Ring-fencing under IBC, and Open Issues
If you have questions or would like additional information on the material covered herein, please contact:
Ring-fencing under IBC, and Open Issues
An ordinance was promulgated on December 28, 2019 (“Ordinance”) making further amendment in the Insolvency
and Bankruptcy Code, 2016 (“IBC) and the President of India accorded his assent to the Insolvency and Bankruptcy
Code (Amendment) Act, 2020 (Amendment Act) inserting section 32 A which is now the fourth amendment to IBC.
The Amendment Act inter alia introduced Section 32 A to IBC which provides immunity to the corporate debtor and
its assets if the resolution plan is approved and it results in change of the management of the corporate debtor from
any prosecution, action, attachment, confiscation.
It is imperative to mention that the underlining reason of introduction of Section 32 A to the IBC is in connection to
the Corporate Insolvency Resolution Process (“CIRP”) of one the giants having its place in the list of dirty dozen
announced by Reserve Bank of India, ‘Bhushan Power & Steel Limited’ (“BPSL”).
While National Company Law Tribunal, Delhi (“NCLT”) approved the resolution Plan of JSW Steel Limited (“JSW”)
with certain modifications/amendments on September 5, 2019, the Directorate of Enforcement of Central
Government (“ED”) attached assets of BPSL under Section 5 of the ‘Prevention of Money Laundering Act, 2002’
(“PMLA”) vide its order of October 14, 2019.
JSW in Company Appeal (AT) (Insolvency) No. 957 of 2019 in the matter of JSW Steel Ltd Vs. Mahender Kumar
Khandelwal & Ors before National Company Law Appellate Tribunal (“NCLAT”) inter alia objected and challenged
the jurisdiction of ED to attach the properties of BPSL. During the pendency of the appeal, the Ordinance relating
to introduction of Section 32 A was promulgated and therefore, the same has been taken into consideration by the
NCLAT while deciding the appeal. NCLAT sought from ED and Union of India to report whether JSW is covered by
the newly inserted Section 32A of the IBC.
ED took a contrary stand from Union of India and stated that the proposed Section 32 A will not be applicable to
JSW, being a related party as also the amendment being prospective in nature and thus the benefit of provisions
of Section 32 A sub clause (2) is not available to the properties attached of BPSL by ED.
NCLAT vide its judgment dated February 17, 2020 rejected the contentions of ED and held that the benefits of
proposed Section 32 A are very much applicable in the present case and the attachment of assets of BPSL under
PMLA by the ED after the approval of resolution plan is illegal and without jurisdiction. However, the said order is
sub-judice before the Supreme Court of India and will be heard on April 17, 2020.
It would be interesting to see whether the Supreme Court while deciding the aforesaid, if a challenge is presented
will adjudicate upon the constitutional validity of Section 32A of the IBC or limit the scope of appeal to the JSW
Introduction of Section 32A of IBC is quite a dominant and overriding amendment to IBC read with its Section 238
having the ability to cease any/all prosecution, attachment, and/or seizure against the corporate debtor under any
law for the time being in force, and thus various far-reaching implications of Section 32 A, including the following,
are yet to be tested judicially:
- Whether by virtue of Section 32A of IBC all the statutory remedy under the criminal statutes will come to a halt
by mere approval of the resolution plan which is purely a civil and commercial activity.
- How will the amendment address the law laid by Delhi High Court in the case of the Deputy director of
Directorate of Enforcement vs Axis Bank wherein it was held that objective of PMLA is for distinct purpose and
IBC cannot prevail over the former.
- What would be the fate of the attachment of assets under the Negotiable Instrument Act, 1881, if the attachment is pending while resolution plan is approved when the NCLAT has in Shah Brothers Ispat Pvt. Ltd vs P. Mohanraj & Ors. exempted proceedings under Negotiable Instrument Act, 1881 from the scope of IBC.
- Another absurdity which is staring for adjudication by the higher courts/legal authorities is that what would
happen to attachments of the assets of the corporate debtor which are acquired through “proceeds of crime”
and the investigation by ED is underway while the resolution plan is approved.
To see the text of Section 32A, IBC, please refer the following URL.
For Covid 19 related articles, please refer to https://lexcounsel.in/articles-2020/ and for Covid 19 related legal
updates, please refer to https://lexcounsel.in/newletters/newsletters-2020/.