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This ruling reaffirms the interplay of Insolvency and Bankruptcy Code (IBC) with SEBI proceedings insofar as a CIS is concerned; that once it has finally been adjudicated upon by SEBI, insolvency can be triggered but while it is pending SEBI investigation/ final verdict, the NCLT will not interfere despite Section 238 (Pancard Clubs)
The modus operandi of HBN was as follows: HBN invited applications from customers/investors for the upbringing of the cattle under its investment scheme by issuing a rulebook, an application form, a certificate, a receipt, etc. Such investment was done by executing a Joint Venture (JV) entered into between the investor and HBN. There was a minimum lock-in period of 3 years with a maturity term, depending on the plan selected. The JV was to be repaid only after expiry of the term
HBN would issue a certificate against the investment taken, which was in the nature of a certificate of investment, inter alia, indicating the amount invested and appreciated value due on completion of the term. Upon maturity and despite several reminders, HBN failed to repay the amount.
The RBI referred the case to SEBI for investigation for illegal mobilisation of funds. During the investigation, the SEBI concluded that HBN was, in fact, operating as a CIS without obtaining the certificate, and issued directions against it. An appeal was filed with SAT but the SAT directed SEBI to sell properties of HBN within 6 months.
Meanwhile, some of the investors filed an insolvency application as financial creditors claiming a sum of more than Rs. 91 lakhs. They relied on the NCLAT ruling Nikhil Mehta & Sons vs. AMR Infrastructure where it was held that a commitment to pay ‘assured return’ would make the investor a financial creditor.
HBN opposed the application on many grounds, most of which were technical.
The first opposition was that the petitioners entered into a JV along with HBN and could not claim to be financial creditors. This was rejected by NCLT, observing that even SEBI, after studying the nature of transactions had recognised that HBN owed money to the investors and that it was not a really JV but an investment scheme.
HBN also opposed by saying that the case was vested with SEBI since they had adjudicated on it. As a counter, the case of Royal Twinkle was put forth which was also a CIS adjudicated upon by SEBI, and was under insolvency as well. The NCLT also noted section 238 of the IBC, which is a non-obstante provision, as one being of the ‘widest amplitude’.
HBN tried arguing that the notice for auction for recovery proceedings by SEBI was issued, but the NCLT ignored this argument by saying that would now be the Resolution Professional’s mandate.
Accordingly, insolvency resolution process has been triggered against yet another CIS.
Senior Advocate U.K. Chaudhary along with Manisha Chaudhary and N. Raja Singh of UKCA Partners, Advocates and Solicitors appeared for the investors.