IMMUNITY TO THE RESOLUTION APPLICANT UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016: A WELCOME STEP
Recently, in the matter of JSW Steel Limited V. Mahender Kumar Khandelwal & Ors., Hon’ble NCLAT has provided immunity to resolution applicant to the corporate debtor whose resolution plan has been approved by Committee of Creditor and Adjudicating Authority, against the confiscation of property by the Department of Enforcement. Department of Enforcement in the said matter has contended that the property/assets of the corporate debtor have been acquired by way of proceeds of crime and therefore they are having absolute authority to cease such properties and recover the amount. In this matter, Hon’ble NCLAT is of the view that new promotor i.e. Resolution Applicant shall not be in any manner be held liable for the acts done by erstwhile management.
In this article, the author shall be reporting the order of Hon’ble NCLAT and will be discussing as to whether the basis taken by Hon’ble NCLAT is an appreciable one or can be harmful in any manner.
Facts of the Case:
Bhushan Power & Steels Limited (hereinafter referred to as ‘Corporate Debtor’) undergoing Corporate Insolvency Resolution Plan (CIRP) has got the resolution plan submitted by JSW Steels Limited (hereinafter referred to as ‘Resolution Applicant’) duly approved by Adjudicating Authority vide judgement dated 05th September 2019. Pursuant to such order, the management of Corporate Debtor was supposed to be changed and taken over by new management decided by Resolution Applicant. Meanwhile, during such change of management, Directorate of Enforcement, a department under Central Government inculpate/attached the assets of Corporate Debtor under Section 5 of the Prevention of Money Laundering Act, 2002 by taking the stand that assets of the corporate debtor have been acquired by way of proceeds of crime.
Question of law which arose for discussion during the arguments was ‘Whether ED have such power to attach or confiscate the assets of the Corporate Debtor whose resolution plan has been duly approved by the Adjudicating Authority?’
Hon’ble NCLAT when observed that two different wings of the Central Government i.e. Ministry of Corporate Affairs (MCA) and Directorate of Enforcement (ED) are involved in the matter advised them to sit and come with the conclusion. Prior to which, during the argument in the present matter, on 14th October, 2019 MCA (in brief) has already given the view in writing by way of affidavit that Resolution Applicant who is giving resolution to sick company to revive it and is acquiring assets of corporate debtor in good faith as third party, that too by following the proper process of law prescribed under the Code and with the approval of Adjudicating Authority, shall not pay for the wrong acts of the erstwhile management and therefore, the assets of corporate debtor shall not be allowed to be attached by ED for the wrongs of earlier management as the same will not make the purpose of the Code achieved. And the same view, more or less, has been later supported by SFIO, CBI and Director (Legal and Prosecution), Ministry of Corporate Affairs. While, on the other hand ED has taken a contradictory stand by relying over two arguments i.e. –
- The Resolution Applicant is not eligible to take benefit of Section 32A as the Resolution Applicant and Corporate Debtor are related parties, and
- The said section has been introduced by way of ordinance dated 28th December 2019, therefore the same cannot have retrospective effect and benefit in the present case where resolution plan has been approved before such date.
Analysis of the case:
To the first query w.r.t question of being related party, ED is of the view that it is important to take a declaration from the resolution applicant that he is not a promoter or in the management or control of corporate debtor and is not a related party to it. Also, it was contented by ED that corporate debtor and resolution applicant falls under the category of related party as they are associate company/joint venture to each other, and therefore must not be benefitted by the provisions of Section 32A of the Code introduced by way of Ordinance. This view has been taken by ED based on the documents showing investment and shareholding of Corporate Debtor as 24.09% and Resolution Applicant as 49% in third entity namely ‘Rohne Coal Company Private Limited’, , a joint venture of Corporate Debtor and Resolution Applicant, which was formed pursuant to central government order only.
The Hon’ble Appellate Tribunal observed the definition of associate company provided in the Companies Act, 2013 and concluded that for being an associate company of another company, one company should have significant influence into that other company, and investment in and significant influence on any third entity will not fall under the ambit of associate company. In brief, significant influence must be between two companies directly and having a parallel significant influence of two entities in any third company will not make them associate to each other as the same is not covered under the definition of Associate Company provided under the Companies Act, 2013. The same is in the case of joint venture. Hon’ble NCLAT also concluded that where a party for the purpose of its business, if mandated by the Central Government to join hands together and are forced to form a consortium or as joint associate, such person (‘Resolution Applicant’) cannot be held ineligible in terms of Section 32A (1) (a) on the ground of ‘related party’, and further worded that in the present case ‘Rohne Coal Company Private Limited’ is an associate to corporate debtor and resolution applicant individually and this does not lead that the corporate debtor and resolution applicant are associate company. In respect to contention raised by ED w.r.t to declaration from the Resolution Application w.r.t factor of being related party, Hon’ble NCLAT concluded that since the provision of Section 32A of the Code does not ask for declaration, the same cannot be asked for or required to be submitted.
