Section 32A protection extends to buyers of a corporate debtor sold as a going concern during liquidation, NCLAT rules

The appellants purchased Seam Industries Limited (“Corporate Debtor”) as a going concern during liquidation proceedings, which commenced on 30 June 2021.

A sale certificate was issued in their favour on 7 August 2023.

Thereafter, they filed I.A. No. 5599 of 2023 before the NCLT seeking various waivers, concessions, and protection under Section 32A of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

The NCLT granted relief concerning certain pre-existing liabilities to the extent stated in paragraph 4.15 of its order, but declined relief relating to pending or future proceedings, investigations, liabilities, penalties, and statutory non-compliances concerning the period preceding the NCLT order.

The appellants challenged the denial of these protections before the NCLAT.

Whether the benefit and protection under Section 32A of the IBC can apply where the Corporate Debtor is sold as a going concern during liquidation, including for the period between commencement of liquidation and issuance of the sale certificate?

Whether the appellants were entitled to the requested waivers and concessions concerning past liabilities, investigations, proceedings, statutory violations, penalties, and non-compliances of the Corporate Debtor?

Section 32A of the IBC extinguishes the liability of the Corporate Debtor for offences committed before commencement of the corporate insolvency resolution process upon approval of a resolution plan or sale of liquidation assets, subject to the statutory conditions concerning change in management, absence of connection with or participation in the offence, and cooperation with investigating authorities.

The Tribunal applied the “clean slate” principle recognised in Ghanashyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd., which provides that claims not forming part of the approved insolvency process cannot ordinarily survive against the resolved Corporate Debtor.

It also relied on M/s Shiv Shakti Inter Globe Exports Pvt. Ltd. v. M/s KTC Foods Pvt. Ltd. and Paschimanchal Vidyut Vitran Nigam Ltd. v. HSA Traders, which recognised the availability of Section 32A protection in the context of a sale during liquidation.

The Tribunal distinguished statutory protection under Section 32A from discretionary waivers or concessions, which must ordinarily be sought from the concerned statutory authorities.

The NCLAT held that insolvency proceedings may culminate either in approval of a resolution plan under Section 31 or in liquidation under Section 33, and that the legislative objective remains the revival or sale of the Corporate Debtor as a going concern.

It reasoned that the clean-slate principle is not confined to a formally approved resolution plan: where the Corporate Debtor is sold as a going concern during liquidation, past liabilities and consequences that remained unclaimed or unresolved during the insolvency process should not continue against the purchaser after completion of the sale.

Accordingly, the fact that liquidation commenced on 30 June 2021 and the sale certificate was issued only on 7 August 2023 did not prevent the appellants from receiving Section 32A protection for the relevant liquidation period.

However, the Tribunal declined to itself grant general waivers or concessions, holding that such reliefs must be addressed to the competent statutory authorities.

The protections under Section 32A remained subject to fulfilment of the statutory conditions.

The NCLAT set aside the portion of the NCLT’s order that had declined relief under items 5 and 6 of the appellants’ prayer and held that the appellants were entitled to the benefit of Section 32A of the IBC in respect of those matters, subject to fulfilment of the conditions prescribed under that provision.

The Tribunal did not grant the broader waivers and concessions sought from statutory authorities and imposed no costs.