2016. The evolving nature of I&B Code, 2016 gives out a very dynamic image of the legislation which was introduced with a noble cause to cater the requirements of the insolvency and bankruptcy as a legislation. The Hon’ble Supreme Court in Swiss Ribbons[1] profoundly upheld the constitutionality of the code and the code has been witnessing a perennial change by way of amendments which is necessary as the working of said legislation directly reflects on the economy of the country.
By virtue of section 5(1) of I&B Code, 2016, various adjudicating authorities have been steadily working in the letter and spirit of I & B Code, 2016. That most recently, National Company Law Tribunal, Ahmedabad Bench, in a section 7 application in Bhavi Shreyans Shah RP for V S Textiles Pvt. Ltd. Vs. Canara Bank & Ors[2]. dealt with a very interesting question i.e. ‘whether approving a resolution plan entails automatic waiver of legal proceedings against/by the Corporate Debtor’?
This article while dealing with the horizons set forth by the said order of the Hon’ble NCLT, Ahmedabad Bench, also tries to explain the virtue that the legislation aims to achieve by inserting section 32A in the I&B Code, 2016. By way of this article, we have tried to deal with following questions i.e. whether the Resolution Plan approved by the Adjudicating Authority will be subjected to Criminal Proceedings going on against the Corporate Debtor prior to the Commencement of the CIRP? And, what will be the effect of insertion of a new section i.e. section 32A and the implications of preposition set forth by the Hon’ble National Company Law Appellate Tribunal (‘NCLAT’) in the JSW Steel judgment[3]?
The provision under the I&B Code, 2016 with respect to approval of Resolution Plan, has given the Adjudicating Authority jurisdiction qua power only to assess and see whether the plan is approved by the requisite voting share of members of the Committee of Creditor, and whether the plan provides for payment of Insolvency Resolution Process cost, provides for payment of dues of the operational creditors equal to the amount of payment, they would have realized during liquidation, management of affairs of the Corporate Debtor, effective implementation of the Resolution Plan. Hence, it can be said that the jurisdiction of the Adjudicating Authority with respect to acceptance or rejection of a resolution plan is circumscribed to the aforementioned subjects and if the Adjudicating Authority is satisfied that the compliance is done, it may order for approval of the plan. It is pertinent to note that by virtue of sub-section 4 of section 31 of the I&B Code, 2016, the provision states that the Resolution Applicant pursuant to the approval of the plan has to obtain necessary approval required under the I&B Code, 2016. Interestingly, the legislature without meddling with the jurisdiction of the adjudicating authorities per se inserted a section i.e. section 32A by way of an amendment which invariably grants power to the adjudicating authorities to absolve the pending proceedings against the corporate debtor after the approval of the resolution plan. Hence, it can be assailed that the jurisdiction of the Adjudicating Authority with respect to acceptance or rejection of a resolution plan is circumscribed to the aforementioned subjects and if the Adjudicating Authority is satisfied with the compliance as aforementioned, it may order for approval of the plan.
The Ahmedabad Bench in its order dated 01.01.2020 in Bhavi Shreyans (supra) stated that ‘Para 16. In this regard, we are of the view that approval of the Resolution Plan does not mean automatic waiver or abetment of legal proceedings, if any, which are pending by or against the Company/Corporate Debtor as those are the subject matter of the Concerned Competent Authorities having their proper/own jurisdiction to pass any appropriate order as the case may be. The Resolution Applicant(s) on approval of the Plan may approach the Competent Authorities/Courts/Legal Forums/Offices-Govt. or Semi Govt./State or Central Govt. for appropriate relief(s) sought for in Clause No. e of Chapter IV of the Resolution Plan. It is pertinent to note that by virtue of sub-section 4 of section 31 of the I&B Code, 2016, the provision states that the Resolution Applicant pursuant to the approval of the plan has to obtain necessary approval as required under any law in force within one year from the date of approval of the resolution plan.
At this juncture, it becomes significant to point out a newly inserted section i.e. section 32A of I&B Code, 2016 which has been inserted vide an amendment dated 28.12.2019 (Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019). The section provides clarity with respect to the pending proceedings against the corporate debtor i.e.it entails the liability arising out of a dispute prior to the commencement of CIRP (see section 32A(1)). The section further sheds light upon the prospect that, once a resolution plan is approved by the Adjudicating Authority which will invariably change the management of the corporate debtor, then no proceeding can be initiated against the corporate debtor. The property of the Corporate Debtor has been secured by way of second proviso of section 32A of I&B Code, 2016 wherein, it has been categorically made clear by the legislature that the properties covered under the resolution plan shall be secured and no action shall be initiated against it. Further, the explanation added to section 32A specifically protects the properties of the corporate debtor from seizure, attachment or confiscation.
