The Bombay High Court’s 1 March ruling in Shiv Charan & Ors. v. Adjudicating Authority & Ors. is an important addition to the canon that a person acquiring an insolvent company through a resolution process under the Indian Insolvency & Bankruptcy Code, 2016 (IBC) starts with a clean slate.
Once a company has been acquired under a resolution process, the IBC protects the company and its property from any action and prosecution for offences committed prior to insolvency.
Facts
The company in question DSK Southern Projects Pvt. Ltd. (DSK) had been placed in insolvency in 2021. The appellants in the case, Shiv Charan and two other individuals, submitted a resolution plan to take over DSK under the IBC, and their resolution plan was approved by the National Company Law Tribunal (NCLT) in February 2023.
In 2019, a couple years before DSK was placed in insolvency, the ED had attached four bank accounts and fourteen apartments constructed by DSK on anti-money laundering charges. This 2019 attachment continued even after insolvency commenced.
Section 32A of the IBC
When approving Shiv Charan’s resolution plan, the NCLT had directed the ED to release the attachment, relying on Section 32A of the IBC which says that once a resolution plan has been approved by the NCLT, an insolvent company’s liability for any offence committed prior to insolvency shall cease, and the company will not be prosecuted for such an offence.
Section 32A also says that no action shall be taken against an insolvent company’s property for an offence committed before insolvency if the property is covered by the resolution plan approved by the NCLT, including seizure, retention, or confiscation of property.
ED’s Arguments
The ED argued that it had attached the property even before the insolvency commenced, and that if Shiv Charan or any other bidder had objections, they could approach the Appellate Tribunal constituted under the Prevention of Money Laundering Act, 2002 (PMLA).
The ED also argued that the IBC could not be interpreted in a manner that would negate the PMLA’s objectives, and that the NCLT must refrain from ruling on any matter if it would have an implication on other special laws like the PMLA. The ED argued that Section 32A of the IBC could not stretch to curtailing the ED’s power to keep properties attached under the PMLA.
Bombay High Court’s Findings
The Bombay High Court explained that Section 32A was a ‘non-obstante’ provision, which would be triggered only once a resolution plan was approved. The court added that once the ingredients of Section 32A were met, it enabled an automatic discharge from prosecution for the insolvent company in question.
The court emphasized the need for a complete change in management and control of the insolvent company before the protection of Section 32A could apply. However, once in play, the court found that Section 32A protected the insolvent company’s property from any action, including attachment, seizure, retention, or confiscation. This, the court said, included any action against the property taken under the Prevention of Money Laundering Act.
Forcing a successful resolution applicant to approach a PMLA tribunal to reverse a confiscation or attachment was unnecessary, and contradicted Section 32A of the IBC. The High Court said that it was ‘untenable’ to say that the NCLT was incompetent or powerless to interpret or give effect to provisions of the IBC, and that it was fully empowered to direct the ED to release the attachment over a property once a resolution plan was approved.
In support, the Bombay High Court referred to the Supreme Court’s decision in Manish Kumar v. Union of India1, which found that immunity under Section 32A was conscious and valid, even in cases where provisions of the PMLA were involved. The decision in Manish Kuma held that extinguishing a company’s criminal liability once a resolution plan was approved was important for a clean break with the past, and to start on a clean slate.
The Bombay High Court noted the above and reiterated that the ED could not continue attaching a property once a resolution plan was approved, observing that parliament was aware of the PMLA’s existence when legislating Section 32A of the IBC. The court added that the ED would not be a creditor and no debt would be owed by the company to the ED.
Limitations of the Decision
The Bombay High Court’s judgment is a welcome move that strengthens the insolvency framework under the IBC. It ensures that bidders looking to submit a resolution plan under the IBC will not worry about the potential for future litigation by agencies such as the ED, freeing up assets whose value can be utilized to benefit the company’s creditors.
However, the scope of the decision in Shiv Charan is limited. The High Court clarified that the decision was restricted to situations where a resolution plan had been approved. It did not clarify whether any attachment of assets could continue during the pendency of the insolvency process, before a resolution plan was approved. This is a question that has already seen much litigation, and judicial clarification on this point will help resolution professionals and creditors accurately assess the value and availability of a property in the insolvent company’s estate.
