In a ruling that will have a bearing on several high-profile insolvency cases, the Supreme Court has clarified that proceedings against a corporate debtor over money-laundering charges would end once a resolution plan is approved, but continue against wrongdoers in the erstwhile management. A three-judge bench led by Justice RF Nariman recently clarified this while upholding Section 32A of the Insolvency and Bankruptcy Code. The pending cases that will be impacted by the ruling include that of Bhushan Power &Steel, which was acquired by JSW Steel.
The legislature has consciously kept in consideration the distinction between a corporate entity and people who were in charge and control of it, said Ruby Singh Ahuja, senior partner, Karanjawala and Co, and associate Ashutosh P Shukla. “Though the provision extinguishes the criminal liability of the corporate debtor, it does not allow the person in charge or control of the company prior to the resolution process to go scot-free and there is no bar for initiation of such proceeding against such person or persons,” Ahuja said.
“Therefore, the authorities will be well within their right to exercise their discretion to initiate any action against such persons under PMLA.” The court also upheld amendments to the code, granting immunity to an unconnected resolution applicant for the past criminal actions of the former management. The immunity also extends to the properties of the corporate debtor but not properties of the wrongdoers in the earlier management.
In several insolvencies, the Enforcement Directorate that investigates money-laundering cases has sought priority in attaching properties of the corporate debtor on the ground that the assets were proceeds of crime. In some cases, it has said the law would not apply to resolution processes initiated earlier. PSP Legal, Advocates & Solicitors partner Aditya Parolia said the clarification from the top court would help “attract more resolution applicants/plans, especially in companies which have faced insolvency due to criminal wrongs of the erstwhile managements”.
“The intent is to revive a company. Unless protection is provided to the new management from criminal liabilities and offences of the earlier management, no one will like to take over the affairs of such a company. This might lead to a failure of the objective of reviving insolvent companies,” Parolia said. Afair playing field has to be given to the new management to run the affairs of the company without any fear of prosecution, he said. The provision protects the properties or assets of the company undergoing insolvency without which the immunity to the new management might not make any sense.
