National Company Law Tribunal & NCLATAttachment of Assets during Liquidation

National Company Law Tribunal, Kolkata Bench

SBER Bank v. Varrsana Ispat Limited

AND

Mr. Anil Goel v. Deputy Director, Directorate of Enforcement, New Delhi

C.P. (IB) No. 543 /KB/2017 | Date: 22.07.2020

FACTS 

Corporate Insolvency Resolution Process (“CIRP”) was initiated against Corporate Debtor, Varrsana Ispat Limited. Thereafter, since no resolution plan was approved, liquidation proceedings were initiated.

Further, CBI, BS and FC had registered FIR against one of the Corporate Debtor’s group company, REI Agro Ltd and its promoter/directors, under sections 120B, 420, 467, 468 and 471 of the Indian Penal Code and Charge Sheet was filed for the same. The Directorate of Enforcement (“ED”) had attached the assets of the Corporate Debtor, including land, building, plant and machinery, alleging that the assets acquired were proceeds of crime as per Section 2(1)(u) of the Prevention of Money Laundering Act, 2002.

The Resolution Professional (“RP”) had filed an application before NCLT for de-attachment of assets of CD, which was dismissed by the NCLT. The RP then preferred as appeal before the NCLAT, which was also dismissed. Further, the RP appealed against the dismissal before the Supreme Court, which was also dismissed.

The Corporate Debtor is currently undergoing liquidation while the valuable assets remain attached. The Liquidator stated that he is running the Company as a going concern, but is unable to sell the Corporate Debtor or its business due to the attached assets. Several parties have shown interest but no one is willing do bid for the company.

On 28^th December 2019, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was promulgated which came into force on 13^th March 2020, as the Insolvency and Bankruptcy Code (Amendment) Act, 2020. Through this, Section 32A was inserted to the Code which gives clarity regarding assets under attachment.

The Liquidator has filed this application under Section 32A of the Code seeking permission to sell the assets of the Corporate Debtor attached by the ED.

ISSUE BEFORE THE TRIBUNAL

The following issues were considered by the Tribunal:

1. Whether an application under Section 32A of the Code can be made during the pendency of liquidation process by the liquidator?

2. Whether the attachment of property of Corporate Debtor undergoing CIRP or liquidation is void as per Section 32A of the Code?

3. Whether the assets of the Corporate Debtor attached by the ED can be sold by the Liquidator?

DECISION OF THE TRIBUNAL

Regarding the first issue, the Tribunal relied upon the provision under Section 32A of the Code and the object behind the introduction of the Section. The Tribunal observed that Section 32A is also applicable to liquidation proceedings.

The Tribunal noted that on interpretation of Section 32A (2) of the Code, it is clear that Section 32A is applicable to the assets of a Corporate Debtor undergoing liquidation. Likewise, a liquidator can file an application under Section 32A of the Code during the pendency of liquidation proceedings.

“We are stressing the wording CIRP or Liquidation in the object behind insertion of this section and the following words under subsection (2) of Section 32-A. “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 under the provisions of Chapter III of Part II of this Code to a person, who was not—”. The above said discussion no doubt enables us to hold that the 32-A is also applicable to the assets of the CD undergoing liquidation and a liquidator can file an application like the one in hand.”

Regarding the second issue, the Tribunal observed that the provision of Section 32A of the Code prohibits the ED from taking action against the assets of the Corporate Debtor undergoing CIRP or liquidation. However, Section 32A does not apply to the designated partner or an officer in default or in any manner responsible for the conduct of Corporate Debtor’s business or associated in the commission of the offence, directly or indirectly. To conclude, the Tribunal held that the properties of Corporate Debtor were also exempted from the purview of commission of such offence.

Regarding the third issue, the Tribunal held that the Liquidator can proceed with the sale of assets under attachment by the ED in order to proceed with the liquidation proceedings under the Code. It noted that the buyer of the assets can seek appropriate relief for de-attachment in accordance with Section 32A, upon confirmation of the sale.

Further, the Tribunal observed that attachment and confiscation of the properties of Corporate Debtor undergoing CIRP or liquidation becomes void as per Section 32A of the Code. It opined in

Therefore, the Tribunal allowed the application and permitted the liquidator to sell the assets of the Corporate Debtor attached by the ED as per the provisions of the Code, subject to right of the buyer to apply for de-attachment in accordance with Section 32A of the Code.

AMLEGALS REMARKS

The Code has evolved to strengthen insolvency framework for India and to provide successful Resolution Applicant or the liquidator a clean slate to attain a positive economic outcome for the Corporate Debtor, without fear of prosecution for past misdeeds of the erstwhile promoters/directors.

The decision of the Tribunal is res-integra after promulgation of Section 32 A of the Code. The Tribunal has clarified the interpretation of Section 32A of the Code which came into force on 13^th March 2020.

Section 32A in its present form covers prosecution of corporate debtors and not a group entity. The instant case pertained to the regulatory implication of another entity (for instance a group entity of the corporate debtor) who has committed an offence, and the proceeds of which are parked with the corporate debtor.

According to Section 32 A, a Corporate Debtor ceases to have liability for any offence committed prior to the commencement of CIRP and the Corporate Debtor cannot be prosecuted for such an offence from the date of approval of the resolution plan by the NCLT.

Sub-section 2 of the Section prohibits any action to be taken against the property of Corporate Debtor which is covered under a resolution plan approved by the NCLT, for an offence committed prior to the initiation of CIRP. The Tribunal, while interpreting this Section, noted that since the sub-section contains the terms “property covered under a resolution plan”, the Section applies to Corporate Debtors undergoing CIRP or liquidation.

Further, the Tribunal clarified that the RP or liquidator is entitled to proceed with a resolution plan approved by the NCLT even during the pendency of a criminal trial, and the resolution process or liquidation process shall not be hampered by any liability incurred due to commission of any criminal offence prior to the commencement of resolution process.

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