Would you like to buy something with a hanging sword that someone else can take it away anytime from you?
Several companies that are undergoing proceedings under the Insolvency and Bankruptcy Code (IBC) are also facing investigations by the Enforcement Directorate (ED) over alleged money laundering by their promoters. ED, which is an investigative arm of the finance ministry, has claimed that it could attach such assets under the Prevention of Money Laundering Act (PMLA).
To Illustrate: ED seized some assets of Bhushan Steel & Power, posing challenges to the ongoing resolution process for the company.
The attachment of Bhushan Power & Steel Ltd.’s (BPSL) assets by the (ED) created fresh doubts among bankers for using the IBC. Potential bidders under the insolvency process were wary of buying out companies as many bad loan cases undergoing resolution under the IBC have elements of fraud, thereby bringing them under the ambit of the Prevention of Money Laundering Act (PMLA).
While hearing the BPSL case, the NCLAT, asked “the two wings of the same government, i.e. the Finance Ministry and the Ministry of Corporate Affairs”. to sit together and settle the issue. The NCLAT had also put the Rs 19,700-crore payout by the JSW Steel to buy debt-ridden BPSL on hold until further orders.
“You are going to kill the economy of the country… (You are) playing with fire,” Justice Mukhopadhyaya said. “No outsider will come and purchase (distressed companies) … IBC cannot be annulled in this manner. Money laundering is by an individual.”
BPCL and other cases opened a new Pandora’s box as many bad loan cases had fraud elements and their assets could be attached under PMLA.
The Need for Amendment – Rationale & Spirit of IBC
The purpose and scheme of the Corporate Insolvency Resolution Process is to hand over the company of the corporate debtor to a bona fide new resolution applicant. Any threat of attachment of the assets of the corporate debtor or subjecting the corporate debtor to proceedings by investigating agencies for wrongdoing of the previous management will defeat the very purpose and scheme of CIR process, which inter-alia includes resolution of insolvency and revival of the company, and the efforts of the bank to realise dues from their NPAs would get derailed.
For the companies which are undergoing the insolvency process, new acquirers are “not fools” to risk their money. An acquirer needs a clean asset. The person acquiring a company cannot be subjected to any harassment by any agency as per the spirit of the bankruptcy code.
The Gaps filled- Promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019
By way of insertion of Section 32A in the Code, immunity has been provided to the corporate debtor and its assets, from an offence committed prior to the commencement of the insolvency process. In other words, it is a ring-fence for the corporate debtor from offences committed by the previous management or promoters.
Further, the immunity will only apply in cases where the resolution plan has resulted in a change in management or control of the corporate debtor. The immunity also stands extended to the property or assets of a corporate debtor, which cannot be attached, seized, confiscated or retained.
But this immunity comes with a rider. It won’t apply to:
Therefore, it is equally important to draw a line between offences committed by the corporate debtor and offences committed by those running the corporate debtor.
Another important aspect is to note that while releasing the liability against ‘offences’, the section does not define the scope of the word ‘offence’ – hence, the same will have to interpreted broadly so as to cover any offence which the corporate debtor might have committed under any law including to tax laws, corporate laws, labour laws, environmental laws, and several other laws. The view finds support in opening non-obstante phrase of section 32A(1).
The Benefits of Section 32A:
1. This would encourage more bidders to bid for stressed assets.
2. Will secure a hassle-free acquisition.
3. Blanket protection and no fear of criminal prosecution and
4. New management post-resolution would get control of a clean firm.
5. Protection of asset base of the corporate debtor to ensure value maximisation for the creditors.
The amendment provision is a paradigm shift and continues the pro-active legislative steps being taken to address the live issues in the resolving bad named companies by granting the immunity in terms of Section 32-A. This will act as an enabler for cleaner acquisitions, thereby incentivising higher bids and promoting an investor-friendly regime.