The SEBI vs. IBC Conundrum

In the previous articles of this series, we discussed the nature of SEBI’s enforcement powers and its prosecutorial process as well. But in recent times, no discussion the regulator’s powers is complete without examining the interaction of the Securities and Exchange Board of India Act, 1992 (SEBI Act) with the Insolvency and Bankruptcy Code, 2016 (also known as the IBC or Code), insofar as their competing non-obstante clauses and its impact on SEBI’s overall enforcement powers.

The advent of IBC in 2016 harked in a new, significant era in India’s corporate insolvency framework, with the introduction of a “creditor-in-control” regime. To aid in an effective resolution process, Section 14 of the IBC allows for a moratorium to be declared, prohibiting initiation or continuation of certain specific kinds of legal action against the corporate debtor, for a period which starts from the date of admission of an application for initiation of corporate insolvency resolution process (CIRP) by the National Company Law Tribunal (NCLT) and culminates on the date of approval of a resolution plan by NCLT or the liquidation order (whichever is earlier). The embargo created by a Section1 4 moratorium is, inter alia, on the following :-

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

To put it simply, once the moratorium kicks in, a corporate debtor is shielded from other proceedings, including those for recovery of dues as well as proceedings before a court of law, tribunals or “any other authority”. When read with Section 238 of the IBC, i.e., the non-obstante provision which declares that the IBC holds priority over other laws and has an overriding effect over them if they are inconsistent with its provisions, the remit of the moratorium assumes considerable legal significance in a multi-regulatory environment such as India, where companies under CIRP are also likely to be subject to various other legal and regulatory proceedings. In fact, the Insolvency Law Committee’s report in 2018 observes, in the context of the Section 14 moratorium that while the mere determination of the amount (and not its enforcement) may not have been the intent of the Code…it may not be prudent to provide explicit carve-outs from section 14 without on-ground evidence, at this stage. The 2022 Insolvency Law Committee report also rejects the requirement to introduce any such exceptions to the moratorium process.

Section 28A of the SEBI Act makes SEBI’s enforcement powers meaningful and empowers it to recover dues from defaulters as well. [Similar provisions also exist in terms of Section 23JB of the Securities Contracts (Regulation) Act, 1956 and Section 19-IB of the Depositories Act, 1996.] Introduced in 2014 (with retrospective effect from 2013), this provision contemplates recovery action being taken by SEBI when a person fails to pay a penalty imposed, fails to pay any dues, or “fails to comply with any direction of the Board for refund of monies or fails to comply with a direction of disgorgement order issued under section 11B.” At that stage, the regulator is empowered to recover proceeds in certain prescribed ways, including:-

• attachment and sale of the person’s movable and immovable property;

• attachment of the person’s bank accounts;

Interestingly, Section 28A (3) of the SEBI Act also brandishes a non-obstante clause of its own and states that “Notwithstanding anything contained in any other law for the time being in force, the recovery of amounts by a recovery Officer under sub-section (1), pursuant to non-compliance with any direction issued by the Board under section 11B, shall have precedence over any other claim against such person.” As we know, Section 11B is SEBI’s trusted brahmastra, one that empowers it to take any action in the interest of the market, include disgorge monies, illegal gains as well as seek refunds in investor interest. Section 28A provides the means through which such recoveries can be effected.

The conflict between SEBI’s authority to recover monies, which may include seizing assets of the corporate debtor, and the moratorium provisions of IBC that directly prohibit such actions during the pendency of the moratorium, raises the question of which law (SEBI Act or IBC) should be given priority and which non-obstante provision would prevail. In doing so, what does the moratorium prohibit; the crystallising the claim through continuation of proceedings or merely recovery of the amounts?

The Supreme Court had occasion to consider a conflict in statutory interpretation in Maharashtra Tubes Limited vs. State Industrial and Investment Corporation of Maharashtra, which deciding between the provisions of the State Finance Corporation Act, 1951 and the Sick Industrial Companies (Special Provisions) Act, 1985. Having reached the conclusion that both the statutes were special legislations, with slight overlaps, the Court held that the subsequent enactment would have overriding effect on the earlier statute. Such observations though, are often premised on a form of omniscience in our lawmakers, presupposing that the legislature is always aware of overlaps while introducing conflicting pieces of legislation and while bestowing them each with non-obstante clauses, which may not always be the case practically.

Another seminal case by the Supreme Court in the context of inconsistency between statutes is Kishorebhai Goyal vs. State of Gujarat, which sets out a three pronged test to determine:- (i) whether there is direct conflict between the two provisions; (ii) whether the legislature intended to lay down an exhaustive Code in respect of the subject-matter replacing the earlier law; and (iii) whether the two laws occupy the same field.

