Leaving IBC in the Lurch: Issues Unattended by NCLAT in JSW-BPSL Case
[Devansh is a student at Ram Manohar Lohia National Law University.]
The unification of insolvency laws in the form of the Insolvency Bankruptcy Code 2016 (Code) has been a colossal respite to the withering economy replacing the erstwhile Sick Industrial Companies Act (SICA) regime. Not only has it put the cases on an accelerated track, but it has also witnessed a paradigm shift from a ‘debtor in possession’ model to a ‘creditor in control’ one. Nevertheless, at times, the purpose of the Code becomes uncertain , such as when it was witnessed to be at loggerheads with the Prevention of Money Laundering Act 2002 (PMLA). In numerous instances, PMLA prevailed over the Code despite the founding principle that where two legislative enactments are entailed with over-riding effects, the later enactment would dominate the former. However, to continue with the smooth functioning of the Code, and to provide shelter to the successful resolution applicants and the properties of the corporate debtor from the liability of offenses committed by erstwhile promoters, Section 32A was introduced via the IBC (Amendment) Ordinance of 2019. The urgency for such a section stemmed from attachments made by the Enforcement Directorate (ED) on properties of Bhushan Power and Steel Limited (BPSL) on 10 October 2019 which was much after the resolution plan submitted by the JSW was approved by the National Company Law Tribunal (NCLT). Nonetheless, the National Company Law Appellate Tribunal (NCLAT) has lifted the attachments and allowed JSW to resume the acquisition of BPSL, but it has failed to elucidate the rationale and scope of Section 32A. The author will try to unveil the same along with raising the questions that have popped up with the addition of the new section, which questions were left untouched by the NCLAT.
Contours of the NCLAT decision
The focal issue which arose before NCLAT was whether it is within the jurisdiction of the ED to attach the properties once the resolution plan has acquired a green nod under Section 31 of the Code. While the bench answered in negative, it deduced the same by emphasizing on the factual matrix of the case and not by interpreting the newly added section. However, Union of India via Ministry of Corporate Affairs (MCA) in its reply affidavit has stated that resolution applicant being a bona-fide investor and acquiring all the properties through a statutory process under the supervision of NCLT should not face the consequences of the attachments made by ED. The bench reiterated the aforesaid stand of MCA without scrutinizing the Section 32A.
However, the plausible rationale behind the introduction of Section 32A can be understood to stimulate more and more of resolution applicants to submit the bid by rendering a blanket cover to the properties of the debtor and the new management from the actions of investigating authorities. No resolution applicant would capitalize in a stressed entity which is already canopied by various investigations and whose assets are provisionally attached by investigating authorities, leading to never-ending litigation to acquire the same. If Section 32A would have not been incorporated, in most of the cases where PMLA is involved, it would have led to attachment of the properties making the resolution applicants reluctant to go with the acquisition, throwing the insolvency regime back into the times when SICA was relevant.
From another glance, the introduction of such a section was intended to ensure a successful corporate insolvency resolution process (CIRP) of the BPSL which was considered as one of biggest defaulters by Reserve Bank of India (RBI) in 2017, naming it in the ‘dirty dozen’ that cumulatively owed a quarter of India’s reckoned $120 billion bad loan crisis. To unclog the pressure which was building on India’s financial system due to outstanding debts taken by BPSL and other major defaulters, a successful resolution plan without any impediments must have been the intent of the Central Government while incorporating Section 32A.
Issues necessitating attention
Though the newly added section has come as a sigh of relief for the resolution applicants, it is nebulous to an extent. The following paragraphs deal with the same.
