The Clean Slate Problem: Section 32A and Separate Corporate Personality

[Mohamed is a student at National Law School of India University.]

While the doctrine of separate corporate personality has long been a cornerstone of modern company law, its application within the domain of corporate criminal liability remains conceptually inconsistent and often contradictory. As Eric Colvin notes, while courts have become more willing to attribute criminal liability to corporate entities, such liability is typically based on vicarious responsibility for the acts of individuals within the company, rather than a recognition of corporate fault as attributable to the company itself. This results in a selective application of corporate personhood, undermining the development of a coherent, substantive framework for attributing criminal culpability to companies.

This discourse has gained renewed significance following the recent decision of the National Company Law Appellate Tribunal (NCLAT) in Anil Kohli v Directorate of Enforcement (3 July 2025) (Anil Kohli), which clarified that Section 32A of the Insolvency and Bankruptcy Code 2016 (IBC) applies only after control transfer to an unrelated, bona fide management. Although the Supreme Court in Manish Kumar v. Union of India (Manish Kumar) upheld the provision for promoting economic efficiency and facilitating insolvency proceedings, it is “clean slate” approach to pre-resolution criminal liabilities, particularly under statutes like the Prevention of Money Laundering Act 2002 (PMLA), that undermines both, efforts to strengthen separate corporate personality and public interest present in ensuring accountability.

In this context, the author argues that Section 32A weakens the conceptual and normative basis of corporate personhood and obstructs the development of a substantive theory of corporate criminal culpability. This post proceeds in three parts: first, by tracing the shift towards an organizational conceptualization of corporate criminal liability; second, by examining the implications of Section 32A of the IBC; and third, by critiquing the provision for its role in undermining the principle of separate corporate personality.

Towards Organizational Liability

Following its articulation in Salomon v. Salomon & Co. , early case law began to acknowledge the implications of the doctrine of separate corporate personality for the imposition of criminal liability on companies. Decisions such as New York Central and Hudson River Railroad Cp. v. United States recognized that corporations could no longer claim immunity from all forms of punishment, affirming that they too may commit crimes. However, this development also brought out the central dilemma of corporate criminal liability: how can liability be attributed to corporations for offences that inherently require mens rea or personal fault?

This dilemma was addressed by the doctrine of attribution, developed through decisions such as DPP v. Kent and Sussex Contractors Limited and HL Bolton (Engineering) Co Limited v. TJ Graham and Sons, which provided that the criminal intent of the company is to be identified with the individuals who direct its business.[1] This common law conceptualisation of corporate criminal liability, best articulated in Tesco Supermarkets Limited v. Nattrass, views the individual as not speaking or acting for the company, but as the company, being its directing mind who can take its decision.

For this reason, corporate criminal liability operates within, what Colvin calls, a ‘derivative model of liability,’ whereby the company’s criminal liability is defined as being derived from the criminal liability of its members. This means that an individual must first commit an offence, and the responsibility for that offence is then imputed to the corporation. This common law approach has been recognized and applied in the Indian context, as seen in the Iridium India Telecom Limited v. Motorola Incorporated decision.

However, while the common law solution found in the doctrine of attribution ended the immunity once enjoyed by corporations, this derivative model is still insufficient for two reasons. First, when considering the larger significance of separate corporate personality within common law’s conceptualisation of companies, the doctrine constrains the logical scope of this principle by failing to recognise a company’s independent criminal liability, that exists separate from its members. Second, as a result, this model too fails to meet the ends of justice, as the corporate entity that committed the offence may remain unpunished, distinct from its directing minds.

Given these shortcomings, many jurisdictions have begun shifting their conceptualization of corporate criminal liability from individualized liability towards organizational liability. This shift acknowledges that the fault elements for criminal offences may be found not only in individual actions, but also in criminogenic corporate cultures – organizational cultures and structures that are conducive to the commission of crimes. It reflects the realization that organizational properties and dynamics are crucial to understanding the nature of corporate liability, a development increasingly recognized in the study of white-collar crime. Thus, by moving from an individual to an organizational theorization of liability, the principle of separate corporate personality can be more fully realized, through the recognition of the company’s independent liability arising from its organizational flaws, rather than limiting liability solely to its directing minds.

This shift is visible when considering legislative developments in various jurisdictions, such as the Corporate Manslaughter and Corporate Homicide Act 2007, in the United Kingdom, which provides, in Section 8, that in assessing breach, courts are to consider failure in management by senior management as a substantial element.  More prominently, the Australian Criminal Code Act 1995, in Section 12.3, provides that the existence of a corporate culture that “directed, encouraged, tolerated, or led to non-compliance” constitutes one of the fault elements for criminal responsibility. Further, this Section also defines corporate culture as meaning “an attitude, policy, rule, course of conduct or practice existing within the body corporate” when the relevant activities took place.

Therefore, as many jurisdictions seek to expand and refine the theoretical foundations of organizational criminal liability, it is imperative for India to develop a robust framework for assigning such liability. Unfortunately, the introduction of Section 32A of the IBC suggests that India is making little meaningful progress in this direction.

Liability Post CIRP?

