Section 32A of the IBC (Second Amendment) Bill, 2019: A Step in the Right Direction?

[Khushi Maheshwari is a 3rd year student at the National Law School of India University, Bangalore and Apoorva Satapathy a 4th year student at the National Law University of Odisha, Cuttack]

The Insolvency and Bankruptcy Code, 2016 (“IBC”) has been amended thrice since its introduction in 2016. Each amendment has sought to remove bottlenecks in the corporate insolvency process and streamline the same. The latest amendment, The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 (“Bill”), which was approved by the Union Cabinet, has been introduced in the Lok Sabha, and has now been referred to the Standing Committee. The Bill modifies many sections and also introduces a new provision to the IBC, a summary of which can be found here and here. The focus of this post is on the introduction of section 32A to the IBC through section 10 of the Bill and its impact on section 14 of the IBC.

This section comes as a much-needed relief for the companies that are vying for assets of the corporate debtors in legal trouble due to pending criminal charges against them. In essence, section 32A, if enacted, would

• cease the liability of the corporate debtor and prevent any action being taken against its property from the date of approval of the resolution plan by the adjudicating authority (“AA”);
• for any offence committed prior to the commencement of the corporate insolvency resolution process (“CIRP”);
• conditional to change in management and control of the corporate debtor; while continuing the liability of the promoter or personnel who were associated with the offence, on the basis of complaint or report made by the investigating authority.

Effect of section 32A on section 14 of the IBC

Section 32A of the IBC, due to the changes it brings about, has a direct implication on the ambit of section 14 of the IBC, which provides for the moratorium period. Section 14 lays down that there has to be a mandatory moratorium period provided to the corporate debtor from the insolvency commencement date wherein, inter alia, institution of new suits or continuation of the pending suits, against the corporate debtor, are temporarily suspended until the completion of the CIRP. That this moratorium period will not affect the criminal proceedings against the corporate debtor was made fairly clear in Shah Brothers Ispat Pvt. Ltd. v. P. Mohanraj. In this case, the National Company Law Appellate Tribunal (“NCLAT”) held that section 14 is not applicable to the proceedings under section 138 of the Negotiable Instruments Act (“NI Act”) as they are criminal proceedings. In crux, the NCLAT held that section 14 of the IBC does not affect any criminal proceedings. Hence, even during the moratorium, criminal proceedings could be instituted or continued against the corporate debtor.

However, the introduction of section 32A effectively nullifies the exception created for criminal cases under section 14 of the IBC by Shah Brothers Ispat, as there is a complete cessation of corporate debtor’s liability in such cases. Thus, once the CIRP is approved by the AA, there can neither be institution nor continuation of criminal proceedings against the corporate debtor for the offences committed by it prior to the commencement of the CIRP. Such nullification of the judgment in Shah Brothers Ispat might seem to be problematic as it absolves the corporate debtor of its criminal liability. However, section 32A is a fairly balanced provision since:

• It comes into operation only when the CIRP proposes a change in the management of the corporate debtor, i.e., if it proposes a new management that will take over the affairs of the corporate debtor through a bidding process.
• Even if, in the aforementioned case, the provision relieves the corporate debtor from criminal liability, the liability of the promoters and the associated persons, who were involved in the commission of the offence, continues.
• However, if the CIRP does not propose any such change and the previous management continues to look after the affairs of the corporate debtor, then section 32A will not apply and the criminal liability of the corporate debtor will not cease.

Thus, the provision, while protecting the new management that will take over the corporate debtor from liability as it has no relation with the offences previously committed, ensures that the previous management i.e., the actual offenders, are not advantaged by such relaxation. Furthermore, such an amendment was necessary in the light of scenarios where the new management, which took over a corporate debtor, faced difficulties due to the continuation of the criminal proceedings and consequent attachment or seizure of properties.

Lack of clarity with respect to investigating authority

The phrase “investigating authority” that appears in the proviso to section 32A(1)(b) has a potential for creation of confusion and conflicts. The wordings of the provision read: “as per the report submitted or complaint filed by the investigating authority”. To understand the nature of such an authority is important, in light of the fact that the liability of personnel associated with the corporate debtor (designated partner/officer who is in default/person in charge of or responsible or associated with the business of the corporate debtor) for offences contemplated under this section can continue merely on the basis of a complaint made by this investigating authority. The importance increases even more in situations wherein the person whose liability continues under this proviso is in fact vital for running the affairs of the corporate debtor. An example of such a situation could be a technology start-up where the promoter was involved in the design of the same.

However, there is no clarity with respect to the composition of such an investigating authority, either in the IBC or in the associated Regulations. In such a situation, continuing the liability of the concerned personnel merely on the basis of the complaint might prove to be detrimental to the functioning of the corporate debtor. However, this is not to suggest that such persons should not be proceeded against, but merely to point out that the Bill should ideally clarify the ‘investigating authority’ referred to, and not allow the continuation of liability of such persons merely on the basis of complaints. Instead, it is recommended that reliance should be placed on the report, which would ensure that some degree of investigation and inspection has been conducted by the investigating authority.

Conclusion

From the perspective of companies grappling with the takeover of corporate debtors, the amendment is a boon as it ensures that the previous liability of the corporate debtors does not affect the takeover process. However, to realize its objectives behind such changes, it would be pertinent to clarify certain parts in the provision which the amendment brings about. The aim should not be to let off those involved in the offences, but merely to proceed against them in a more just manner, so as to ensure that genuine parties interested in the resolution of the corporate debtor do not face any difficulties that were not envisaged.

Khushi Maheshwari & Apoorva Satapathy