The Insolvency and Bankruptcy Code, 2016 (IBC), has inter alia introduced a statutory platform for the restructuring and resolution of stressed assets in India across all corporates. The code is intended to be a single-window clearance for all steps that may be required to put the corporate back on the path to recovery. In recognition of this objective, the Ministry of Corporate Affairs, as well as securities regulator the Securities Exchange Board of India (SEBI), has either entirely exempted and/or relaxed compliance norms for resolution plans approved under the code.
One of the major concerns that arose, however, was the apprehension of prospective resolution applicants regarding the potential criminal liability on the corporate and/or the prospective resolution applicants, post resolution, on account of the past actions of the erstwhile management of the corporate.
A conflict has arisen between the provisions of the code – which aim to achieve the object of the code towards maximization of value of the assets of a financially distressed corporate – with that of criminal legislation, specifically the Prevention of Money Laundering Act, 2002 (PMLA). The PMLA aims to achieve the object of preventing money laundering, and provides for confiscation of property derived from, or involved in, money laundering.
Such provisions in the PMLA put it at loggerheads with the scheme and object of the code, to facilitate a viable corporate path back to recovery. The dichotomy in this entire scheme of affairs arises on account of the fact that, during the resolution process, prospective resolution applicants, after conducting their necessary diligence, ascribe an enterprise value to the assets of the financially distressed corporate and propose a resolution plan keeping in mind that value.
Such assets, however, may, without the knowledge of the prospective resolution applicants, include assets that have been created using proceeds of a crime, and hence, are potentially capable of being attached under the PMLA
This conflict came to the fore in the resolution proceedings of Bhushan Power & Steel Limited (BPSL), where, subsequent to the approval of the resolution plan submitted by JSW Steel (JSW), the enforcement directorate under the PMLA proceeded to attach the assets of BPSL.
JSW, faced with the anomalous situation of having committed to pay a significant value to acquire the assets of BPSL, only for that to be lost in attachment under the PMLA, refused to implement the resolution plan until there was some clarity on this aspect.
The above-mentioned controversy triggered a panic button for many resolution applicants across the country. The reason was simple – a resolution applicant, while bidding for a financially distressed asset, ought to be assured of the safety of these assets, and it is only with such legitimate expectation that any prospective applicant would step up to acquire the enterprise. In absence of such assurance, the resolution of distressed assets under the code is simply impractical.
It is in view of this that the legislature immediately stepped up to introduce the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, where the code was amended to protect a financially distressed corporate being taken over by new management from past criminal offences. Further, immunity was granted from any action against the property of the distressed corporate once it is brought under new management, as long as the new management had no connection with any past criminal deeds.
This is yet another instance of swift governmental intervention to ensure success in the working of the code. Subsequently, the legislature approved the amendment to the code in the same terms as the ordinance, indicating the clear intent of the legislature to give primacy to the object of resolution under the code.
The above amendment has surely evoked a sigh of relief from resolution applicants and creditors alike, and has given the necessary impetus for the successful implementation of the code.
The question, however, remains as to whether the amendment may prove to be an escape route to persons indulging in money laundering, as the tainted assets created on account of money laundering have been given a protection under a code, and hence provide legitimacy to assets otherwise procured illegitimately.
The answer perhaps will lie in ensuring strict implementation of the amendment, which protects the new management, and its newly acquired assets in the corporate, only if it is not directly or indirectly linked to the commission of crime by erstwhile management, and efficacious individual action against the members of erstwhile management to tackle money laundering.
Misha is a partner in the insolvency and bankruptcy practice and Siddhant Kant is a senior associate at Shardul Amarchand Mangaldas & Co