THE SC DECISION ON SECTION 32A OF IBC

This Article is written by Oishee Chaudhuri student of Heritage Law College.

INTRODUCTION:

It is of paramount importance to delve into the essential notions revolving around the Insolvency and Bankruptcy Code, 2016 to comprehend and grasp the judicial decisions and expert opinions of the Honorable Supreme Court of India of the new legal regime. The Insolvency and Bankruptcy Code (IBC) was introduced in the Lok Sabha in December 2015. It was finally passed by Lok Sabha on 5th May, 2016. The Insolvency and Bankruptcy Code (IBC) 2016 commenced on 28th May, 2016 and was introduced by Honorable Mr. Arun Jaitley, the then Finance Minister, with the intention to unite the then prevailing legal structure around the subject matter of insolvency and bankruptcy into a codified law. There have been many laws which were in effect prior to the enactment of The Insolvency and Bankruptcy Code, 2016, despite the diversity, none of the legislations could provide an evolving solution to the perplexing bankruptcy concerns which gave many corporate debtors a leeway through their debts. Therefore, the enactment of the present innovative and effective regime manifested into success quickly.

WHAT DOES SECTION 32A UNDER IBC, 2016 SAY?

There has already been four amendments to the Insolvency and Bankruptcy Code since is enactment in 2016. The ramifications are being studied throughout the years to the present day. Under Part II of Chapter II of Insolvency and Bankruptcy Code, section 32A is addressed as follows.

32A. Liability for prior offences etc.:

– the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not—

(a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or

(b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court:

(2) No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the corporate insolvency resolution process of the corporate debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under section 31, which results in the change in control of the corporate debtor to a person, or sale of liquidation assets under the provisions of Chapter III of Part II of this Code to a person, who was not—

(i) a promoter or in the management or control of the corporate debtor or a related party of such a person; or

(ii) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.

(3) Subject to the provisions contained in sub-sections (1) and (2), and notwithstanding the immunity given in this section, the corporate debtor and any person who may be required to provide assistance under such law as may be applicable to such corporate debtor or person, shall extend all assistance and co-operation to any authority investigating an offence committed prior to the commencement of the corporate insolvency resolution process.”.

WHY WAS SECTION 32A INTRODUCED?

The purpose of insertion of Section 32A is of pertinent nature. Section 32A was introduced into the Code by way of an Insolvency and Bankruptcy (Amendment) Act, 2020. It received the assent of the President on 13th March, 2020. Section 32A was inserted with the aim to provide immunity to a corporate debtor, 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.

SUPREME COURT UPHOLDS CONSTITUTIONALITY:

In the matter of Manish Kumar v. Union of India and Ors., (MANU/SC/0029/2021) decided on 19th January, 2021 by the honorable coram consisting of Rohinton Fali Nariman, Navin Sinha and K.M Joseph on the issue of validity of certain sections inserted through the amendments to The Insolvency and Bankruptcy Code. Most of the petitioners were allotees belonging to the same real estate project under question and some of them were investors for the projects of the real estate. It was the contention of the allotees and investors that the immunity granted to the corporate debtors and the assets acquired from the steps of a crime are fruits from a poisonous tree.  They further contend that he offences of the erstwhile management for the offences committed prior to initiation of CIRP and approval of the resolution plan by the adjudicating authority further jeopardizes the interest of the allottees and investors. It will lead to tremendous losses to the parties to the project. The Honorable Court concluded that although the contending parties might feel that an unreasonable immunity is being granted to the corporate debtors, but in reality the provisions of Section 32A also dictate that the corporate debtors to assist in the proceedings. The immunity granted under this Section is also provided only on the fulfillment of the conditions laid down. It is also mandatory for the existence of a resolution plan, which gains the approval. It is not that the corporate debtors are completely free of the consequences of the offences committed, they are still liable. There is not much scope of Courts to intervene in provisions and legislations which is so well thought. The reasonability of the Section lies in the fact that the offences of corporate debtors are overlooked if not forgiven to give an opportunity to the new management to start their corporate affairs with a fresh start and with no baggage of the past.

The Court therefore held that there is not much scale to declare this provision as arbitrary or unreasonable and thus upheld the constitutional validity of Section 32A of IBC, 2016. The endeavor of Courts is never to cripple legislation but to fill up the lacunas so that it can be resourceful.

CONCLUSION:

The Insolvency and Bankruptcy Code, 2016 inclusive of the consecutive amendments is not without flaws. It has always been open to interpretations to bring out the efficacy of the Code to govern the Bankruptcy laws in India successfully and has also brought about a paradigm shift in the bankruptcy and insolvency laws. Thus, IBC has lived through the tests of amendments and constitutionality. The judgments of the Honorable Courts of India have paved a way to streamline the usefulness of the Code so enacted.

REFERENCES:

  • Manish Kumar v. Union of India and Ors., (MANU/SC/0029/2021): Manupatra.
  • Nausher Kohli, Section 32A of the IBC – An amendment with far reaching consequences, Bar and Bench (Apr., 08, 2020, 11:39 AM)https://www.barandbench.com/columns/
  • The Insolvency and Bankruptcy Code (Amendment) Act, 2020, Bare Act.
  • Two years of IBC: Early harvest ‘extremely successful’; recovered Rs 80,000 crore, says Arun Jaitley, FE, Jan. 03, 2019. FE Online,