Mere Pendency Of Criminal Proceedings Does Not Disqualify Resolution Applicant: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has ruled that the mere pendency of criminal proceedings or an investigation does not by itself make a prospective Resolution Applicant ineligible to submit a resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC).

A bench of Judicial Member Justice Mohd. Faiz Alam Khan and Technical Member Naresh Salecha observed,

"Therefore, in our considered opinion, the pendency of any criminal proceedings or investigation against a prospective resolution applicant may not be a ground to debar him from presenting a Resolution Plan. However, it would be the CoC to assess the viability and credibility of such Resolution Applicant and Plan by exercising its commercial wisdom. But the sole fact that some inquiry, investigation, or proceedings have been initiated against a person would not be sufficient to brand him ineligible from submitting the resolution plan. In this regard Section 29A is to be harmoniously construed with Regulation 39 (1) (c) of CIRP Regulations, 2016"

The bench added that the Committee of Creditors (CoC) must assess the applicant's viability and credibility while exercising its commercial wisdom.

The bench was hearing an appeal filed by Suraksha Realty Ltd. against approval of a resolution plan submitted by Bermaco Energy Systems Ltd. for Mahavir Roads and Infrastructure Pvt. Ltd.

The Mumbai bench of the National Company Law Tribunal (NCLT) had approved the plan on May 14, 2024.

Suraksha had sanctioned a ₹60 crore loan to the corporate debtor against an equitable mortgage of immovable property. After the loan default, the corporate debtor was admitted into the corporate insolvency resolution process (CIRP) on February 21, 2019.

Suraksha submitted a claim of ₹109.63 crore as a secured financial creditor. The Interim Resolution Professional admitted ₹40.84 crore and categorised Suraksha as an unsecured financial creditor.

Suraksha later objected to Bermaco's resolution plan, alleging that it had failed to properly disclose proceedings initiated by the Enforcement Directorate (ED) and attachment of certain properties under the Prevention of Money Laundering Act, 2002 (PMLA).

Bermaco had answered “No” to a query asking whether any criminal proceedings, investigations, or inquiries had been commenced or were pending against it or any connected person.

The resolution plan also contained an undertaking under Regulation 39(1)(c) of the CIRP Regulations that the information and records provided in connection with the plan were true and correct.

Regulation 39(1)(c) requires a Resolution Applicant to undertake that the information and records provided in connection with or in the resolution plan are true and correct. If false information or records are discovered, the applicant will be rendered ineligible to continue in the CIRP. The regulation also provides for forfeiture of a refundable deposit and penal action under the IBC.

Suraksha argued that Bermaco's disclosure amounted to material concealment. It also contended that the PMLA proceedings created a risk to the source of funds, which could affect implementation of the resolution plan.

Bermaco and the Resolution Professional disputed the allegations. They argued that the relevant disqualification under Section 29A(d) of the IBC is triggered in specified circumstances by a conviction. There was no conviction against Bermaco that attracted the disqualification under Section 29A(d).

The respondents also pointed out that the CoC had considered Suraksha's objections. The Resolution Professional sought further details from Bermaco and appointed chartered accountants Bagchi & Gupta to examine its eligibility under Section 29A. Their report found no disqualification.

The tribunal examined the nature of attachment proceedings under the PMLA. Referring to the Supreme Court's judgment in Vijay Madan Lal Choudhary v. Union of India, the tribunal noted that attachment under the PMLA is civil in nature.

At the same time, it noted that the attachment concerns properties which prima facie appear to be proceeds of crime. “It would be proper to say that, though the action of attachment is of civil in nature, it would have criminal consequences and attachment is with regard to the properties which prima facie appears to be proceeds of crime,” the tribunal observed.

The tribunal then considered Section 29A(d) of the IBC. The provision disqualifies a person from submitting a resolution plan in specified circumstances where the person has been convicted of offences carrying the prescribed terms of imprisonment. The proviso provides that the disqualification under this clause will not apply after two years from the person's release from imprisonment.

The tribunal therefore held that the mere initiation or pendency of criminal proceedings, an inquiry, or an investigation was not enough to make Bermaco ineligible. It said Section 29A had to be read harmoniously with Regulation 39(1)(c).

The tribunal also considered how the CoC dealt with the disclosure issue.

After the allegations were brought to its notice, the CoC examined Bermaco's eligibility and considered the report of Bagchi & Gupta. It then approved the plan after considering the applicant's credentials and the plan's feasibility and viability.

The tribunal held that it could not sit in appeal over the commercial decision of the CoC.

Finding no ground to interfere with the NCLT's approval of the plan, the NCLAT dismissed Suraksha's appeal.