Criminal Law Meets Insolvency Law: Insights from Ashwini Mehra v. State of Odisha
Table of Contents
The liquidator, appointed under Section 34 of the Insolvency and Bankruptcy Code, 2016 (IBC), assumes all powers of the corporate debtor’s board of directors and key managerial personnel upon receipt of a liquidation order, acting as a court officer to oversee the company’s orderly dissolution. The liquidator serves a quasi-judicial function, particularly in admitting or rejecting claims that necessitate an independent assessment based on evidence, and their decisions are appealable to the National Company Law Tribunal (NCLT). Legal scrutiny and criminal investigations have emerged against liquidators, particularly regarding allegations of misconduct, failure to act diligently, or involvement in preferential transactions, highlighting the importance of accountability in a role critical to creditor protection. Pre-arrest bail is important in ensuring the continuity of insolvency proceedings, as delays or disruptions caused by a liquidator’s prolonged detention can jeopardize the time-sensitive nature of the liquidation process, which must be completed within one year.
Role of a Liquidator under IBC
The liquidator is appointed under Section 34 of the IBC, which is typically the Resolution Professional from the Corporate Insolvency Resolution Process (CIRP), unless replaced by the Adjudicating Authority due to plan rejection, misconduct, or failure to provide consent. Upon appointment, the liquidator assumes all of the powers of the corporate debtor’s Board of Directors, key managerial personnel, and partners, making them the sole authority for managing the company’s affairs during liquidation. The liquidator’s primary responsibilities include seizing and controlling all assets, property, and actionable claims of the corporate debtor, verifying creditor claims, and evaluating assets for sale. They are authorized to sell immovable and movable property at public auction or by private contract, subject to statutory limitations, and to continue the business if necessary for beneficial liquidation. Proceeds from asset sales are distributed in accordance with the priority of claims specified in Section 53 of the IBC, with secured creditors paid first, followed by unsecured creditors, employees, and shareholders. The liquidator is accountable to the Adjudicating Authority, the NCLT, and is required to report progress. However, they may face legal consequences for misfeasance, fraud, or failure to exercise due diligence, with the authority to be replaced at any time if such misconduct is established.
Legal Background of Pre-Arrest Bail
Section 438 of the Code of Criminal Procedure (CrPC) governs anticipatory bail, which allows an individual to seek protection from arrest in advance of being charged with a non-bailable offense, thereby providing a preemptive safeguard for personal liberty. It is not a right, but rather a discretionary remedy granted by the High Court or Sessions Court when there is a reasonable suspicion of arrest based on concrete facts such as a pending FIR, threats, or police investigation. Courts grant anticipatory bail if the applicant demonstrates sufficient grounds, such as a clean criminal record, a low flight risk due to strong community ties, and an agreement to cooperate with the investigation without tampering with evidence. The Supreme Court has emphasized that anticipatory bail should not be time-limited and can remain in effect until the conclusion of the trial, ensuring long-term protection against arbitrary detention. Therefore, this provision strikes a balance between protecting individual liberty under Article 21 of the Constitution and preserving the state’s sovereign power to conduct a fair investigation, with courts imposing conditions to keep this balance.
Read more : Financial creditor can initiate CIRP against both Principal Borrower and Corporate Guarantor
Case Context: Bail Granted to Liquidator
In Ashwini Mehra vs. State of Odisha, GAIL awarded Punj Lloyd Ltd. a pipeline construction contract for the Dhamra-Angul project, which then subcontracted a portion of the work to DSP Infracon Pvt. Ltd. DSP claimed to have completed about 90% of its assigned work, but alleged that ₹3.28 crore remained unpaid and that Punj Lloyd availed GST input tax credit of ₹35.95 lakh without paying dues. Meanwhile, Punj Lloyd’s contract with GAIL was terminated, and insolvency proceedings were initiated before the NCLT on behalf of ICICI Bank, which resulted in the appointment of Ashwini Mehra as liquidator. During these insolvency proceedings, DSP filed a FIR against the liquidator and senior officials of Punj Lloyd, alleging cheating under Sections 418 and 420 of the CrPC, which became the subject of anticipatory bail applications before the Orissa High Court.
Judicial Reasoning in Granting Bail in Ashwini Mehra vs. State of Odisha
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The Court ruled that allowing arrest during an ongoing NCLT liquidation would violate and disrupt the IBC’s statutory insolvency process.
