Insolvency and Bankruptcy

Analyzing the scope of Immunity to Corporate Debtor

The government inserted a new section by the IBC Amendment Act 2020 in the Insolvency and Bankruptcy Code to provide immunity to Corporate Debtor from the offences that were committed before. Further, the provisions of the Insolvency and Bankruptcy Code will have an overriding effect on other Acts.  Hence, on certain conditions, immunity to corporate debtor is provided, and its management also get immunity from offences committed in the past. This article examines the question whether old directors of the corporate debtor also get this immunity. Here we need to understand Section 32 of the Insolvency and Bankruptcy Code which deals with immunity to corporate debtor.

Who is a Corporate Debtor?

A corporate debtor under the IBC 2016 refers to a corporate person who owes debt to any person. Corporate person is mentioned under section 3(7) of the IBC, which shall include:

• Companies under Companies Act;
• LLPs under LLP Act;
• Any other person incorporated with limited liability.

It do not include financial service providers that means banks or NBFCs.

Section 32A- Immunity to Corporate Debtor

Section 32A (1) says that notwithstanding anything to the contrary in this code or any other law, the liability of a corporate debtor for an offence that was committed before the corporate insolvency resolution process shall cease. Further, the immunity to corporate debtor is given that means corporate debtor won’t be prosecuted for such an offence from the date when resolution plan has been approved by the adjudicating authority if the resolution plan causes change in the management/control of the corporate debtor to a person who was not-

• A promoter or in management or in control of the corporate debtor or a related party of the person; or
• A person in respect of whom the investigating authority on the basis of the material in its possession has a reason to believe that he abetted or conspired for committing offence and submitted/filed a report or a complaint to the relevant statutory authority or to a court.

Provided that in case a prosecution was instituted during the CIRP against such corporate debtor, it will stand discharged from the approval date of the resolution plan provided that the requirements to this sub-section having been met.

Further that every person being a designated partner as provided in clause (j) of Section 2 of the LLP Act 2008^[1] or an officer who is in default as provided in clause 60 of Section 2 of Companies Act 2013 or was in charge of or responsible to the corporate debtor for the conduct of the business or associated with corporate debtor in any way and who was either directly or indirectly involved in the commission of the offence according to the report given or complaint filed by the investigating authority, would continue to be liable to be prosecuted for such an offence committed by corporate debtor notwithstanding that the liability of the corporate debtor has ceased under this sub-section.

Section 32A (2) says that no action would be taken against the property of the corporate debtor in respect of an offence committed before the CIRP of the corporate debtor, where such property falls under a resolution plan which is approved by the adjudicating authority under Section 31, which causes change in the control of the corporate debtor to a person, or sale of liquidation assets under provisions of Chapter III of Part II of this code to a person who-

• Was not a promoter or in management or control of corporate debtor or a related party of such person; or
• Was not a person in respect of whom the investigating authority on the basis of the material in its possession has a reason to believe that he abetted or conspired for committing offence and submitted or filed a report or a complaint to the relevant statutory authority or to a court.

For the purpose of the sub-section, it has been clarified that:

• An action against the corporate debtor’s property in relation to an offence will include attachment, seizure, retention or confiscation of the property under a law as applicable to the corporate debtor;
• Nothing in this sub-section would construed to bar an action against the property of a person other than corporate debtor or a person who acquired the property through CIRP or liquidation process under this code & fulfils the requirements mentioned in this section against whom the action an action can be taken under such law as applicable.

Section 32A (3) says subject to the provisions in sub-sections (1) and (2) and notwithstanding the immunity granted in this section, the corporate debtor and a person who is required to provide help under such law as applicable to such corporate debtor or person, would provide all assistance and co-operation to an authority investigating an offence committed before the commencement of CIRP.

So after going through Section 32A, it is clear that its intended object is two-fold:

• Immunity to corporate debtor/its assets are provided from any liability coming out of an offence committed before or during CIRP;
• No protection is given to persons in default who were connected with the corporate debtor and who were involved in the commission of the offence.

It may be noted that the old directors and other associated persons of the corporate debtor will not have immunity from proceedings already going on or any other proceedings which could commence in future.

Prosecution of the directors of the company for the company’s offence without prosecuting the company

There have been queries regarding if the directors of a company can be prosecuted for violation under the Income Tax Act without prosecution of the company itself. So if the company is immune impliedly, then do the directors also get such immunity?

 The statement mentioned above has been scrutinized by higher judicial forums. In the present scheme of things, it is negated by Section 32A of the Insolvency and Bankruptcy Code itself which denies such immunity.

Case Laws-

The Supreme Court, in case of Anil Hada vs. Indian Acrylic Limited, explained the legal validity of such proceeding and, while interpreting Section 138 and 141 of the Negotiable Instrument Act 1881, held that when the company was drawer of the cheque, such company was a principal offender under Section 138 thereof.  

The Supreme Court held that the remaining persons were made offenders through legal fiction created by the legislature, according to the section. Expounding further, it held that the provisions didn’t contain a condition that prosecution of the company was sine qua non for prosecution of other persons.

A similar observation was seen in the case of Sheoratan Agarwal vs. State of M.P in respect of Essential Commodities Act and the Andhra Pradesh High Court in Rama Bhushanam vs. Registrar of Companies, Andhra Pradesh. In the Andhra Pradesh High Court case the ROC had filed prosecution against the directors without impleading the company that was under liquidation already.

The provisions containing the liability of directors and other persons in case of offence committed by the company are listed under different acts like the Industries (Development and Regulation) Act, Foreign Exchange Regulation (FERA) Act, MRTP Act, Essential Commodities Act, Employees Provident Fund and Misc Provisions Act, Minimum wages Act, Apprentices Act, Payment of Gratuity Act, Central Excise and Salt Act, Negotiable Instruments Act etc and the provisions are similar as well. Therefore the law as prescribed under other Acts by the courts shall be equally applicable to the Income Tax Act 1961.

Considering the provisions of Section 32A of the Insolvency and Bankruptcy Code and the judicial authorities as provided above, the idea that the directors cannot be prosecuted without prosecution of the company is not legal. It is more in case of Section 32A of the IBC, which provides immunity to the company, and it is a reasonable ground in itself as held by the Supreme Court for proceeding against the director.

Conclusion

Hence it can be concluded that there is no immunity to the old directors or other persons associated either directly or indirectly with the corporate debtor pertaining to any offence by the corporate debtor in the past, and proceedings can be initiated against them without impleading the company.

Read our article:Insolvency and Bankruptcy Law and its Implementation Challenges in India