2025 (7) TMI 1085 - HC - Companies Law

Company sold as going concern during liquidation gets clean slate protection from pre-liquidation criminal liability

Winwind Power Energy Private Limited rep. by its Authorized Signatory Versus The Assistant Registrar of Companies, The Registrar of Companies of Tamil Nadu, The Deputy Director, Office of the Regional Director, Mr. Prakash Kumar Sarogi, Mr. Gautam Sarogi, Mr. Radhakrishnan Dharmarajan

The Madras HC quashed show cause notices issued under the Companies Act, 2013 against a company sold as a going concern during liquidation proceedings. ... Challenge to SCN issued by the first respondent alleging violation of certain provisions of the Companies Act, 2013 - sale of company as a going concern - principles of clean slate - applicability of Section 32A of the IBC fortiori to liquidation - HELD THAT:- It will be relevant for this Court to take note of Regulations 32 and 32A of the Regulations. Under Regulation 32, the liquidator can sell the corporate debtor as a going concern or the business of a corporate debtor as a going concern - In the case in hand, there is no dispute with regard to the fact that the petitioner company was sold by the liquidator as a going concern. Thus, the life of the existing company comes to an end by virtue of liquidation and what was resurrected is only the corporate identity, which enables the new management to buy it as a going concern. The scope of Regulation 32A of the Regulations was dealt with by a learned Single Judge of this Court in the case of M/s.Agniti Industrial Parks Private Limited Vs. Superintendent of CGST & Central Excise, Thiruvallur-I Range [2024 (1) TMI 829 - MADRAS HIGH COURT]. In that case, the issue pertained to the Revenue attempting to enforce the claims against a successful auction purchaser for the service tax dues from the company, which was under liquidation. Fortunately, it was the very same new management namely M/s.Agniti Industrial Parks Private Limited, which bought the petitioner company, had to defend itself by way of filing a writ petition - This Court must also take note of the scope of Section 32 of the IBC. In so far as any criminal prosecution is concerned, the criminal liability of the corporate debtor gets completely wiped off when the new management is allowed to take over the corporate debtor on a clean slate. The only caveat that was issued by the Hon'ble Apex Court is that persons, who were involved in the day-to-day affairs of the corporate debtor and were indulged and responsible for running of the corporate debtor, will be liable to face the prosecution for the offences committed prior to the commencement of the CIRP and that there is no escape for those persons from criminal liability even though the corporate debtor is given a clean slate and is handed over to the new management. It is true that even after a reply is given to the show cause notices, if the first respondent is not satisfied with the reply given by the petitioner company, at the best, the first respondent can only file a private complaint under Section 439 of the Act and it is for the concerned Judicial Magistrate Court to apply its mind on the allegations made and the reply given by the petitioner company and decide with respect to taking cognizance of the complaint filed by the first respondent. The question that arises for consideration is as to whether the petitioner company has to undergo even this rigmarole on the given facts of the case - The petitioner company underwent a liquidation process under the Regulations and the liquidator decided to sell the petitioner company as a going concern to the new management. Thus, in the eye of law, the liquidation process operates as a civil death of the petitioner company and it was resurrected only with respect to its corporate identity when it was sold as a going concern to the new management. If criminal prosecutions are going to be permitted for those events, which took place prior to the approval granted by the NCLT, Chennai and after those consequences, which fell out of such purchase of the going concern, it will go against the very object of providing protection to the new management, which takes over charge after the purchase of the corporate debtor - In the case in hand, there is yet another fact, which has to be taken into consideration by this Court. It is seen that the petitioner company started receiving notices right from August 2022 onwards and at least, on three occasions, similar notices were sent and the petitioner company gave separate detailed reply for the same. In spite of giving such a reply, the impugned show cause notices came to be issued by the first respondent. Those show cause notices are more in the nature of completing the formalities with the only intention to proceed further with the prosecution of the petitioner company and its new management. Just because there is a possibility of compounding the offences under Section 441 of the Act, that does not mean that the petitioner company has to compound the offences when they strongly feel that they have not committed any offence. The impugned show cause notices