On the process of criminal prosecution for offences under the IBC and the problems created by the NCLAT judgment in Amtek case..

“YOUR WORD IS YOUR HONOUR. IF YOU SAY YOU ARE GOING TO DO SOMETHING, THEN YOU NEED TO DO IT.”

Joyce meyer

While honour and morality guide the higher man, for everyone else – there is law. Here we examine: what are the consequences of a Resolution Applicant (under the Insolvency and Bankruptcy Code, 2016 (‘IBC’ or ‘Code’)) backing out from a Resolution Plan?

Given the fact, that such a contravention is a penal offence, can a prosecution be initiated straight away, or is there a requirement – under the law – to conduct a preliminary enquiry?

Also, if such a preliminary enquiry is required to be conducted, what role, if any, would the NCLT play in this? 

This what we seek to examine in this column.

These questions assume great importance as many resolution applicants (under the IBC) have been accused of backing out from their commitments and not following through with their resolution plans.

The National Company Law Appellate Tribunal (‘NCLAT’) had the occasion of enunciating (or, rather, obfuscating!) the law on this issue in the case of Committee of Creditors of Amtek Auto Ltd v. Mr Dinkar T Venkatasubramanian [2019] (hereinafter ‘Amtek Auto’).  

To get the basic principles out of the way first, we understand that whether or not to approve a resolution plan is a question left to the commercial wisdom of the Committee of Creditors (‘CoC’).

Once approved by the CoC, the matter comes to the Adjudicating Authority (‘AA’) which, if satisfied that the resolution plan meets the requirements of Section 30(2) of the Code, has to approve the plan, and such a plan is binding on all the stakeholders, including the Resolution Applicant, by virtue of Section 31(1) of the Code. 

Once approved, a successful resolution applicant cannot withdraw the resolution plan and is bound by it, and so is everyone else. These are basics. 

The NCLAT and its Problematic Ruling

Coming back to the case under discussion (Amtek Auto). In this case, pursuant to a Section 7 application, the Corporate Insolvency Resolution Process (‘CIRP’) of Amtek Auto Ltd was initiated. The CIRP culminated in both the CoC and the AA approving the resolution plan of Liberty House Group Pte Ltd (the successful Resolution Applicant). However, when the question of implementing the plan arose, the Resolution Applicant (Liberty House) backtracked – citing discrepancies and incorrect information in the information memorandum and valuation reports.

The question of liability arose.

As per the scheme of the IBC, if a successful resolution applicant refuses or evades the resolution plan’s implementation, it may amount to an offence under  Section 74(3) of the Code. 

The rationale behind criminal sanctions against contravention of a resolution plan is to maintain the sanctity of the CIRP, to deter frivolous bidders and to ensure that such applicants are punished for leaving the corporate debtor in a devastated state and sabotaging a CIRP process.

Section 74 of the Code, in this regard, reads: 

Section 74.   Punishment for contravention of moratorium or the resolution plan.

            (1) Where the corporate debtor or any of its officer violates the provisions of section 14, any such officer who knowingly or wilfully committed or authorised or permitted such contravention shall be punishable with imprisonment for a term which shall not be less than three years, but may extend to five years or with fine which shall not be less than one lakh rupees, but may extend to three lakh rupees, or with both.

            (2) Where any creditor violates the provisions of section 14, any person who knowingly and wilfully authorised or permitted such contravention by a creditor shall be punishable with imprisonment for a term which shall not be less than one year, but may extend to five years, or with fine which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both.

            (3) Where the corporate debtor, any of its officers or creditors or any person on whom the approved resolution plan is binding under section 31, knowingly and wilfully contravenes any of the terms of such resolution plan or abets such contravention, such corporate debtor, officer, creditor or person shall be punishable with imprisonment of not less than one year, but may extend to five years, or with fine which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both. (emphasis supplied)

Going back on one’s commitment under a resolution plan, therefore, is a punishable offence. So far, so good. However, the next question that arises is slightly more complicated. What needs to be examined is : 

• How is this offence meant to be investigated and prosecuted? 
• Can a FIR be registered against such a resolution applicant? 
• Who is to file the complaint before the Court? 
• Would the NCLT/AA have any role to play in this?

Sub-section (2) of Section 236 of the IBC provides guidance. It reads: “no Court shall take cognisance of any offence punishable under this Act, save on a complaint made by the Board (IBBI) or the Central Government or any person authorised by the Central Government in this behalf”.

