FROM FRESH START TO FREE PASS? A CRITICAL APPRAISAL OF SECTION 32A IBC AND ITS IMPLICATIONS FOR CORPORATE ACCOUNTABILITY

This post is authored by Akshit Dwivedi, a 2nd-year B.A. LL.B. (Hons.) student at Hidayatuallah National Law University, Raipur

INTRODUCTION

IBC’s​‍​‌‍​‍‌ law is based on the two primary objectives of making the maximum value available to creditors and, at the same time, encouraging the revival of the companies that are in distress. In light of this, the introduction of Section 32A in 2019 represented a major shift: a corporate debtor is entitled to statutory immunity from offenses committed before the start of CIRP and protection of its assets from attachment upon successful completion of the resolution process and approval of a resolution plan by the NCLT, provided there is a complete change in management and no connection between the new acquirer and the prior wrongdoers. Therefore, the question of corporate debtor discharge under Section 32A, in light of the NSEL case (Central Bureau of Investigation-Investigated National Spot Exchange Ltd.), becomes timely. 

The main point of this blog is to examine that Section 32A aims to provide a "once-for-all" resolution for the corporate debtor, providing immunity and asset protection only in cases where the resolution plan results in a change of management and does not shield people responsible for past misconduct. After carefully examining the legislative framework and significant court rulings, this paper highlights three primary problems with Section 32A and suggests changes that will improve accountability while cautiously maintaining the settlement process. To prevent increased scrutiny from undermining the "once-for-all" commercial policy of Section 32A, these modifications are designed to reduce risks like prolonging CIRP, raising buyer uncertainty, or deterring resolution applicants.

THE LEGISLATIVE FRAMEWORK AND INTENDED PURPOSE OF SECTION 32A

Section 32A(1) gives a corporate debtor a shield from a criminal prosecution of the injustice that happened before the start of the Corporate Insolvency Resolution Process (CIRP) if a court of law issues an order regarding the approval of a resolution plan, which has the consequence of a change of management to a new eligible person. Section 32A(2) forbids the seizure of property in connection with the offence of the corporate debtor. Section 32A(3) states that the corporate debtor and the staff of the corporate debtor must provide all the necessary assistance and cooperation to the investigating authorities in relation to the offences committed before the CIRP.

The Supreme Court of India validated the legality of Section 32A in Manish Kumar v. Union of India. The Court also emphasized that the protection conferred by this provision is conditional, and it applies to those who were not involved in managing the corporate debtor or in committing the pre-CIRP offenses. The immunity granted was seen as pivotal to the IBC resolution mechanism.

THE EXISTING LOOPHOLES IN SECTION 32A OF IBC

Section​‍​‌‍​‍‌ 32A aims at a good cause, but only after examining it closely, three major shortcomings of the law's design occur:

(a) Immunities for Serious Misconduct by Corporate Debtors

Firstly, the NSEL instance is a good +example to look at. In May 2025, a special court cleared Dunar Foods Ltd., which was accused of being the main conspirator in a fraud of Rs. 120 crores. The court said that since the insolvency plan was accepted, the company's Section 32A liability came to an end. It thus raises an important issue of how Section 32A does not release those accountable for pre-CIRP offenses, but protect the corporate debtor as an entity from prosecution upon a successful resolution. So, even when individual accountability is maintained, the corporate vehicle that facilitates wrongdoing is protected, which might hinder the capacity to recover diverted funds.

While the corporate body itself is protected under Section 32A, people in control of the corporate debtor may still face prosecution for pre-CIRP offenses under the "second proviso" to subsection 1. In such situations, authorities such as SEBI may find it difficult to recover investor cash when the corporate debtor is protected under Section 32A. The actual conflict arises is in striking a balance between the regulator's ability to guarantee complete restitution and the resolution applicant's right to a fresh start.

(b) Strategic Timing of CIRP Filings to Secure Immunity

Theoretically, a corporate debtor could influence the process to ensure a seamless transition of ownership and the application of Section 32A's protections, regardless of whether they initiate CIRP voluntarily or are forced to do so. This raises the possibility that insolvency could be abused to evade obligations.

(c) Conflicts with Other Enforcement Regimes: Attachment and Prosecution

Thirdly, Section 32A may not be harmoniously functioning with different enforcement regimes, particularly with instances where creditors or statutory authorities (e.g., the Directorate of Enforcement (ED) set up under the PMLA) intend to attach or take over a debtor's assets which results from an infraction. Being a non-obstante provision, Section 32A implies that the said section limits the actions of attaching a corporate debtor's property due to a pre-CIRP infraction once a resolution plan has been approved.