Author here would like to appreciate the view of the Hon’ble Appellate Tribunal as the definition of associate company provided under the Companies Act, 2013 is quite clear and does not say that such category of companies will be construed as an associate company, and since the rule of literal interpretation says that law must be read in plain and simple manner and must be given literal meaning, therefore, any new addition to such definition by the Appellate Tribunal will lead to change in law, and the same will not be appreciable and is not allowed. Term ‘Joint Venture’ used in the definition of ‘Associate Company’ provided under the Companies Act, 2013 means that arrangement where the parties that have joint arrangement have control over the assets of such arrangements, which means that the assets will be jointly controlled by the parties owning it. In the present case, there is no assets or arrangement which has been jointly controlled by Corporate Debtor and Resolution Applicant. Therefore, the view taken by Appellate Tribunal is correct.
To the second query, the Hon’ble NCLAT is of the view that since the ordinance has been issued pursuant to the order passed by Hon’ble Appellate Tribunal in the present case asking the two wings of central government to sit together and conclude whether the action taken by ED to attach assets of corporate debtor is sustainable or not, and consequent to such deliberation, the necessity to pass such ordinance has been felt and therefore, such ordinance shall have retrospective effect and is applicable in the present case. Also, prior to passing of such ordinance and introduction of Section 32A, there has been a view escalated by Ministry of Corporate Affairs (discussed earlier) on the subject which more or less is in line to provision being introduced, therefore also ED is not empowered to confiscate or attach the assets of corporate debtor rather having liberty to initiate prosecution against the erstwhile management and bring personal liability to them. New management acquiring corporate debtor in good faith with an intent to revive it must be saved in all sense, and therefore there is a need to give retrospective effect to the said provision.
The author here would like to support the view of this Hon’ble Tribunal with the submission that the Code has been introduced with the primary objective to maximise the value of assets and to bring an effective solution to a company undergoing sickness. Generally, the principle is that the new law will always have prospective effect and not retrospective effect, but the same principle is having some riders to it, where it allows giving retrospective effect to any provision to be introduced. The same is possible where either it has been specifically mentioned or is construed from the reason behind or circumstances in which such provision has been introduced. In the present case, ordinance dated 28.12.2019 has been introduced with an intent and after feeling necessitated to protect interest of last-mile funding to corporate debtor, and is a result consequent to ongoing case in hand of Appellate Tribunal, therefore it can be concluded that the provisions of Section 32A introduced by way of ordinance shall be having retrospective effect.
Another question which came before this Hon’ble Appellate Tribunal is that who is having authority to check whether Resolution Applicant submitting Resolution Plan is eligible to do so under Section 29A of the Insolvency and Bankruptcy Code, 2016, or whether ED is authorised to make such comment on the eligibility of Resolution Applicant under Section 29A of the Code, to which Hon’ble Appellate Tribunal has given its view after analysing the provisions of Section 30 and 31 of the Code that following three persons/authorities are empowered to decide the question of eligibility of Resolution Applicant-
- In pursuance to provisions of Section 30(1) Resolution profession is obligated with the duty to check whether an affidavit has been made by Resolution Applicant declaring that he is eligible under Section 29A to act as Resolution Applicant,
- Further, in pursuance of section 30(3) and (4) of the Code, Committee of Creditor is authorised to check the eligibility of resolution applicant and confirm whether it is meeting the requirements specified under section 29A or not, and
- Lastly, in terms of provisions of Section 31, Ld. Adjudicating Authority is having supreme authority to conduct in toto the eligibility test and shall approve the resolution plan only after getting confirmed.
Given above the view taken by Hon’ble Appellate Tribunal, it is clear that ED is not having authority to judge the eligibility of Resolution Applicant.
Though the judgement of Hon’ble Appellate Tribunal is still challenge-able but the view taken by Hon’ble Appellate Tribunal is very effective and is meeting the objective of the Code in entire manner. At the same time, it’s a big relief for the resolution applicant who were under dilemma as to whether Criminal Proceedings against the corporate debtor will continue to be there, will the resolution applicant be prosecuted for the same, and whether the assets of corporate debtor being taken over by Resolution Applicant is allowed to be attached in any case by any department or authority due to misconduct of erstwhile management. Also, the insertion of Section 32A in the Code by way ordinance makes it amply clear that what exactly the purpose of the code is, and resolution applicant must not be affected due to such situation. This move of the government and judgement of Hon’ble Appellate Tribunal will act as a shield for the corporate debtors against the misconduct of erstwhile management and will help the new management to work with a clear mind and thought, and to come forward freely to participate in resolution of sick companies and help in the growth of economy.