This manifests that cognisance of an offence under Section 74 can only be taken on a complaint made by the Insolvency and Bankruptcy Board of India (‘IBBI’ or ‘Board’) or the Central Government. Therefore, an offence u/s 74 of the IBC is not something for which an FIR can be registered at the local police station. It is not a cognizable offence – in that sense.

Further, as per design of the Code, the NCLT also seems to have no role to play in this. Whether to prosecute or not to prosecute, the decision firmly rests with IBBI/Board or the Central Government, appears to be the letter and intent of the Code.

This led to a conundrum; if only the IBBI/Board or the Central Government can file a complaint, how do they get to know whether an offence under Section 74 is committed, given the fact that they are neither parties to a CIRP nor made respondents.

The other issue is whether the IBC envisages any role of the NCLT/AA in this respect.

These were the questions that arose in Amtek Auto case before the NCLAT. This is where NCLAT ended up creating a procedure totally alien not only to the IBC but the first principles of criminal law. Whereas the IBC envisaged only the IBBI or the Central Government to take a decision in this regard, by an interesting process of reasoning, NCLAT envisaged a role to be played by the AA.

Since IBC does not provide for this, the NCLAT chose to place reliance on Section 213 of the Companies Act, 2013 for this, and observed:

1. Section 213 of the Companies Act, 2013 relates to “Investigation into the company’s affairs in other cases”.
2. As per clause (b) of Section 213, on an application made to the AA by any other person (say, the ‘Resolution Professional’ or the ‘CoC’) or otherwise (suo moto), the AA has the authority to order that the affairs of the company be investigated by an inspector(s) appointed by the Central Government.
3. Before passing such an order, the AA needs to provide a reasonable opportunity of being heard to the parties concerned.
4. Thereafter, suppose the AA is satisfied that circumstances suggest that the company’s business is being conducted with an intent to defraud its creditors, members or any other person (or otherwise for a fraudulent or unlawful purpose) misfeasance or other misconduct towards the company (‘Corporate Debtor’ through ‘Successful Resolution Applicant’), it may pass an order of investigation.
5. The Central Government shall appoint one or more competent persons as inspectors to investigate the company’s affairs.

While this – indeed – is the procedure when NCLT is investigating into a company’s affairs under the Companies Act, 2013, this process is – in no way – applicable when it comes to a decision to prosecute or not to prosecute a resolution applicant for an offence under the IBC.

The NCLAT made the above process applicable to prosecution of IBC offences. It held:

Therefore, we are of the opinion that before referring any matter to the Insolvency and Bankruptcy Board of India or the Central Government, the Adjudicating Authority/Tribunal is required to provide a reasonable opportunity of hearing to the parties concerned/alleged offenders of provisions of Chapter VII of Part II and if satisfied may request the Central Government to investigate the matter and then to decide on such opinion whether to refer and lodge any case before the Special Judge for trial under Section 236 of the ‘I&B Code’ for an alleged offence under Section 74(3) or any other provision under Chapter VII of Part II of the ‘I&B Code’ and for punishment under Section 447 of the Companies Act, 2013.”

This ruling is problematic for a number of reasons.

Where the NCLAT lost its way

With great respect, the NCLAT while rendering its decision has, unfortunately, neither paid heed to the statutory scheme of the Code nor the difference in civil and criminal proceedings. The NCLAT decision in Amtek Auto suffers from the following anomalies:

• The IBC is a complete Code: The usage of Section 213 by the NCLAT was incorrect. By doing so, it has squarely disregarded the Supreme Court’s decision in M/s. Innoventive Industries Ltd v. ICICI Bank [2017 SCC OnLine SC 1025] where the Court held that “there can be no doubt, therefore, that the Code is a parliamentary law that is an exhaustive code on the subject matter of insolvency in relation to corporate entities”. Accordingly, the said provision of the Companies Act, 2013 or for that matter, any other enactment, cannot be imported into the IBC’s scheme since the IBC is a complete code in itself.

