NCLT: Union Of India Vs BPSL Maintainability Upheld, Allows ₹5,431 Cr Recovery

• The NCLT rejected a challenge to the maintainability of the Central government's petition to recover ₹5,431 crore from former Bhushan Power and Steel Limited promoters.
• The government's petition, filed by the SFIO, alleges the diversion of funds and is based on a May 2022 investigation report.
• The Tribunal ruled that insolvency resolution and management replacement do not prevent proceedings against those allegedly retaining diverted funds.
• Former promoters Sanjay Singal and Aarti Singal, along with their daughter Priyanka Miglani, were among those whose eight applications were dismissed.
• The NCLT's October 30 order focused solely on the petition's procedural validity, making no determination on the merits of the fund diversion allegations.

Their ruling in the Union of India vs BPSL maintainability case clarified that the process of insolvency resolution and the change in corporate leadership do not serve as a shield against actions aimed at recovering allegedly diverted funds.

The National Company Law Tribunal (NCLT) recently dismissed a series of challenges to the maintainability of a significant petition filed by the Central government. This petition seeks the recovery of ₹5,431 crore, which is alleged to have been improperly diverted from Bhushan Power and Steel Limited (BPSL). The former promoters of BPSL, along with other associated parties, had contested the government's ability to pursue this claim.

The NCLT's decision, issued on October 30, specifically rejected eight separate applications that argued against the petition's maintainability. Among those who filed these applications were former promoters Sanjay Singal and Aarti Singal, their daughter Priyanka Miglani, and various companies and individuals linked to them. The Union government, acting through the Serious Fraud Investigation Office (SFIO), initiated these proceedings, basing its claims on an SFIO investigation report dated May 6, 2022.

The government's petition against the former BPSL promoters was brought under specific provisions of the Companies Act, 2013, namely Sections 241(2), 242, and 246, read in conjunction with Section 339. These sections empower the government to intervene in cases of corporate mismanagement and fraud. The core of the challenge from the former promoters revolved around the argument that the company's insolvency resolution and the subsequent replacement of its management should preclude such recovery proceedings.

However, the NCLT bench, comprising President Justice Anupinder Singh Grewal and Technical Member Ravindra Chaturvedi, firmly rejected this contention. Their ruling in the Union of India vs BPSL maintainability case clarified that the process of insolvency resolution and the change in corporate leadership do not serve as a shield against actions aimed at recovering allegedly diverted funds. The Tribunal emphasized that while new management might take control, this does not inherently reverse the financial prejudice caused by the alleged diversions or negate the impact on public interest.

This NCLT order holds significant implications, particularly for individuals previously involved in the management of companies undergoing insolvency. It underscores that personal liability for alleged financial misconduct, such as the diversion of funds, can persist even after a company's management has been replaced through an insolvency process. The Tribunal explicitly stated that its decision was strictly limited to the question of the petition's maintainability, meaning it only determined whether the government's plea could be heard.

Crucially, the NCLT made no findings regarding the merits of the allegations themselves, reserving that for future adjudication. This distinction means that while the former promoters' challenge to the procedural validity of the case was dismissed, the actual claims of fund diversion still need to be proven. The ruling reinforces the principle that corporate restructuring, including under the insolvency framework, does not automatically absolve former directors or promoters of accountability for past alleged financial irregularities, especially when the SFIO Bhushan Power investigation has identified potential wrongdoing.

This ruling clarifies that insolvency resolution and replacement of management do not shield former promoters or directors from proceedings related to alleged diversion of funds. Lawyers advising clients involved in corporate insolvency should note that personal liability for financial misconduct can persist, requiring continued vigilance and defense strategies even after management changes.

Source: Original reporting via legal news outlet