The High Court of Bombay (“Court”) in a recent judgment[1] has upheld the NCLT’s powers to direct the Directorate of Enforcement (“ED”) to release attached properties of a corporate debtor, once a resolution plan in respect of the corporate debtor had been approved. The Court’s decision was based on an interpretation of Section 32A of the Insolvency and Bankruptcy Code, 2016 (“IBC”).
Before delving into the Court’s analysis, it is imperative to set out certain relevant facts of the matter.
Factual Background
In March 2018, the ED filed an Enforcement Case Information Report (“ECIR”) against DSK Southern Projects Private Limited (“Corporate Debtor”) and its erstwhile promoters. Pursuant to the ECIR, the ED attached assets of the Corporate Debtor by way of a provisional attachment, which was later confirmed in August 2019 vide an order of the Adjudicating Authority under the Prevention of Money Laundering Act, 2002 (“PMLA”).
Subsequently, in December 2021, the Corporate Debtor underwent Corporate Insolvency Resolution Process (“CIRP”) at the instance of a financial creditor. In February 2023, the National Company Law Tribunal, Mumbai (“NCLT”), approved the resolution plan propounded by Mr. Shiv Charan and two others (“Resolution Applicants”). Subsequently, in April 2023, the NCLT issued another order directing the ED to release the attached properties of the Corporate Debtor.
The Court in the present case was dealing with two competing writ petitions. The Resolution Applicants preferred a Writ Petition inter alia seeking directions to release the attached properties in light of the approval of the resolution plan on February 17, 2023. On the other hand, the ED preferred a Writ Petition seeking relief to quash the April 2023 order of the NCLT that directed it to release assets of the Corporate Debtor. The ED also inter alia submitted that the NCLT ought not to traverse beyond the IBC and encroach into the ambit of the PMLA, thereby rendering provisions of the PMLA nugatory.
Analysing the Court’s decision
At the outset, the Court clarified that it will not be dealing with the issue of whether attachment proceedings can continue even after the initiation of the moratorium period for a Corporate Debtor. The Court rightly observed that the final approval of the resolution plan presently rendered the aforesaid issue academic and it accordingly confined itself to the core issue of whether the NCLT has the jurisdiction to direct the ED to release attached properties under Section 32A.
Analysis of Section 32A:
At the outset, the Court analysed Section 32A of the IBC, basis which the NCLT had directed the ED to release the attached assets of the Corporate Debtor. The Section confers immunity on a Corporate Debtor as regards its liability and assets for an offence committed prior to the CIRP. However, Section 32A is subject to checks and balances for affording protection and it imposes the following conditions:
- the approved resolution plan results in a complete change and character of the ownership and control of the corporate debtor;
- that third parties who are not promoters or persons in management or control of the corporate debtor and who come into management or control of the corporate debtor under the resolution plan are not persons who, the Investigative Authority has reason to believe (based on material), have abetted or conspired for the commission of the offence in question.
However, the immunity is available only to the corporate debtor and its assets. Such immunity is not available to any other person who will continue to remain liable to prosecution and the corporate debtor will in fact be liable to extend cooperation to the relevant investigating authorities in pursuing such investigation. Further, the Court observed that it ensured a clean break in the management and control of the corporate debtor, and that the persons now in control of the corporate debtor are completely dissociated from the persons previously in control.
Presently, the Court observed that the aforesaid conditions were admittedly complied with and the same was not in dispute. Accordingly, the Court held that once the rigours of the Section are satisfied, the Corporate Debtor and its assets would be immune in respect of any offence committed prior to the CIRP.
Crucially, the Court relied on the language of Section 32A, which is a non-obstante provision and begins with the words ‘Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force’ and held that there is no reason to treat attachment under the PMLA as an exception when the legislature chose to cover prosecution coming to an end by the Section.
Legislative intent:
Further, to appreciate the import and underpin the analysis of Section 32A, the Court referred to its legislative intent as discussed by the Supreme Court in Manish Kumar v. Union of India[2]. There, the Supreme Court noted that Section 32A was born out of experience of the working of the IBC and that due to lack of any immunity, resolution applicants were reticent in putting forth a resolution plan. It was with this objective that the provision (not originally part of the IBC) was introduced vide the Insolvency and Bankruptcy Code (Amendment) Act, 2020, with effect from December 28, 2019.
