Introduction
The Delhi High Court in Aryan Constructions v. Punjab National Bank Ltd.[i] concretised the application of s. 32A of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). S. 32A of the IBC states that the criminal liability of the corporate debtor (‘CD’) for offences committed prior to initiating the corporate insolvency resolution process (CIRP) is halted. The assets shall acquire a clean slate despite any attachments by orders from the ED, SFIO or other entities. These assets are then disbursed among the creditors according to the resolution plan (‘Plan’) approved by the adjudicating authority (AA). Banks and similar entities cannot be compelled to reclaim siphoned funds from the former promoters of the CD. Once approved by the AA, the Plan becomes binding on the creditors and CD regardless of their consent.
Brief Facts
In this case, the petitioner was the CD's operational creditor (‘OC’). The amount finalised in the Plan approved by the AA, to be disbursed among the OCs, came out to be Rs. 350 crores after a haircut of 52.31%. However, the resolution professional's original claim, submitted to the National Company Law Tribunal (‘NCLT’), was Rs. 47,000 crores for financial creditors (FCs) and Rs. 620 crores for OCs.
The petitioner alleged that the respondent banks failed to take timely action to recover assets worth over Rs. 4,000 crores siphoned off by the former promoters of the CD. The enforcement directorate (ED) had attached these assets under the Prevention of Money Laundering Act, 2002 (‘PMLA’) on 10.10.2019. The petitioner argued that the respondents should have pursued these assets for the benefit of the creditors.
The petitioner also contested the applicability of s. 32A of the IBC, introduced on 28.12.2019 after the Plan had already been approved, further alleged that the successful Plan was inapplicable because the successful resolution applicant (SRA) and CD are related as per s. 5(24) of the IBC.
Held
The Delhi High Court dismissed the writ petition, holding that the petitioner’s claims were legally unsustainable. The Court emphasised that once a Plan is approved under the IBC, it binds all creditors, and the CD’s assets, in the hands of the resolution applicant, are protected from criminal prosecution and attachment.
The Court also clarified that s. 32A of the IBC, although introduced after the approval of the Plan, is merely clarificatory and does not alter the legal position regarding the protection of the CD’s assets post-resolution.
The Court further noted that the petitioner failed to provide substantial evidence to support the claim that the resolution applicant was a ‘related party’ of the CD and, thus, ineligible under s. 29A of the IBC. The High Court upheld the decisions of the NCLT and the National Company Appellate Tribunal (NCLAT), which had previously addressed these concerns, and found no merit in the petitioner's arguments regarding the alleged inaction by the respondent banks.
Our Analysis
The High Court’s ruling highlights a Plan's finality and binding nature once approved under the IBC. S. 31 of the IBC clearly mandates that a Plan, once approved by the NCLT, is binding on all stakeholders, including creditors, regardless of whether they consented to it. This principle aligns with the broader objectives of the IBC, aiming to maximise the value of the CD’s assets and ensure a timely resolution of insolvency issues.
The petitioner’s attempt to challenge the applicability of s. 32A of the IBC, which provides immunity from prosecution and attachment, was rightly dismissed by the Court. S. 32A protects the resolution applicant from any liability arising from the actions of the previous management, thereby facilitating the revival of the CD.
This provision is different from the moratorium period. In the moratorium period, criminal liability is not extinguished entirely. It comes to a standstill for the said period. Once it ends, the protective measures are lifted, and criminal proceedings can resume. On the other hand, criminal liability ceases entirely under s. 32A of the IBC.
The Court’s interpretation that S. 32A is clarificatory in nature ensures that the legislative intent behind the IBC – to provide a clean slate to the resolution applicant – is preserved.
Further, the ruling provides clarity on the interplay between the IBC and other statutory frameworks, such as the PMLA, ensuring that the resolution process remains focused on reviving the corporate debtor while shielding it from past liabilities.
End Note
[i] [2024] 165 taxmann.com 567 (Delhi) dated 05.08.2024.
Authored by Vanshika, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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