Legislative amendments to the IBC are now more or less a biannual affair. Many of these have been important and necessary. But the problem with this hectic pace of change is that it opens the door to carelessness and bad drafting. Section 32A offers a good example of the perils of hasty workmanship. It has a laudable aim – to protect the new owners of the corporate debtor (or of its assets) from prosecution for the offences of the earlier promoters. While lavishing most of its attention on insulating the winning bidders in the resolution process, its error lies in the short shrift it gives to the less-fashionable liquidation process.
The kind of immunity given by 32A is detailed in its first two sub-sections. Of these, sub-section (1) is longer, more elaborately drafted, and wider in scope. It stops prosecutions in their tracks (“the liability…for an offence…shall cease, and the corporate debtor shall not be prosecuted…”). However, incomprehensibly, it pertains exclusively to the insolvency resolution process, and makes no mention of liquidation. Sub-section (2) extends a kind of immunity to the liquidation process, but does so almost in passing, in the following terms:
“No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the corporate insolvency resolution process of the corporate debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under section 31, which results in the change in control of the corporate debtor to a person, or sale of liquidation assets…”
The underlined portion is unmeaning when read in tandem with the words preceding it (try it). Further, the opening words of the sub-section preclude prosecuting agencies from taking action, but unlike sub-section (1) they do not apply to existing prosecutions. Which means that when in liquidation, the corporate debtor’s assets are protected only from future actions and not past actions, such as an attachment. This is absurd, given that in this context, there is no discernible principle for discriminating against the liquidation process.
It also makes the question of when a “sale of liquidation assets” has taken place extremely important, since that is the cut-off date for launching prosecutions. In a recent case, the Delhi High Court had to ascertain the validity of an argument by the Enforcement Directorate that an order for provisional attachment under the Prevention of Money Laundering Act, 2002 was valid till a sale certificate was issued to the purchaser of liquidation assets. The Court wisely rejected this argument, instead holding that “sale” under Section 32A refers to an earlier point of time – when the Adjudicating Authority approves of a sale in one of the means listed in the Liquidation Process Regulations, 2016.
Courts can only do so much. Parliament has to realise that 32A needs to be amended urgently, to ensure that when it comes to prosecutions taken against the assets of a corporate debtor, the liquidation process is at par with the CIRP.