As, in Shiv Charan & Ors. v. Adjudicating Authority under PMLA, the Bombay High Court affirmed that Section 32A protects the corporate debtor's assets from post-CIRP attachment by the ED once a resolution plan is approved with a genuine change of management and control. This recognizes Parliament's intention to maintain the viability of resolution plans while permitting the prosecution of responsible individuals under PMLA. In Rajiv Chakraborty v. Directorate of Enforcement, the Delhi High Court reaffirmed that a PMLA moratorium does not automatically yield to an IBC moratorium and emphasized the different goals of the two regime, while earlier precedents, such as Nitin Jain, Liquidator of PSL Ltd. v. Directorate of Enforcement, interpreted Section 32A as limiting actions against a corporate debtor's properties for pre-CIRP offences so that resolution or liquidation can proceed unhindered. The Supreme Court's ruling in Kalyani Transco v. Bhushan Power & Steel Ltd has also upheld the boundaries of IBC tribunals' jurisdiction to review actions by statutory authorities under public law (such as ED actions) while maintaining Section 32A's immunity which does not extend to individuals responsible for wrongdoing and does not completely extinguish enforcement rights

This cluster of decisions shows that while Section 32A can prohibit specific asset attachments to safeguard the resolution process, Indian courts are cautious not to undermine the PMLA's primary goal of disgorging proceeds of crime in cases where individual liability remains. Instead, they support a practical reconciliation rather than a general override of anti-money laundering objectives.

TARGETED REFORM SUGGESTIONS 

To​‍​‌‍​‍‌ bring back the equilibrium of revival and responsibility, the reforms enumerated below are worth considering:

(i) Carve out for “serious offences.”

A possible reform could be a carefully limited clarification stating that immunity under Section 32A should not apply in cases of extremely serious economic offenses, such as large-scale fraud, money laundering, or intentional falsification of financial statements, where the misconduct causes widespread or systemic harm. Without raising the risks for resolution applicants, postponing CIRP, or deterring sincere involvement in the bankruptcy process, this strategy strikes a compromise between the objective of successful resolution and the requirement for accountability.

(ii) Stricter and time-bound change of control verification obligation

The IBC's definition of a "related party" could be expanded to specifically cover circumstances in which control is exercised not just through shareholding but also through contractual rights, veto power, or decisive influence over management. These steps are intended to prevent strategic abuse of CIRP while upholding Section 32A's clean-slate goal and providing clarity for legitimate resolution applicants.

(iii) Priority for attachments for creditor protection

To make the distinction between pre-CIRP and post-resolution enforcement activities more evident, Section 32A(2) should be improved. Attachments made by investigative agencies before the commencement of CIRP may be permitted to continue, subject to oversight by the adjudicating body; however, further attachments of the corporate debtor's assets following adoption of the resolution plan should remain prohibited. Only in cases where it does not significantly obstruct the resolution plan's execution or the corporate debtor's recovery under new management could such continuance be allowed. This would balance the clean-slate concept with the interests of ongoing enforcement actions by recognizing a certain category of pre-existing or "grandfathered" attachments rather than releasing all connected assets upon resolution.

(iv) Enhanced disclosure and post-approval monitoring

Any post-resolution disclosure requirement must be proportional and carefully targeted to avoid compromising the clean-slate principle under Section 32A. Only significant pre-CIRP liabilities that were purposefully concealed during the resolution process may be subject to a one-time "Liability Disclosure Certificate" filing requirement for resolution applicants at the time of plan execution. This strategy reinforces accountability without deterring participation in the insolvency framework by maintaining certainty for bona fide resolution applicants, avoiding undue compliance burdens, and guaranteeing that asset recovery mechanisms are only used in extreme cases of bad faith.

CONCLUSION

A key component of India's bankruptcy regime is Section 32A of the IBC, which shields successful resolution applicants from legacy liabilities to facilitate the revival of distressed firms. Its goal is to make sure that the dread of previous wrongdoing does not prevent resolution. A conflict that can occur when this clean-slate protection coexists with serious allegations of economic wrongdoing is demonstrated by recent jurisprudence, such as the NSEL-related trials. These decisions highlight the possibility that, in the absence of adequately calibrated safeguards, entity-level immunity may limit certain enforcement outcomes, even though they do not imply that Section 32A was intended to shield wrongdoing.

Therefore, the policy question is not whether Section 32A should exist, but rather how it should be governed to prevent responsibility from being overshadowed by revival. While maintaining consideration for the larger public interest in deterrent and regulatory enforcement, the insolvency framework must continue to safeguard bona fide resolution applicants.