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.
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.
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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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