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The liquidator, as a court officer, was found to be carrying out statutory duties in good faith under the IBC and thus not subject to routine criminal prosecution.
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While granting pre-arrest bail, the Court ensured that the liquidator was subject to lawful investigation, striking a balance between protection from coercive arrest and investigative requirements.
Interplay Between Criminal Proceedings and Insolvency Proceedings
The insolvency moratorium under Section 96 of the IBC does not stay criminal proceedings because the Supreme Court clarified in Rakesh Bhanot v. Gurdas Agro Pvt. Ltd. that criminal liability is personal and distinct from civil debt obligations, allowing prosecution to continue even during insolvency proceedings. The Delhi High Court and the Calcutta High Court have similarly ruled that the moratorium does not apply to individuals facing criminal charges under Section 138, particularly when the liability arises from their role as directors or signatories rather than corporate debtors. Precedents such as P. Mohanraj v. Shah Bros. Ispat and Sandeep Gupta v. The State of Delhi confirms that, while the IBC moratorium applies to corporate entities, it does not protect natural persons from criminal liability, reinforcing the principle that insolvency proceedings cannot be used to avoid criminal prosecution. Therefore, Courts have taken a balanced approach, recognizing the autonomy of both the IBC and criminal laws, ensuring that insolvency resolution is not hampered while maintaining the integrity of criminal accountability, especially in cases involving financial misconduct or cheque dishonour.
Implications of the Decision
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Insolvency professionals are assured of legal protection from criminal prosecution for actions taken in their official capacity during the liquidation process.
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Creditors and stakeholders are assured that third-party claims or proceedings in other courts will not disrupt the liquidation process.
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The Insolvency Framework is strengthened by confirming that proceedings under the IBC take precedence over other litigation during a company’s financial restructuring.
Challenges & Concerns
- Liquidators face the risk of misusing their position because they have significant control over corporate assets and decision-making during insolvency proceedings, which can lead to conflicts of interest or improper actions if not properly monitored.
- There is concern that investigations into corporate insolvency may be delayed in order to conceal fraudulent activities or avoidable transactions.
- The need for stricter accountability mechanisms is emphasized by the need to ensure that liquidators and other insolvency professionals act transparently and in the best interests of all stakeholders, especially in cases involving complex or high-value assets.
Conclusion
In this case, criminal law became a pressure tactic and not a genuine remedy. The grant of pre-arrest bail to liquidators suggests judicial recognition of their essential function in ensuring the smooth operation of the insolvency process under the IBC. Courts seek to prevent parallel proceedings from derailing the IBC’s core objectives, such as timely resolution and asset maximization. However, a balanced approach is being taken, with the protection of liquidators and other insolvency professionals guaranteed without jeopardizing the integrity of ongoing investigations. This reflects a judicial understanding that criminal proceedings should not undermine the IBC’s goal of corporate revival and orderly liquidation.
FAQs
Q1. Can a liquidator face criminal charges while handling insolvency proceedings?
Yes, a liquidator may face criminal charges if they are found guilty of a company-related offense, such as misconduct or failure to report criminal offenses as mandated under the IBC.
Q2. Under what circumstances can a liquidator seek anticipatory bail?
A liquidator may seek anticipatory bail under Section 438 of the CrPC if there is a genuine and reasonable fear of arrest in connection with a non-bailable offence, provided that the application is based on objective facts rather than speculative concerns, and the court is satisfied that the conditions for granting such relief are met, including the nature and gravity of the accusation, the applicant’s background, and the risk of flight or tampering with evidence.
Q3. Does grant of bail stop investigations against liquidators?
No, the grant of bail does not end investigations against liquidators; investigations can continue even after bail is granted, as bail is primarily concerned with personal liberty and does not automatically halt the investigative process.
Q4. How does the court balance IBC proceedings with criminal law actions?
The courts balance IBC proceedings with criminal law actions, recognizing that while the IBC moratorium stays civil and debt recovery proceedings, it does not extend to criminal liabilities or regulatory penalties, which serve distinct public interest objectives such as maintaining financial discipline, ensuring compliance with consumer protection laws, or deterring white-collar crime, thereby preserving the integrity of criminal justice even during insolvency resolution.
Q5. What protection does IBC provide to liquidators performing their duties?
The IBC empowers liquidators to perform their duties without interference, including accessing information systems, initiating legal proceedings, and seeking police protection when necessary. It also requires accountability through reporting to the NCLT.
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