Can NCLT Grant Blanket Immunity From Statutory Liabilities During CIRP? NCLT Jaipur Delivers Split Verdicts

The National Company Law Tribunal (NCLT), Jaipur Bench, on Monday delivered a split verdict on whether it can grant blanket protection from statutory, civil, and penal consequences arising from alleged defaults during a company's Corporate Insolvency Resolution Process (CIRP).

Technical Member Kavita Bhatnagar held that such consequences must be examined by the authorities empowered under the respective statutes, while Judicial Member Reeta Kohli took a contrary view and allowed the application seeking protection.

The matter is, therefore, directed to be placed before the NCLT President for appropriate orders.

The case arose from an application filed by Rajasthan Land Holdings Limited (RLHL), seeking protection for itself, its subsidiaries Chirayu Kath Real Estate Private Limited and Devika Build Estate Private Limited, and their directors from consequences arising from alleged statutory non-compliances during CIRP. RLHL attributed the alleged lapses to erstwhile Resolution Professional Anuradha Gupta.

RLHL's CIRP was admitted on September 24, 2019. During the process, around ₹7 crore was lying in the company's bank account against operational creditors' claims of about ₹26.76 lakh. The tribunal terminated the CIRP on April 20, 2023, after recording concerns over its continuation despite the company's available funds and the costs incurred during the process. The earlier order recorded CIRP costs of about ₹73.31 lakh, including RP remuneration of about ₹41.13 lakh.

After control was restored to the erstwhile management, RLHL alleged that statutory compliances had not been undertaken during the CIRP. These included filing annual returns and financial statements, holding annual general meetings, filing income tax and GST returns, and maintaining books of account.

RLHL contended that the alleged defaults could expose the company, its subsidiaries and their directors to fines, penalties, and other consequences.

The Technical Member held that the NCLT could not use its inherent powers under Rule 11 of the NCLT Rules to grant general or prospective immunity from consequences under independent statutes.

“The consequences of a default under the Companies Act, 2013, the Income Tax Act, 1961 or the Goods and Services Tax Act, 2017 are required to be examined by the authorities competent under the respective enactments, having regard to the nature of the particular default, the statutory provision governing it, the period during which it occurred and the person upon whom the concerned statute places responsibility.”, she ruled.

The Technical Member held that whether a statutory default occurred, who was responsible for it, and what consequences followed must be determined under the relevant law by the authority empowered to do so. The NCLT could not use Rule 11 to grant such general or prospective immunity merely because the alleged defaults arose during CIRP.

She also considered the IBBI circular dated January 3, 2018, which requires an insolvency professional to exercise reasonable care and diligence and take necessary steps to ensure statutory compliance. She held that the circular does not automatically make an RP responsible for every subsequent statutory non-compliance. Responsibility depends on the particular statutory obligation, the period involved, and the person on whom the law places that obligation.

She further held that the tribunal's earlier observations concerning the RP's conduct could not be treated as a determination of individual liability for every alleged statutory default.

“An observation regarding the conduct or responsibility of the RP cannot, by itself, be converted into a general adjudication extinguishing liabilities which arise under separate statutes and which were not the subject matter of determination in those proceedings and fastening upon the erstwhile RP responsibility for every statutory default now alleged.”, she observed.

The Technical Member therefore dismissed the application seeking blanket protection. She clarified that RLHL, its subsidiaries and their directors could rely before the competent statutory authorities on the earlier NCLT orders, the vesting of management in the RP during CIRP, and the RP's statutory responsibilities.

The Judicial Member, however, took a different view and allowed the application. She relied on the tribunal's earlier findings that RP was bound to ensure the compliance.

“The RP was duty-bound to ensure compliance with all applicable laws on behalf of the Corporate Debtor during the CIRP process and the said fact has been duly taken note by this Adjudicating Authority in its Order dated 20.04.2023.”

The Judicial Member also relied on the earlier orders, which she noted had attained finality, along with the IBBI circular and the circumstances of the case. She observed:

“keeping in view the totality of the circumstances, the peculiar facts and circumstances of the present case, and the observations made by this Adjudicating Authority in its earlier orders, which have attained finality, there is no other option left but to allow the present application.”

She accordingly allowed the application.

With the two members reaching conflicting conclusions, the matter has been directed to the NCLT President for appropriate order

For Applicant: Advocates Tarun Agarwal, Bhaskar Agarwal, Ayush Baheti and Chitransh Gupta