Dilemmas in the filing of Financial Statements and Annual Returns by the new management for the period prior to the approval of the Resolution Plan

The circular issued by the Insolvency and Bankruptcy Board of India (IBBI) on January 03, 2018, read with section 17 of the Insolvency and Bankruptcy Code, 2016 (IBC) clearly mandates Interim Resolution Professional (IRP)/ Resolution Professional (RP) to Comply all applicable laws unless the provision is specifically exempted by the competent authority or becomes inapplicable by operation of law for the corporate person. It is stated that an IRP/RP/ Liquidator for a corporate person shall exercise reasonable care and diligence and take all necessary steps to ensure that the corporate person undergoing any process under the Code complies with the applicable laws. If Corporate Person suffers any loss, including the penalty, if any, on account of non-compliance of any provision of the applicable laws, such loss shall not form part of insolvency resolution process cost or liquidation process cost under the Code. Insolvency Professional (IP) will be responsible for the non-compliance of the provisions of the applicable laws if it is on account of his conduct.

Ministry of Corporate Affairs (MCA) vide its General Circular No. 4 of 2020 dated 17.02.2020, superseded by General Circular No. 8 of 2020 dated 06.03.2020 provides that:

1. IRP/RP/Liquidator to file NCLT order for admission of CIRP of Corporate Debtor in form INC 28. He has to select the “others” category and designation as “CEO”.
2. Intimation to IBBI regarding the commencement of CIRP. IBBI shall submit the Change Request Form to the E-Governance Cell of MCA and the status shall change from "Active"/ "inactive" to CIRP/ Liquidation or CIRP/Liquidation to "Active”. Respective ROCs have no power to do so.
3. The IRP/ RP/ Liquidator shall be responsible for filing all the e-forms in the MCA portal and signing the form in the capacity of the CEO in order to meet the filing protocol in the architecture of the existing form.
4. All filings of e-forms including AOC-4 and MGT-7 shall be filed through e-form GNL-2 by way of attachments till the company is under CIRP. In the existing field no.3 of form no.GNL-2, IRP/ RP/ Liquidator will choose the radio button "Filings under IBC"
5. Against the date of the event and Board Resolution in INC-28 and GNL-2, the date of order of NCLT/NCLAT/Court may be mentioned.
6. All forms shall be filed with one-time normal fees only. Each Form shall be filed through a separate GNL – 2.
7. Filing of e-forms under the category CEO shall in no way affect his legal status as IRP/ RP/ Liquidator.

However, it is commonly seen that the Companies that are subjected to Corporate Insolvency Resolution Process (CIRP) are in default of filing the financial statements and annual returns and further even during CIRP, owing to various challenges the Resolution Professional (RP) is not able to hold an annual general meeting, adopt the financial statements and file the same with the Registrar of Companies.?

Obligations of New Management post approval of Resolution Plan by Adjudicating Authority:?

The successful Resolution Applicant as per the Resolution Plan approved by the Adjudicating Authority enters into the management of Corporate Debtor on a clean slate and is not liable for any non-compliance/liability except as admitted and approved in the Resolution Plan. Section 32A of the IBC provides a necessary shield to the new management in this regard. However old management remains liable for all such defaults. Section 32A reads under:

“32A. (1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not—

?(a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or

?(b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court:

Provided that if a prosecution had been instituted during the corporate insolvency resolution process against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having been fulfilled:

?Provided further that every person who was a “designated partner” as defined in clause (j) of section 2 of the Limited Liability Partnership Act, 2008, or an “officer who is in default”, as defined in clause (60) of section 2 of the Companies Act, 2013, or was in any manner incharge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority, shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor notwithstanding that the corporate debtor’s liability has ceased under this sub-section.”?

Further, Section 238 of the IBC, being a non-obstante clause provides overriding effect to the provisions of section 32A of IBC over the consequences as provided in the Companies Act, 2013 for non-filing of the financial statements and annual returns.

Section 99 of the Companies Act, 2013 (Act) provides for the consequences for not holding of the annual general meeting in due time as per the provisions of section 96 of the Act and reads as under:

Section 99: If any default is made in holding a meeting of the company in accordance with section 96 or section 97 or section 98 or in complying with any directions of the Tribunal, the company and every officer of the company who is in default shall be punishable with fine which may extend to one lakh rupees and in the case of continuing default, with a further fine which may extend to five thousand rupees for every day during which such default continues.

Section 92(5) of the Act provides for the consequences for not filing of Annual Return in due time and reads as under:

Section 92(5): If any company fails to file its annual return under sub-section (4), before the expiry of the period specified therein, such company and its every officer who is in default shall be liable to a penalty of ten thousand rupees] and in case of continuing failure, with further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default.

Section 137(3) of the Act provides for the consequences for not filing the financial statements in due time and reads as under:

Section 137(3): If a company fails to file the copy of the financial statements under sub-section (1) or sub-section (2), as the case may be, before the expiry of the period specified therein, the company shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of two lakh rupees, and the managing director and the Chief Financial Officer of the company, if any, and, in the absence of the managing director and the Chief Financial Officer, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the directors of the company, shall be shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of fifty thousand rupees.

Way forward for a new Management:

Though new management gets protection from prosecution for non-compliance for the period prior to the approval of the Resolution Plan, owing to various reasons such as fundraising, borrowings, etc., the need may arise to make good the offence even for the previous period and make necessary filings. As the office of Resolution Professional becomes functus officio as soon as the Resolution Plan is approved, an option to file such financial statements and annual return in form GNL 2 by making payment of normal fees, seems not available. The new management can certainly make an offence good by finalising the annual accounts, holding of the annual general meeting for the adoption thereof and filing the same in respective form AOC 4/MGT 7 by payment of additional fees. Further, an offence regarding the delay in holding of AGM being a compoundable offence can be compounded as well and perhaps with a token cost in view of protection available in terms of provisions of section 32A of IBC. Further, in addition to the protection under section 32A of IBC, section 454 of the Act provides protection from adjudication for default relating to non-compliance of sub-section (4) of section 92 or sub-section (1) or sub-section (2) of section 137, if such default has been rectified either prior to, or within thirty days of, the issue of the notice by the adjudicating officer.