• IBBI/Board guidelines already provide for a satisfactory procedure: The IBBI guidelines for complaints under Section 236 clearly show how a preliminary determination of the commission of an offence under Section 74 is to be made, and the AA has no role in this process. The guidelines state that:
  1. Every complaint/allegation received by the IBBI complaining/alleging misconduct of a debtor, a creditor, a resolution applicant or any other person other than a service provider shall be forwarded/referred to Prosecution Division in the Administrative Law Wing.
  2. Every misconduct of a debtor, a creditor, a resolution applicant or any other person, as may be noticed by any Division of the IBBI in discharge of its functions, shall be referred to the Prosecution Division.
  3. On receipt of the reference under (a) or (b) above, the Prosecution Division shall assign a number to each such reference.
  4. The Prosecution Division shall gather information from the complainant, operational Division, and the debtor, the creditor the resolution applicants, or the other person, as the case may be, and evidence, if any, regarding the alleged misconduct, within 30 days of the receipt of the complaint.
  5. A DGM level officer of the Prosecution Division shall form an opinion within 45 days of receipt of the complaint if there exists a prima facie case for filing a complaint before the Special Court. If he is of the opinion that there exists a prima facie case, he shall put up the matter to the ED in charge of Prosecution Division who shall decide whether a complaint is to be filed before the Special Court or not. In cases where the ED in charge of Prosecution Division is of the opinion that there exists no prima facie case, he shall close the complaint after recording reasons for the same.
  6. In case where the ED in charge of Prosecution Division is satisfied that a complaint should be filed, he shall cause filing of the complaint under section 236 of the Code to the Special Court having jurisdiction over the matter according to the procedure of Criminal Procedure Code, 1973.
  7. Thereafter, due process of law shall be followed.

Therefore, it is evident that the NCLAT’s concern that a preliminary inquiry is necessary for a complaint to be made has been satisfactorily taken care of in the Board’s guidelines. The AA need not make the preliminary determination here.

• Conflicting observations by the NCLAT: It is interesting to note the NCLAT itself has questioned (see para 42) the AA’s jurisdiction to refer the matter to the IBBI/Board or the Central Government under Section 74 of the Code. It also observes (see para 49) that “Section 213 of the Companies Act, 2013 may not apply to the proceeding under the IBC”. Nonetheless, the Hon’ble Appellate Tribunal thought it fit to import the procedure established under Section 213 of the Companies Act, 2013.

• Incorrect interpretation of Section 236 of the Code: Another legal folly was to read into Section 236 of the Code what the Legislature did not enact. While placing reliance upon Section 213 of the Companies Act, 2013, the NCLAT failed to appreciate the fact that Section 236 of the Code does not mention the AA (the NCLT) as an authority capable of making reference to the IBBI/Board or the Central Government as opposed to Section 213 of the Companies Act where it is explicitly mentioned.

• Furthermore, the NCLAT has also read into Section 236 of the Code, a two-step process before the Special Court can take cognisance. Firstly, an application shall be made before the AA, which shall evaluate whether circumstances exist for referring the matter to the IBBI/Board or the Central Government. Secondly, the IBBI/Board or the Central Government (as the case may be) shall investigate whether an offence is sufficiently made out so that a complaint may be filed before the Special Court. The NCLAT did not make any observation as to whether such reference would be directory or binding.

• The AA cannot assume criminal jurisdiction: The NCLAT, through this ruling, has also blurred the line between the civil and criminal process. It is undisputed that the AA is a civil and not a criminal forum, bereft of any jurisdiction of determining a question/ issue of criminal nature. It has essentially made the finding of the AA, a civil forum, a condition precedent for a criminal complaint. The NCLAT, without any legal provision, has allowed the AA to virtually take cognisance of an offence under Section 74 of the Code. This is an encroachment upon the Special Court’s jurisdiction and violative of sub-section (2) of Section 236 of the Code. It is noteworthy that the NCLAT has itself observed (see para 41) that it cannot deliberate whether an offence under Section 74(3) is, prima facie, made out. Therefore, there is no rationale for the show-cause notice when determining the commission of an offence is beyond the NCLAT’s jurisdiction.

• An Accused is not entitled to show-cause notice: Furthermore, the issuance of a show-cause notice to the accused is a concept alien to criminal law. An accused has no say at the stage of instituting the criminal complaint. A criminal complaint may be filed without notifying the accused or providing an opportunity to be heard. The issue of principles of natural justice being violated does not arise at this stage.

• Whether or not the default on the part of the successful Resolution Applicant was wilful and violative of Section 74(3), is a matter of defence in a trial before the Special Court after cognisance is taken on a complaint made by either the IBBI/Board or the Central Government.

The above, in our humble opinion, renders the NCLAT ruling bad in law.

Currently, the matter is pending in appeal before the Supreme Court in CA No 007567-007569 of 2019. We hope that the Apex Court will remedy this and reinstate the difference between civil and criminal proceedings and restore to the IBBI/Central Government, the powers to initiate prosecutions.

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Authored by Bharat Chugh (Advocate)

Sushant Kumar (Class of 2023, RML NlU, Lucknow)