Will IBC override SEBI Act? NCLT order challenged by SEBI in Supreme Court
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Will IBC override SEBI Act? NCLT order challenged by SEBI in Supreme Court

Shruti Mahajan

The Securities and Exchange Board of India (SEBI) has approached the Supreme Court challenging the order of the National Company Law Tribunal (NCLT) which had ruled that the Insolvency and Bankruptcy Code (IBC) would override the SEBI Act.

A Bench of Justices Indira Banerjee and Ajay Rastogi issued notice in the case and ordered that status quo be maintained.

The appeal comes in a case concerning Collective Investment Schemes (CIS) in which the SEBI had directed attachment of properties.

The NCLT had reversed this order and had held that the IBC would take precedence over SEBI Act.

The main issue involved in the case is whether depositors in a CIS can be treated as Financial Creditors and whether IBC can be triggered in case of a CIS which is governed and regulated by the SEBI Act.

In the instant case, the SEBI had, in 2015, directed attachment of properties belonging to one HBN Dairies and Allies Ltd on account of illegally collecting monies worth Rs. 1136 Crores under an unauthorized CIS. This order was passed in accordance with the provisions of the SEBI Act. The properties of HBN Dairies were ordered to be attached to facilitate their sale in order to pay back the depositors. This order was subsequently affirmed by the Securities Appellate Tribunal (SAT).

However, earlier this year, a group of over 30 depositors filed an application against HBN Dairies before the NCLT under the IBC. This application was admitted before the NCLT without involving the SEBI and led to the NCLT ordering the appointment of an Insolvency Resolution professional to carry out proceedings under the IBC. The order also directed de-attachment of the properties that were attached by the SEBI.

The NCLT held that the IBC would have an overriding effect on the provisions of the SEBI Act and consequently, SEBI cannot recover money from HBN Dairies. The National Company Law Appellate Tribunal (NCLAT) upheld this order which also reiterated that the SEBI Act would stand overridden by the IBC. This has led to the current appeal before the Supreme Court.

The SEBI has challenged the NCLT order on the grounds that a CIS is constituted in the form of a Trust and its assets are held by the Trustees for the benefit of the investors. This Trust is completely divorced from the Collective Investment Management Company which initiates the scheme. Thus, the IBC cannot be invoked when the case concerns a CIS and not a company.

Further, it has also been contended that the unit purchasers, that is the depositors in the scheme, are not lenders but holders of units which would become tradeable commodity once the trust is registered. This makes them completely different from Financial Creditors, which the depositors claimed to be when they approached the NCLT.

The Supreme Court’s Vacation Bench of Justices Indira Banerjee and Ajay Rastogi issued notice in the case on Wednesday and listed the matter to be heard on June 17. The Court also ordered status quo to be maintained in the meantime.

SEBI was represented by Senior Counsel CU Singh and advocate Bhargava Desai.

[Read Order]

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