SEBI raises questions on IBC’s overriding provisions

By Abhishek Dutta, Manish Parmar and Sayli Petiwale, Aureus Law Partners

A recent challenge by the Securities and Exchange Board of India (SEBI) before the Supreme Court exemplifies how the Insolvency and Bankruptcy Code, 2016 (IBC), remains a heavily contested field. The Supreme Court is scheduled to hear the appeal filed by SEBI. The ruling is likely to have wide ramifications in the interpretation of overriding provisions contained in IBC.

The brief facts leading to the appeal involve a scheme floated by HBN Dairies & Allied Ltd (corporate debtor) under which applications were invited from its customers and investors for the purchase and rearing of cattle, and guaranteed assured returns on completion of the term of the scheme.

Abhishek Dutta
Founder and managing partner
Aureus Law Partners

It was later held by SEBI as being in the nature of a collective investment scheme (CIS) as defined under section 11AA of the SEBI Act, 1992. Against the order, the corporate debtor appeal to the Securities Appellate Tribunal (SAT), which ordered SEBI to sell the assets and properties of the corporate debtor within six months. SEBI attached 41 properties of the corporate debtor and issued a recovery certificate of ₹11.36 billion (US$164.6 million). In the meantime, some of the investors preferred an insolvency application under section 7 of the IBC against the corporate debtor before the National Company Law Tribunal (NCLT).

The NCLT, via its order dated 14 August 2018, considered the applicants and investors as financial creditors by relying on the judgment of the National Company Law Appellate Tribunal (NCLAT) in the case of Nikhil Mehta & Sons and Ors v AMR Infrastructure Ltd, which held that those who have committed to pay assured return or interest are covered by the expression financial creditor. Accordingly, an insolvency application was admitted against the corporate debtor and a moratorium was declared as per the provisions of the IBC, which was challenged by HBN Dairies before the NCLAT. However, on 13 August 2018, SEBI had already made the public announcement for auction of the corporate debtor’s properties in accordance with the SAT’s order.

Manish Parmar
Senior associate
Aureus Law Partners

Pursuant to the NCLT’s order for initiation of a corporate insolvency resolution process (CIRP), the resolution professional (RP) approached SEBI for de-attachment of properties, which was not accepted by the regulator. The RP joined SEBI as a party before the NCLT, which held that in view of section 238 of the IBC, the provisions of the IBC will have an overriding effect on SEBI act, and directed SEBI to hand over the title deeds of the corporate debtor’s properties.

The NCLAT rejected the appeal brought against the NCLT order for CIRP, thereby, confirming the view taken by the NCLT that provisions of the IBC would override the provisions of the SEBI act. The NCLAT, while rejecting the appeal, relied on its own judgment in Anju Agarwal v Bombay Stock Exchange and Ors. It discussed the effect of a moratorium under section 14 of the IBC, which expressly barred the institution or continuation of proceedings, including the execution of any order, decree or judgment of any court of law, tribunal, arbitration panel or authority, against a corporate debtor.

SEBI has lodged an appeal before the Supreme Court against the order and has argued that section 238 of IBC could only apply where there is a contrary provision contained in any other enactments. However, in this case, there is no conflict between the provisions of the IBC and SEBI act, and both these enactments can proceed simultaneously. SEBI argued that insofar as a CIS is concerned, SEBI alone has the jurisdiction as it is regulated by the SEBI act. The assets of a CIS are held by the corporate debtor in a trust for and/or on behalf of the investors, and the provisions of IBC are not applicable as the corporate debtor does not have any control on the trust. It was also argued that investors are not lenders but holders of units that are tradable in nature and so do not qualify as financial creditors under the IBC.

The courts have time and again upheld the precedence of the IBC over statutes inconsistent with it. Earlier, in Pr Commissioner of Income Tax v Monnet Ispat and Energy Ltd, the Supreme Court adjudged that section 238 of IBC overrides the Income Tax Act, 1961.

Questions that have arisen for adjudication before the Supreme Court are whether the depositors and investors in a CIS scheme are financial creditors, and whether the overriding provisions of the IBC can be invoked in case of a CIS scheme regulated by the provisions of the SEBI act. The Supreme Court has ordered the parties to maintain the status quo and has listed the same for hearing by an appropriate bench in July.

Abhishek Dutta is the founder and managing partner of Aureus Law Partners Manish Parmar is a senior associate and Sayli Petiwale is an associate at the firm.

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