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NCLAT: Attachment of assets of corporate debtor by ED is illegal
February 17, 2020JSW Steel Ltd. Vs. Mahender Kumar Khandelwal & Ors.
The NCLAT has opined on the issue of whether after approval of a Resolution Plan under section 31 of the I&B Code, it is open to the Directorate of Enforcement (ED) to attach the assets of the Corporate Debtor (CD) on the alleged ground of money laundering by erstwhile promoters. The issue arose in the context of the attachment orders against Bhushan Power & Steel Ltd post acceptance of the resolution plan of JSW Steel in the CIRP. The stand of the government of India, which has been incorporated in section 32A(1)[1] of the I&B Code through the I&B Amendment Ordinance 2019, is that the ED, while conducting investigation under PMLA is free to deal with or attach the personal assets of erstwhile promoters and other accused persons acquired through crime proceeds and not the assets of the CD, which have been financed by creditors and acquired by a bona-fide third party Resolution Applicant with the approval of the CoC and AA. However, the ED took a stand that it had the power to seize the assets of the CD, even after the approval of the Resolution Plan, on the ground that JSW Steel was a ‘related party’ of the CD as it had entered into a joint venture company (JVC) with it and was therefore ineligible to be a resolution applicant.
The NCLAT held that Section 32A(1)(a) read with the definition of ‘related party’ clearly shows that JSW Steel Limited is not an associate company/related party of the CD. While the JVC is an ‘associate company’ of the CD as well as of JSW Steel Limited, however, by virtue of both having investment in such a downstream JVC, they do not become related parties of each other. Section 32A(1) and (2) clearly suggests that the ED/ other investigating agencies do not have the powers to attach assets of a CD once the Resolution Plan stands approved and the criminal investigations against the CD stands abated. Section 32A does not in any manner suggest that the benefit provided thereunder is only for such resolution plans which are yet to be approved. The Ordinance being clarificatory in nature must be made applicable retrospectively.
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[1] 32A. (1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not-
(a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or
(b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court:
Provided that if a prosecution had been instituted during the corporate insolvency resolution process against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having fulfilled:
Provided further that every person who was a “designated partner” as defined in clause (j) of section 2 of the Limited Liability Partnership Act, 2008 or an “officer who is in default”, as defined in clause (60) of section 2 of the Companies Act, 2013, or was in any manner in-charge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority, shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor notwithstanding that the corporate debtor’s liability has ceased under this sub-section.
(2) 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 under the provisions of Chapter III of Part II of this Code to a person, who was not –
(i) a promoter or in the management or control of the corporate debtor or a related party of such a person; or
(ii) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.
Explanation.- For the purposes of this sub-section, it is hereby clarified that,-
(i) an action against the property of the corporate debtor in relation to an offence shall include the attachment, seizure, retention or confiscation of such property under such law as may be applicable to the corporate debtor;
(ii) nothing in this sub-section shall be construed to bar an action against the property of any person, other than the corporate debtor or a person who has acquired such property through corporate insolvency resolution process or liquidation process under this Code and fulfils the requirements specified in this section, against whom such an action may be taken under such law as may be applicable.
(3) Subject to the provisions contained in sub-sections (1) and (2), and notwithstanding the immunity given in this section, the corporate debtor and any person, who may be required to provide assistance under such law as may be applicable to such corporate debtor or person, shall extend all assistance and co-operation to any authority investigating an offence committed prior to the commencement of the corporate insolvency resolution process.
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