• Scope of the term “other authority”: The phrase “other authority” as used in Section 14 of the IBC, assumes significance in the determining SEBI’s success in this contest. In 2019, the NCLAT, in the case of Anju Agarwal vs. Bombay Stock Exchange & Ors., overturned the NCLT’s decision and ruled that the term “other authority” encompasses “regulatory authorities” such as SEBI and stock exchanges. The NCLAT emphasized the words “execution of any,” “order,” and “other authority” and held that the BSE cannot enforce compliance with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 once a moratorium is in place, by virtue of the non-obstante provisions of Section 238 of the IBC. The basis for all this of course is the Supreme Court’s views in M/s. Innoventive Industries Limited. vs. ICICI Bank Limited, where it held that any proceedings under any law against a corporate debtor cannot be proceeded once moratorium is in effect. In extenso, once a moratorium has been declared under section 14, SEBI cannot proceed under the SEBI laws against a corporate debtor.

• This view was echoed by the NCLT in the matter of Bhanu Ram & Ors. vs. HBN Dairies & Allied Limited which was concerned with SEBI’s attachment of the properties of HBN Dairies. SEBI had earlier held HBN Dairies to be in violation of the SEBI Act and rules in relation to collective investment schemes and had directed refund of monies to investors. The NCLT held that, since the provisions of the SEBI Act were in conflict with the IBC, the “omnibus provision” of Section 14 of the IBC would eclipse SEBI’s powers and nullify its actions of recovery, by virtue of Section 238 of the IBC. SEBI was therefore directed to de-attach the properties, even if such attachment order was issued prior to initiation of the moratorium. The NCLT also placed reliance on the Supreme Court decision in Commissioner of Income Tax v Monnet Ispat and Energy Limited, which acknowledging the supremacy of the non-obstante clause in Section 238, IBC.

• Initiation of CIRP: A few decisions by the NCLT and NCLAT have also weighed in on the developing jurisprudence here. For instance, while adjudicating on ancillary issues concerning admissibility of a Section 9 application under IBC, in Shobha Limited & Anr. vs. Pancard Clubs Limited the NCLT Mumbai relied on two well-known Supreme Court decisions and observed that “…there is no conflict between SEBI Act and Insolvency and Bankruptcy Code because SEBI deals with investor protection issues whereas Bankruptcy code deals with creditor issues. The jural relationship between the parties is also different. In SEBI, it is between the investors and the company, whereas in I & B Code, it is between the creditors and the debtor, therefore, we don't find any subject matter conflict in between the two statutes”. Resultantly, it was held that the CIRP could not be initiated against the corporate debtor on an application by an investor, whose interests were already under protection at the hands of SEBI. This order was upheld by the NCLAT as well. However, in the related matter of Nitin Suresh Satghare & Ors. vs. Pancard Clubs Limited, the NCLT, Mumbai Bench initiated CIRP against Pancard Clubs for failure to repay monies due to lakhs of investors and stated that initiation of CIRP cannot be impeded by an existing SEBI order.

• Impact of approval of a resolution plan on SEBI action: The approach of granting precedence to IBC has been further fine-tuned by the SAT as well in a spate of decisions, including Monnet Ispat & Energy Limited, Dewan Housing Finance Corporation Limited and M/s. Tata Steel Limited, all of which categorically recognize the clean slate principles enshrined in the IBC and state that once the resolution plan has been approved, SEBI loses the ability to initiate proceedings or pass any penalty orders pertaining to the pre-CIRP period.

The issue regarding the reading of the non-obstante clauses in the IBC and the SEBI Act is still awaiting final determination by the Supreme Court in three petitions, namely, SEBI v. Monnet Ispat and Energy Limited, SEBI v. Rohit Sehgal & Ors. (i.e., the HBN Dairies case) and SEBI v. Raj Oil Mills Limited. A SEBI committee report issued under the Chairmanship of Justice Dave in June 2020 also provides excellent insight into the challenges the IBC poses to SEBI’s duties towards investors and recommends amendments to Section 14, to accommodate commencement and continuation of regulatory proceedings during the moratorium, an approach akin to the US bankruptcy laws. No doubt, this will be a difficult question to resolve, one that will have a domino effect on how the IBC interacts with other statutes such as the PMLA, the Income Tax Act etc, all of which have their own jurisprudential journeys before the courts but all long as interests of bona-fide third parties and investors are prioritised by courts, the outcome will be well worth the wait.

Shruti Rajan is a Partner , Vivek S Shah is a Senior Associate & Harishankar Raghunath is an Associate at Trilegal.

This is the third article in the Securities Law series by Trilegal.