Firstly, it is vital to understand that PMLA and IBC can clank at three junctures with respect to the CIRP, i.e., properties can be attached before or during the CIRP has commenced or after the CIRP has been completed. If the assets are attached before the commencement of the CIRP, then such an action of the investigating authority will be considered valid and the IRP cannot pray for the release of such assets even if moratorium under Section 14 has come into the picture. If the attachments are made after the CIRP has been completed and the resolution plan has been accepted by NCLT, the properties will be protected by Section 32A. For the properties attached during the CIRP, the first proviso of Section 32A(1) has to be ruminated. It states that “if a prosecution had been instituted during the corporate insolvency resolution process against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having been fulfilled.” This proviso comes to the rescue but only partially as it fails to explain the consequences if the investigation is complete and the asset is a result of ‘proceeds of crime’ but the CIRP is still on-going. The chances of the conclusion of the investigation and the immediate result thereof (which maybe restoration of the asset to the claimant having a legitimate interest in the property as under Section 8(8) of PMLA) before that of the CIRP has increased as the latter process can be extended to 330 days or further from the initial period of 180/270 days. From the view of the investigating authorities, it will be a race against time, i.e., to complete the investigation before the conclusion of CIRP. Such a scenario will be a major detriment for the committee of creditors (CoC) and the resolution applicants will look for either withdrawal / renegotiation of the plan if the asset involved is of considerate value. IRP can also file an IA before the appropriate forum but only leading to never-ending litigations and delaying the time-bound process as envisaged under the Code.
Second, whether it is the NCLT or the PMLA authorities to entertain the issues arising out of the attached property has always been a question to mull over especially due to the dearth of uniformity in answering the question posed. In Anil Goel v. Ramanjit Kaur Sethi, it was held that it is within the jurisdiction of authorities under PMLA to answer whether the property attached was proceeds of crime or not. On the other hand, Section 60(5)(c) confers NCLT the exclusive jurisdiction to entertain question of facts arising out of the CIRP of the corporate debtor. Though it may seem that with the advent of Section 32A, it should be the NCLT to govern such a question; however, it is beyond the scope of Section 32A, as could be inferred from its plain reading, to grant NCLT such dominance since the same is cabined only to provide a shelter to the properties and the new management.
Lastly, whether Section 32A will come to the rescue of a personal guarantor, whose assets are attached by the investigating authorities, of the corporate debtor whose resolution plan has been attained the approval of Debt Recovery Tribunal under Part III of the Code? It is vital to highlight that Part III of the Code except for the fresh start process in so far as they relate to personal guarantors of corporate debtors has been notified to come into effect since 1 December 2019 by MCA. This question is to test the scope of the newly added section to inquire whether it can be availed by the personal guarantors of the corporate debtor who have been dragged by the lenders before Part III of the Code or whether it is constrained only to the corporate debtor i.e. Part II of the Code. Such a question becomes vital in the present times where the tripartite agreements including the guarantors have beheld a rampant rise further questioning the consequences of such an agreement upon the Code.
Non-consideration of the aforementioned issues is not conclusive to hold that the verdict is stale. There are other vital findings that can be inferred from the judgement. The tribunal inter alia held that investigation against the ex-promoters will resume. This aligns with the founding principle that criminal proceedings will not be affected by the process envisaged under the Code, as was held in Shah Brothers Ispat. This is further evident of the fact that Section 32A is gingerly crafted to shelter the bona fide investors and at the same time to resume the criminal actions against the quondam management. Further, it was also held that the IBC (Amendment) Ordinance of 2019 will operate retrospectively. This has, for the good cause, saved the time of the tribunals, especially when the questioning the applicability of the newly passed ordinance / amendment in the Code has become more of a custom. Moreover, if the debtor and the resolution applicant have earlier invested in a downstream joint venture entity, it cannot be presumed that they are related parties.
It has been a short span since the introduction of the 2020 amendment and no tribunal has yet scrutinized the same. Such a provision is imperative in the current state of affairs where the economy pan-globe is in a distressed mode due to the prevailing pandemic. Due to COVID-19 outbreak, investors are already re-negotiating their resolutions plans with the CoC bringing the investment amount to a substantial reduction. For instance, in April 2020, Ramkrishna Forgings who won the bid for a stressed automotive component maker, Acil Limited, made demands to re-negotiate. With the introduction of the section, applicants would be certain that, at the very least, properties of the debtor would be secured. However, with the appeal pending before the Apex Court, it can be hoped that all the pertinent issues arising out of Section 32A will be settled once in for all.
Solidaire India Ltd. v. Fairgrowth Financial Services Private Limited, (2001) 3 SCC 71.
Varsanna Ispat Limited v. Deputy Director, Directorate of Enforcement.
Civil Appeal No(s). 1808/2020 and other connected Civil Appeals.