Now, it is significant to point out that there were precedents which have had held otherwise. For instance, the High Court of Madras in its judgment in Ajay Kumar Bishnoi vs. M/s Tap Engineering[4] held that, “The binding effect contemplated by section 31 of the Code is in respect of the assets and management of the corporate debtor. No clause in the Corporate Insolvency Resolution Plan even if accepted by the adjudicating authority/appellate Tribunal can take away the power and jurisdiction of the criminal court to conduct and dispose of the proceedings before it in accordance with the provisions of the Code of Criminal Procedure.” Here, the attention is drawn towards the second proviso of section 32A which states that any ‘designated partner’ as defined under the Limited Liability Partnership Act, 2008 or ‘officer who is default’ as defined under clause (60) of section 2 of the Companies Act, 2013 or any person in charge of the affairs or directly/indirectly responsible for the management of the corporate debtor shall continue to be liable for such an offence committed by the corporate debtor notwithstanding the waiver of the corporate debtor under the said section i.e. section 32A of I&B Code, 2016.
Hence, it can be stated that the legislation by way of the said insertion has made sure that such an amendment shall not be used as an alibi propelling an automatic waiver of liability ensuing out of the acts and deeds of an individual under the guise of the corporate debtor.
Now, the preposition set forth by the Hon’ble Ahmedabad Bench gives rise to another interesting moot question i.e. whether the preposition laid down by the said order of the Hon’ble NCLT will subject the resolution applicant(s) to multiple legal forums with respect to different pending legal proceedings against/by the Corporate Debtor and will it defer the objective of I&B Code, 2016 i.e. maximization of value of assets within a specific timeline as defined under the code?
The aforementioned issue has been recently dealt by Hon’ble National Company Law Appellate Tribunal (‘NCLAT’) in JSW Steel Judgment (supra) dated 17.02.2020. The NCLAT very categorically held that, the insertion of section 32A in I&B Code, 2016 shall have retrospective effect and the Resolution Applicant i.e. JSW Steel Limited will be exempted from all criminal investigations post the approval and consequent take-over of the corporate debtor. The judgment is in line with the amendment by way of insertion of section 32A in I&B Code, 2016. The NCLAT by way of this judgment has acted in tandem with the objective of I&B Code, 2016 i.e. to find suitable resolution plan for the corporate debtor within a specified time line. The NCLAT has gone one step further while providing clarity over the insertion of section 32A and holding it to have a retrospective effect which will not pull down the corporate debtor in disputes arising out of a period which is prior to the commencement of CIRP. It is significant to understand that once a resolution applicant has got the resolution plan approved by the concerned Adjudicating Authority, any sort of involvement in the pending litigation would delay the process of resolution and it will defeat the objective and purpose of I&B Code, 2016. The subjection of the Resolution Applicant to different legal forums in order to contest the lit ensuing out of different disputes of the Corporate Debtor arising out of the period prior to the commencement of CIRP would create hurdles for any corporate debtor to achieve the finality of a resolution plan. The Hon’ble High Court of Delhi in SAS Hospitality Private Limited vs. Surya Constructions Private Limited[5] while laying inference upon the jurisdiction of the Adjudicating Authorities stated that “The NCLT is a specialized tribunal constituted for the purpose of speedier and effective regulation of the affairs of the companies”.
The recent amendment by way of insertion of section 32A of I&B Code, 2016 and recent judgment of Hon’ble NCLAT in JSW Steel Limited is a step forward towards making I&B Code, 2016 a comprehensive legislation. The Bankruptcy Law Reforms Committee in its report dated 04.11.2015 stated that ‘…Speed is the essence for the working of the bankruptcy code, for two reasons. First, while the calm period can help an organization afloat, without the full clarity of ownership and control, significant decisions cannot be made. Without effective leadership, the firm will tend to fail……….From the point of creditors, good realization can generally be obtained if the firm is sold as a going concern. Hence, when delays induce liquidation, there is value destruction.’
CONCLUSION:
The quotient of speed and efficiency plays a pivotal role in bringing finality to any resolution that is sought by way of a resolution plan in I&B proceedings. The very reason to make the insolvency proceedings time bound was to expedite the resolution process and with the said amendment, the legislation has tried to ensure that the objective of the code remains sacrosanct. Further, the Hon’ble High Court of Delhi in SAS Hospitality Private Limited vs. Surya Constructions Private Limited while laying inference upon the jurisdiction of the Adjudicating Authorities stated that “The NCLT is a specialized tribunal constituted for the purpose of speedier and effective regulation of the affairs of the companies”. The amendment is a welcoming one as the same will ensure the resolution process meet its finality. The Legislature by way of inserting second proviso to the section 32A has also tried to avoid the conflict between two statutes.
[1] (2019) 4 SCC 17
[2] C.P.(I.B)No.299/NCLT/AHM/2018
[3] Comp. Appeal (AT) (Ins) No.957/2019
[4] Crl OP (MD) No.34996 of 2019
[5] (2019) 212 Comp Cas 102 : (2019) 149 CLA 124
Chirag Gupta and Kumar Sumit
(The views expressed in this Article are based on personal understanding and interpretation of the Authors. Authors are practicing as advocates in Delhi)
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