The intention behind affording protection to the corporate debtor from liability for past offences was to ensure maximization of the assets of the corporate debtor, and to encourage resolution applicants to offer reasonable and fair valuations of such assets as part of the resolution plan. Finally, the Court also appreciated the aspect of extinguishment of criminal liability of the corporate debtor as being vital for the new management to make a clean break and start on a clean slate.
Jurisdiction of NCLT to Direct the ED to Release Attached Assets:
The Court then proceeded to address the ED’s submission that the jurisdiction of the NCLT under Section 60(5) is restricted to interpreting the IBC alone and not the PMLA and therefore the NCLT ought not to have intruded into the PMLA’s domain in respect of attachment of the assets of the corporate debtor. For this purpose, the Court looked at Sections 31 and 60(5) of the IBC.
Section 31 deals with the approval of a resolution plan by the NCLT. The proviso to Section 31(1) requires the NCLT, while approving a resolution plan, to ensure that the resolution plan is capable of being effectively implemented. Consequently, the Court observed that the NCLT’s directions to the ED to release the attached assets of the Corporate Debtor were made in pursuance of this obligation, to ensure that the resolution plan approved in relation to the corporate debtor would be implemented effectively. On this ground alone, the Court held that the NCLT’s order directing the ED to release the assets of the Corporate Debtor could not be faulted.
Nonetheless, the Court further proceeded to look at Section 60(5) of the IBC. Section 60(5), akin to Section 32A, is also a non-obstante provision that empowers the NCLT to decide on ‘any question of law or facts in relation to the insolvency resolution or liquidation proceedings of a corporate debtor’. The Court acknowledged that this power included the right to decide on questions emerging from the grant of immunity under Section 32A to a corporate debtor. Further, since both Sections 32A and 60(5) were non-obstante provisions, there could be no question of an order passed under the IBC infringing upon or rendering obsolete any provisions of the PMLA. Accordingly, the Court rejected the ED’s argument and held that the NCLT had accurately answered the question of law arising under Section 32A of the IBC.
Obligation on quasi-judicial authorities:
The Court further held that once a resolution plan is approved and a corporate debtor qualifies for immunity under Section 32A, then it is incumbent upon quasi-judicial authorities such as the Adjudicating Authority under the PMLA to take judicial notice of the same and release the properties attached on their own. This, the Court said, is the only way to ensure that the rule of law as set out in Section 32A runs its course. Consequently, the Court directed the ED to release the attached assets of the Corporate Debtor.
Conclusion
This is a welcome decision by the Bombay High Court on the scope of operation of Section 32A of the IBC. The judgment delicately balances the interests of the ED and other investigative agencies in conferring immunity to the corporate debtor and its assets, and ensuring that the corporate debtor continues to remain obligated to cooperate with the investigation and prosecution against the other accused. Needless to state that immunity will only be conferred if the conditions of Section 32A are satisfied, including the condition that the person in management or control was not a person that the ED has reason to believe 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.
On the other hand, the judgment will also provide an impetus to, and strengthen, the CIRP. Resolution applicants will be further incentivized to freely participate in the CIRP, without having to worry much about the offences committed prior to the CIRP, and especially about actions taken by investigative agencies, including attachment and/ or freezing of assets despite approval of the resolution plan. Companies will therefore be provided with a clean break or a fresh start and will be given the ability to maximise value for their assets in the resolution process.
Finally, the Court refused to entertain the issue of whether enforcement agencies must release their attachments when the moratorium period for a corporate debtor has commenced as per Section 14 of the IBC. The Court was presently justified in doing so on the ground that since the resolution plan was already approved in the present case, there no longer existed any need for it to decide on the said issue. However, it must be emphasised that this issue has been the subject matter of extensive litigation, with conflicting judgments, and is currently pending resolution with the Supreme Court in Ashok Kumar Sarawgi v. Enforcement Directorate[3]. Needless to say, a clarification from the Apex Court on this point would be very welcome.
For further information, please contact:
Ankoosh Mehta , Partner, Cyril Amarchand Mangaldas
ankoosh.mehta@cyrilshroff.com
[1] Shiv Charan v. Adjudicating Authority, WP (L) No. 9943 of 2023 & WP (L) No. 29111 of 2023, decided on March 01, 2024.
[2] Manish Kumar v. Union of India, (2021) 5 SCC 1, paras 325 to 329.
[3] Ashok Kumar Sarawagi v. Enforcement Directorate and Another, Special Leave Petition (Civil) Diary No (S). 30092/2022.
