Upfront disclosure of Section 32A eligibility: IBBI strengthens the clean slate framework in insolvency resolution

A salient feature of the Code is the “clean slate” principle. The premise of this principle is simple but critical. It provides that a successful resolution applicant must be able to take over a stressed company with the certainty that all past liabilities and claims stand conclusively resolved. Unless the incoming management is given such finality, no serious investor would be willing to participate in the corporate insolvency resolution process (CIRP) to rescue a failing business.

The Supreme Court has also emphasised the importance of this principle. In Committee of Creditors of Essar Steel India Limited v Satish Kumar Gupta, the Court warned against allowing past claims to resurface after the resolution process is completed. It likened such claims to a “hydra head” that defeats the very purpose of insolvency resolution. The Court clarified that a resolution plan must finally resolve all claims against the corporate debtor, so that the successful resolution applicant knows with certainty what it is acquiring, free from any undisclosed or continuing liabilities. This understanding was reaffirmed in Ghanshyam Mishra and Sons (P) Ltd. v Edelweiss Asset Reconstruction Co. Ltd., where the Court explained that the legislative intent behind the Code is to freeze all claims upon approval of a resolution plan, enabling the successful resolution applicant to acquire the corporate debtor on a clean slate.

The clean state principle is statutorily expressed in Section 32A of the Code, introduced by the Insolvency and Bankruptcy Code (Amendment) Act, 2020. Section 32A provides immunity to the corporate debtor from liability for offences committed prior to approval of the resolution plan, provided that the resolution results in a change in control or management. This immunity is not automatic. To avail the protection under section 32A, three cumulative conditions must be satisfied:

• Approval of resolution plan and change in control: The resolution plan must be approved by the National Company Law Tribunal (NCLT) under Section 31 of the Code and must result in a change in management or control of the corporate debtor;
• Eligibility of the new/incoming management: The incoming resolution applicant must not have been a promoter, part of the management, or a related party of such persons at the time the offence was committed; and
• No involvement in prior offences: The resolution applicant must not be a person whom the investigating authority has reason to believe, based on materials on record, that abetted or conspired in the commission of the offence, and in respect of whom a report or complaint has been filed with the investigating authority.

Despite the importance of Section 32A, neither the Code nor the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) previously contained an express mechanism to test Section 32A eligibility at the resolution plan stage. Resolution applicants were not required to affirmatively disclose whether they satisfied the statutory conditions, nor were resolution professionals (RP) or committees of creditors (CoC) mandated to verify such eligibility when evaluating resolution plans.

As a result, the question of eligibility for clean slate protection was often examined only after the resolution plan had already been approved, sometimes in the course of enforcement actions or litigation initiated by investigating agencies. This issue gets compounded by the fact that resolution applicants frequently use complex, multi-layered structures, involving holding companies, investment vehicles, offshore entities, etc., that obscure the identity of the ultimate natural persons exercising ownership or control.

Recognising the existing lacuna, the Insolvency and Bankruptcy Board of India (IBBI) examined the issue in its discussion paper dated 6 August 2025 on measures to enhance the integrity of the CIRP (Discussion Paper). The Discussion Paper noted that the absence of adequate disclosure of beneficial ownership, particularly in the case of intricate holding arrangements, makes it difficult to determine eligibility under Section 32A and weakens the clean slate principle, undermining the spirit of the law. To address this, the IBBI proposed the introduction of a new sub-regulation 38(3A), mandating disclosure of beneficial ownership and an affidavit on section 32A eligibility.

This proposal has now been formalised through the Amendment Regulations, which came into effect on 23 December 2025.

The Amendment Regulations insert sub-regulation (3A) to regulation 38 of the CIRP Regulations, introducing two substantive disclosure requirements:

• Statement of beneficial ownership (Regulation 38(3A)(a))

  Every resolution plan must now include a statement of beneficial ownership in the prescribed format. The term “beneficial owner” is to be determined in accordance with Rule 9(3) of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. Under this rule, the beneficial owner of a company is a natural person who, acting alone or jointly, or through other legal entities:

  • holds (or is entitled to) more than 10% ownership interest (shares, capital or profits); or
  • exercises control, including through the right to appoint a majority of directors or to control management or policy decisions (whether through shareholding agreements or otherwise).

  If no such individual can be identified, the senior managing official of the company is considered its beneficial owner.

• Affidavit on Section 32A eligibility (Regulation 38(3A)(b))

  Every resolution plan must also be accompanied by an affidavit, in the prescribed format, declaring whether the resolution applicant is eligible or not eligible to avail the immunity under section 32A of the Code.

The IBBI notified the format of disclosure of beneficial ownership and the affidavit on 29 December 2025.

The Amendment Regulations represent a shift from post-facto scrutiny to upfront accountability and preclude any circumvention of statutory disqualifications. When read with Sections 30(2) and 30(3) of the Code, the RP is now required to scrutinise resolution plans for compliance with Regulation 38(3A) before placing them before the CoC for evaluation. The RP’s compliance certificate (Form H) will implicitly cover compliance with these new disclosure obligations as part of Regulation 38. The RPs and CoCs are now better equipped to assess Section 32A eligibility at the resolution plan stage, enabling more informed and transparent decision making, deterring ineligible or conflicted bidders, reducing the scope of post-approval disputes, and ultimately enhancing the integrity of the resolution process.

From the perspective of a resolution applicant, the amendments introduce additional disclosure and compliance burdens. Mandatory disclosure of beneficial ownership may raise confidentiality concerns and increase exposure to regulatory and investigative oversight, particularly for foreign bidders and financial investors operating through multi-layered or offshore arrangements. Resolution applicants will also need to carefully assess and document their Section 32A eligibility upfront, given that inaccurate or misleading disclosures could result in denial of statutory immunity, heightened scrutiny by investigating agencies, and challenges to the validity or implementation of the resolution plan.

Importantly, the Amendment Regulations do not require the NCLT to mechanically grant the immunity under Section 32A solely on the basis of the affidavit furnished by the resolution applicant. However, in the absence of rebuttal material placed on record by the RP, the CoC, or investigating agencies, the adjudicating authority is likely to rely on the disclosures made in the affidavit while approving a resolution plan.

By mandating upfront disclosure of beneficial ownership and Section 32A eligibility, the Amendment Regulations are expected to significantly reduce post-approval litigation and uncertainty surrounding the clean slate protection. Additionally, the Amendment Regulations are likely to improve the quality of participation in the CIRP. They discourage opaque or speculative bids, enable more informed decision-making by creditors, and strengthen confidence that approved resolution plans will withstand regulatory and enforcement scrutiny. Taken together, these changes support a more predictable and credible insolvency framework. While the Amendment Regulations are a welcome and overdue step towards reinforcing the clean slate principle, their efficacy will rest on whether resolution professionals and the NCLT treat Section 32A disclosures as a substantive compliance requiring active verification, rather than a box-ticking exercise preceding plan approval.