SC upholds IBC’s Section 32A: Why is it important, what are the implications?

What did the Supreme Court say in its judgment on the validity of Section 32 A of the Insolvency and Bankruptcy Code (IBC)? Why is it important?

The Supreme Court on Tuesday held that the successful bidders for a corporate debtor under the Insolvency and Bankruptcy Code (IBC) would be immune from any investigations being conducted either by any investigating agencies such as the Enforcement Directorate (ED) or other statutory bodies such as Securities and Exchange Board of India (SEBI).

What did the Supreme Court say in its judgment?

In its judgment, the apex court, while upholding the validity of Section 32 A of IBC, said it was important for the IBC to attract bidders who would offer reasonable and fair value for the corporate debtor to ensure the timely completion of corporate insolvency resolution process (CIRP). Such bidders, however, must also be granted protection from any misdeeds of the past since they had nothing to do with it. Such protection, the court said, must also extend to the assets of a corporate debtor, which form a crucial attraction for potential bidders and helps them in assessing and placing a fair bid for the company, which, in turn, will help banks clean up their books of bad loans. “The extinguishment of the criminal liability of the corporate debtor is apparently important to the new management to make a clean break with the past and start on a clean slate. As far as protection afforded to the property is concerned there is clearly a rationale behind it,” it said.

The protection to successful bidders and the assets of a corporate debtor are provided by the rules under Section 32A of the IBC. The apex court has, however, also said that such immunity would be applicable only if there is an approved resolution plan, and a change in the management control of the corporate debtor.

“The new management cannot be the disguised avatar of the old management. It cannot even be the related party of the corporate debtor. The new management cannot be the subject matter of an investigation which has resulted in material showing abetment or conspiracy for the commission of the offence and the report or complaint filed thereto,” the apex court held.

Why is the SC upholding Section 32A important?

Since the IBC came into being in 2016, the implementation of resolution plan of several big ticket cases has been delayed because of various challenges mounted by its own agencies and regulators.

For example, consider the case of Bhushan Power and Steel. The debt-laden company, admitted into insolvency in 2017, owes more than Rs 47,000 crore to banks and other financial institutions, and another Rs 780 crore to its operational creditors. After a prolonged bidding battle, JSW Steel won the rights to take over Bhushan Power with a bid of Rs 19,700 crore. However, before the Sajjan Jindal-led company could move to take over Bhushan Power, the ED swooped in, and attached assets worth Rs 4,000 crore citing alleged fraud in a bank loan taken by the company’s former owners and other cases under the Prevention of Money Laundering Act (PMLA).

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With the Supreme Court upholding the validity of Section 32 A, the cases such as that of Bhushan Power are expected to be completed soon. Experts also said that this will give confidence to other bidders to proceed with confidence while bidding on such disputed companies and their assets.

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