The High Court ruled that the criminal liability of a corporate debtor is extinguished following the approval of a resolution plan under the Insolvency and Bankruptcy Code, but this does not extend to the personal liability of the company’s directors.
The Madras High Court Single-Judge Bench of Justice Dr. G. Jayachandran held that under Section 32A of the Insolvency and Bankruptcy Code, 2016, the corporate debtor's criminal liability for offences committed before the resolution plan’s approval is extinguished, but this protection does not extend to the personal liability of the company's directors.
" .....the protection under Section 32A is specific to the corporate debtor and does not extend to its directors or other individuals", the Bench observed,
In the matter before the High Court, the petitioner company, M/s. Vasan Health Care (P) Ltd., faced prosecution under Section 138 of the Negotiable Instruments Act for dishonouring cheques issued to settle a debt. The company had borrowed funds from M/s. India Infoline Finance Ltd (IIFL) issued cheques for repayment, which were dishonoured due to insufficient funds. Following statutory notices, criminal complaints were filed against the company and its directors.
Subsequently, the company entered into a Corporate Insolvency Resolution Process (CIRP) following an application by M/s. Alcon Laboratories under Section 9 of the Insolvency and Bankruptcy Code, 2016. The NCLT, Chennai, admitted the company into CIRP on 21/04/2017, appointing an Interim Resolution Professional. During the resolution process, the company's Managing Director, A.M. Arun, passed away on 16/11/2020, and the resolution process was continued with a new Resolution Professional appointed on 23/04/2021.
The resolution plan approved by NCLT on 03/02/2023 led to the company's takeover by M/s. ASG Hospital (P) Ltd., with all claims settled as per the resolution plan, including those of IIFL. Section 32A of the IBC was cited, arguing that the criminal proceedings against the corporate debtor should be extinguished following the approval of the resolution plan.
The petitioner contended that, following the Supreme Court’s judgment in Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Limited, REEDLAW 2023 SC 03569, the company’s prior criminal liabilities should be barred post-resolution. The respondent company did not participate in the proceedings despite receiving notice.
The High Court, considering the legal provisions and the judgment, ruled that the criminal prosecution against the petitioner company, as the corporate debtor, could not continue after the resolution plan's approval, aligning with Section 32A of the IBC. However, the protection under Section 32A is specific to the corporate debtor and does not extend to its directors or other individuals. Consequently, the court allowed the petition to quash the criminal complaints against the company, while the prosecution against the individuals involved remains unaffected.
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