issued by the first respondent in all the writ petitions are liable to be interfered by this Court - the impugned show cause notices dated 11.11.2024 are quashed - Petition allowed. ISSUES: Whether the issuance of show cause notices alleging violations of the Companies Act, 2013 against a corporate debtor sold as a going concern during liquidation is maintainable. Whether the 'clean slate' principle under Regulation 32A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 and Section 32 of the Insolvency and Bankruptcy Code, 2016 applies to shield the new management from prosecution for alleged pre-liquidation offences. Whether the petitioner company is liable for prosecution for alleged violations of Sections 128, 129, 139, 147, and 166 of the Companies Act, 2013 relating to maintenance and presentation of books of accounts, financial statements, auditor appointment, and loans after takeover as a going concern. Whether the continuation of statutory auditors appointed prior to the takeover violates the mandatory appointment period under the Companies Act, 2013. Whether the petitioner company is required to respond to the impugned show cause notices at the preliminary stage when the authority appears to have already concluded the violations and intends to proceed with prosecution. Whether the principle of 'civil death' of the company on liquidation and subsequent resurrection of corporate identity as a going concern purchaser protects the new management from liabilities and prosecutions relating to antecedent acts. RULINGS / HOLDINGS: The show cause notices issued against the petitioner company, which was sold as a going concern during liquidation, are liable to be interfered with and ultimately quashed, as the liquidation process operates as a 'civil death' of the company and the new management takes over on a 'clean slate.' The 'clean slate' principle under Regulation 32A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 and Section 32 of the Insolvency and Bankruptcy Code, 2016 wipes off criminal liability of the corporate debtor upon sale as a going concern, except for persons involved in day-to-day affairs prior to CIRP commencement. Alleged violations pertaining to events before the takeover date (February 2021) fall within the scope of the 'clean slate' and cannot be imputed to the new management or the resurrected corporate debtor. Alleged violations after the takeover, including classification of assets and loans, are covered by the NCLT approval order and sale deed terms, which relieve the new management from liabilities arising prior to the deed of sale. The continuation of the statutory auditor appointed before the takeover as a stop-gap measure does not constitute a violation of the mandatory five-year appointment under Section 139 of the Companies Act, 2013, particularly during transition. The petitioner company is not required to undergo the procedural rigmarole of responding to the impugned show cause notices at this stage, as the authority has effectively concluded the violations and intends to proceed with prosecution, rendering further replies futile. The possibility of compounding offences under Section 441 of the Companies Act, 2013 does not compel the petitioner company to do so when it denies commission of any offence. RATIONALE: The Court applied the legal framework under the Insolvency and Bankruptcy Code, 2016, specifically Section 32 and Regulation 32A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, which provide that sale of a corporate debtor as a going concern results in 'civil death' of the original company and resurrection only of its corporate identity, thereby wiping out antecedent liabilities and criminal liabilities of the corporate debtor. The Court relied on the approval order of the National Company Law Tribunal (NCLT), which expressly relieved the corporate debtor from all liabilities arising prior to the deed of sale, and the terms of the sale deed, which transferred the company devoid of liabilities to the new management. The Court referred to precedent decisions, including a prior judgment of the same High Court and judgments of the Calcutta High Court, which affirm that the 'clean slate' principle protects the new management from antecedent liabilities and prosecutions, and that the Regulations cannot override the provisions of the IBC. The Court recognized that criminal liability persists only for persons involved in the corporate debtor's management prior to CIRP commencement, not for the company or new management post-sale. The Court noted the procedural safeguards under the Companies Act, 2013, including the authority's ability to file a private complaint and the judicial magistrate's discretion to take cognizance, but held that forcing the petitioner to respond to show cause notices at a stage where the authority has effectively decided to prosecute serves no useful purpose. No doctrinal shift was indicated; the Court adhered to established principles of insolvency law and corporate prosecution, emphasizing the protective effect of the 'clean slate' doctrine for purchasers of companies as going concerns during liquidation.