Section 32A of the IBC provides that once the corporate insolvency resolution process (CIRP) commences, the liability for any offence committed prior to such commencement shall cease, and the corporate debtor shall not be prosecuted for that offence.  Subsection (2) further stipulates that no action shall be taken against the property of the corporate debtor in connection with such offences. Importantly, as per the second proviso to subsection (1), this immunity extends only to the company and not to individuals such as former directors, promoters, or officers who continue to face personal liability for offences committed.

This provision thus embodies a “clean slate” approach, providing that the corporate debtor is discharged from past liabilities upon completion of the CIRP, and is given a fresh start, or a clean slate, to operate successfully under new management. The necessity of this “clean slate” provision arises from the need to instill confidence in prospective resolution applicants regarding the viability of the corporate debtor. The legislative intent behind this provision is to ensure that resolution applicants must not be burdened by past criminal liabilities caused by the previous management, and consequently, would be enable smooth insolvency proceedings even for companies with a history of pre-resolution liabilities.

The application of this provision is seen in P Mohanraj v. Shah Brother Ispat Private Limited, where the Supreme Court held that criminal proceedings, including quasi-criminal proceedings such as those under Section 138 of the Negotiable Instruments Act 1881, are covered by Section 32A, and that pending proceedings must be halted, once the CIRP commences. Further, as the court clarified in Kalyani Transco v. Bhushan Power and Steel Limited, all actions taken under the PMLA against the property of the corporate debtor, if such property has been declared as “proceeds of crime”, would have to cease due to Section 32A.

When assessing this provision outside the scope of IBC or PMLA provisions; however, it is revealed to have a bearing on the doctrine of separate corporate personality as well. This is visible in the Supreme Court’s decision in Manish Kumar where the court clarified that the provision does not grant blanket immunity for the offences committed, but rather, only prevents incoming management from being burdened with pre-existing liabilities. For this reason, the court upheld the constitutionality of the provision citing that provision is intended to serve an economic measure designed to ensure that successful insolvency proceedings are not undermined by burdening the corporate debtor with pre-existing liabilities once a new management assumes control. For this reason, the bar on proceedings against the property of the corporate debtor was also held valid, for it was deemed to be required for the objective of maximizing asset value at the earlier possible time.

However, in prioritizing economic efficiency, the court’s reasoning has two-fold implication on the separate corporate personality and organizational model of criminal liability: in reasoning that justice is not vitiated when the liability of the company ceases, because proceedings may still continue against individuals, the court implies that the only liability that the company has is what it derives from its members; in its articulation, the company, being merely a collective of people, cannot have any liability of its own, and so long as individuals running the company are held accountable, no separate action is necessary against the company. Second, as reaffirmed in the NCLAT’s decision in Anil Kohli, Section 32A only operates once the control of the company has shifted to an unrelated, bona fide management. In holding so, the court implies that the nature of liability is strictly individual, and not organizational. Thus, the court also completely sidelines larger discourses of organizational criminal liability and doesn’t deem it necessary in incorporating such understanding in India as well.

A Regression in Law

Given that these implications were not considered either by the legislature or by the courts when introducing the provision, it is evident that the goals of economic growth and successful resolution of insolvency were prioritized over other considerations, such as the enforcement of special statutes or maintaining consistency in the law. As a result, when viewed in light of the broader principle of developing separate corporate personality, this provision becomes deeply problematic for three reasons.

First, it directly contradicts several overarching public policy objectives embodied in special statutes such as the PMLA, by excluding its application. This is particularly notable given that the general critique of the PMLA regime is that its application undermines justice by infringing upon personal rights, particularly through its stringent bail provisions, as seen in the Arvind Kejriwal decision. Therefore, it is ironic that in this instance, it is the non-application of the PMLA that results in the vitiation of justice.

Second, subsection (2) of the provision creates an internal contradiction in its treatment of the corporate debtor’s separate personality. While the provision as a whole negates the possibility of corporate entities bearing separate liability, thereby refusing to recognise the company as an entity independent of its members, this subsection strangely enforces the company’s independent personality by providing that no proceedings shall continue against its property. For instance, in proceedings under the PMLA where various properties are identified as “proceeds of crime,” actions may proceed against properties belonging to individual members yet must cease in respect of properties owned by the company, solely because such property is held in the company’s name.

Third, and most important, the application of the provision also necessitates the rejection of organizational criminal liability and criminogenic corporate culture. This not only disregards the growing emphasis on developing substantive theoretical and legislative frameworks for enforcing organizational liability, but also undermines the principle of separate corporate personality, which remains central to the conceptualization of companies.

Concluding Remarks

For these reasons, regardless of its objectives in facilitating insolvency resolution, Section 32A of the IBC represents a regressive step in the evolution of corporate criminal liability in India. While jurisdictions such as the United Kingdom and Australia have developed legal frameworks that recognise organisational models of criminal liability and fully theorise the implications of separate corporate personality, the Indian framework remains stagnant, adhering to the older derivative model despite its inconsistencies and inequities. Consequently, as seen in the Anil Kohli decision, Section 32A narrows the scope for developing a substantive theory of corporate criminal liability, leaving systemic corporate wrongdoing insufficiently addressed.

[1] Director of Public Prosecutions v. Kent and Sussex Contractors Limited [1944 1 All ER 119].