The Insolvency and Bankruptcy Code, 2016, is a law in India that helps resolve financial troubles for companies, partnerships, or individuals by setting a clear process to handle insolvency (when someone can't pay their debts). Section 32A wasn’t part of the original 2016 law but was added later through an amendment in 2020, which took effect on December 28, 2019. This article explains Section 32A of the Insolvency and Bankruptcy Code, 2016 (IBC) in simple, easy-to-understand language. It covers what the section is, why it was introduced, what it does, and its status. The information is based on thorough research into legal documents, amendments, and court rulings to provide a clear and complete picture for everyone, whether you're a business owner, investor, or just curious.
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What is Section 32A of Insolvency and Bankruptcy Code, 2016?
The reason for adding Section 32A was to solve a problem i.e, when a company goes through the insolvency process called the Corporate Insolvency Resolution Process or CIRP, new investors or managers who take over don’t want to be held responsible for bad things the company did before they got involved.
For example, if the old management committed financial wrongs, new owners shouldn’t face punishment for those actions. Section 32A was introduced to protect these new owners and encourage people to invest in struggling companies without fear of legal trouble.
A famous case, JSW Steel Limited’s takeover of Bhushan Power & Steel Limited, showed the need for this kind of protection, as there was confusion about whether new owners could face legal action for past issues.
What Does Section 32A Say?
Section 32A has three main parts, each explaining a different aspect of how a company and its new owners are protected after the insolvency process. Here’s a breakdown in simple terms:
1. No Liability for Past Offences
This part says that once a company goes through the insolvency process and a new resolution plan (a plan to save or restructure the company) is approved under Section 31 of the IBC, the company itself stops being responsible for any illegal actions (offences) it committed before the insolvency process started. However, this protection only applies if:
The new management or owners are not connected to the old management (like promoters or related parties).
The new management wasn’t involved in or didn’t help with the illegal actions, as confirmed by an investigating authority (like the police or a regulatory body).
Any legal cases (prosecutions) started during the insolvency process against the company will be dropped once the resolution plan is approved, as long as the above conditions are met.
Important Note: This protection is only for the company itself, not for individuals like old managers, promoters, or employees who were directly involved in the wrongdoing. Those individuals can still face legal action.
2. Protecting the Company’s Property
This part protects the company’s assets (like buildings, money, or equipment) from being taken away due to illegal actions that happened before the insolvency process. For example:
No one can seize, attach, or take the company’s property if it’s part of the approved resolution plan and the company has new, unrelated management.
This applies to actions under laws like the Prevention of Money Laundering Act, 2002, which might otherwise allow authorities to take assets.
However, this protection only applies to the company’s property and not to assets owned by individuals who were involved in the offences.
3. Cooperation with Investigations
Even though the company gets protection from past offences, it still has to help authorities investigate those offences. This means the company and its new management must provide information or assistance if asked, ensuring that investigations into past wrongdoings can continue without interference.
Importance of Section 32A IBC, 2016
Section 32A is a big deal because it makes it easier for new investors to step in and save a struggling company. Without this section, people might hesitate to take over a company because they could get in trouble for things the previous owners did. By giving the company a “clean slate” after the insolvency process, Section 32A encourages investment, which helps save businesses and protect jobs.
At the same time, it ensures fairness by keeping individuals (like old managers or promoters) responsible for their actions. This balance is important as it helps revive companies while making sure wrongdoers don’t escape punishment. For creditors (people or banks owed money), it means that the company’s assets stay available to pay off debts, which increases their chances of getting some money back.
Some people worry that this section might let companies off too easily, but others say it’s necessary to keep the insolvency process working smoothly. The fact that individuals remain accountable helps address those concerns.
Find out What Insolvency is?
Amendments in Insolvency and Bankruptcy Code, 2016
The IBC has been updated several times since 2016, with major changes in 2018, 2019, 2020, 2021, and 2023. Section 32A was added in the 2020 amendment, effective from December 28, 2019. Since then, no changes have been made to Section 32A itself. For example:
The 2021 amendment introduced a new process called pre-packaged insolvency for small businesses (MSMEs), but it didn’t touch Section 32A.
The 2023 amendment focused on improving procedures, like how insolvency cases are handled, but it didn’t change Section 32A either.
Judicial Interpretations
Indian courts have helped clarify how Section 32A works through important rulings:
In Manish Kumar v. Union of India and Anr. (2021), the Supreme Court explained the three parts of Section 32A, making it clear that it protects new management but not guilty individuals.
In P. Mohanraj and Ors. v. Shah Brothers Ispat Pvt. Ltd. (2021), the court looked at how Section 32A works with Section 14 (which pauses legal actions during insolvency), showing that it gives strong protection to new owners.
Summary
Section 32A of the IBC, 2016 is a key rule that helps new owners take over struggling companies without worrying about past mistakes, while ensuring that individuals who did wrong are still held accountable. It has not changed since it was added in 2020 and court rulings have made it clearer. This section makes the insolvency process smoother and helping save businesses while maintaining fairness.
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Section 32A IBC, 2016: FAQs
Q1. What is Section 32A of the IBC Code 2016?
Section 32A of the Insolvency and Bankruptcy Code, 2016, protects a company undergoing insolvency from liability for offences committed before the process starts, if a new, unrelated management takes over via an approved resolution plan. Individuals involved in the offences remain liable.
Q2. What is Section 32A of the IBC case law?
Key case law on Section 32A includes Manish Kumar v. Union of India (2021), which clarified its scope, confirming immunity for the company but not individuals, and P. Mohanraj v. Shah Brothers Ispat (2021), which explained its interaction with the IBC’s moratorium under Section 14.
Q3. What is Section 32A?
Section 32A of the IBC, 2016, grants immunity to a corporate debtor from prosecution for pre-insolvency offences and protects its assets from seizure, provided a resolution plan transfers control to unrelated, uninvolved parties. Individuals responsible for offences are not protected.
Q4. What is Section 32A of IBC and PMLA?
Section 32A of the IBC prevents actions like attachment or confiscation of a corporate debtor’s property under the Prevention of Money Laundering Act, 2002 (PMLA), if the property is part of an approved resolution plan and the company is under new, unrelated management.
Q5. What is investment allowance under Section 32A?
There is no "investment allowance" under Section 32A of the IBC, 2016. You may be referring to Section 32A of the Income Tax Act, 1961, which previously provided tax deductions for investments in new machinery or plants (discontinued after 1990). For IBC, Section 32A deals with liability immunity, not investment allowances.
