• Siddarth Jasrotia and Ayush Bagrodia

IBC versus SEBI: An Anatomical Snapshot


-Siddharth Jasrotia and Ayush Bagrodia†




I. Introduction

On admitting an application for initiation of corporate insolvency resolution process (“CIRP”), the adjudicating authority under Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) issues a moratorium prohibiting (i) the institution of suits, (ii) continuation of pending suits, and (iii) execution of any judgement, decree or order, against the corporate debtor. Thus, till the completion of CIRP, Section 14 provides a protective shield to the corporate debtor against any form of legal proceedings. The protection under Section 14 is further strengthened by Section 238, which gives the provision of the Code an over-riding effect over every other law by virtue of the non-obstante clause contained therein.


Judicial pronouncements on the overriding nature of IBC and the moratorium related provisions thereunder, have largely been consistent. However, recently, a series of conflicting decisions were witnessed when the Securities and Exchange Board of India (“SEBI”) sought to initiate/continue proceedings or enforce recovery of amounts against the corporate debtor while a moratorium was in place. These decisions emanate from authorities such as Securities Appellate Tribunal (“SAT”), National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”).


SEBI relied upon Sections 28-A and 11-B of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) for justifying its actions. Sub-section (1) of Section 28-A empowers SEBI to recover penalty from any person by attaching and selling their movable and immovable properties. Sub-section (3), which contains a non-obstante clause, fortifies this provision by stipulating that penalty to be recovered by SEBI against any person under Section 28-A shall have precedence over ‘any other claim’ against such person.


In this apparent conflict between SEBI’s power to recover penalty (sometimes by attaching the property of the corporate debtor) and the moratorium related provisions under IBC which strictly prohibit any such actions, the question of which legislation (SEBI Act or IBC) shall take precedence, arises. This issue is still awaiting final determination by the Supreme Court (“SC”) in three petitions, namely, SEBI v. Monnet Ispat and Energy Limited, SEBI v. Rohit Sehgal & Ors. and SEBI v. Raj Oil Mills Limited. Expounding on the legal tussle between various tribunals and regulatory authorities, this article evaluates the arguments put forth by either side and makes a case in favour of IBC overriding SEBI.


II. Moratorium under Section 14: Ambit and Purpose

Courts have critically appraised the legal architecture of Section 14 of IBC by juxtaposing it with compliances required under various SEBI Rules and Regulations.


Overruling NCLT’s decision, the NCLAT in Ms. Anju Agarwal v. Bombay Stock Exchange & Ors (“Anju Agarwal”) held that the term ‘other authority’ under Section 14 included within its ambit ‘regulatory authorities’ such as SEBI and Bombay Stock Exchange (“BSE”). Emphasizing on the terms ‘execution of any’, ‘order’ and ‘other authority’ under Section 14, NCLAT held that BSE was barred from compelling the corporate debtor to abide by SEBI (Listing Obligations and Disclosure Requirements) Regulations, once a moratorium was in place. This was premised on the ground that Section 14(1)(a) ‘covers within its ambit LODR Regulations’ and will override any compliances under the same by virtue of Section 238.


Accentuating on the legislative intent behind Section 14, the NCLT in Bhanu Ram and Ors. v. HBN Daries and Allied Ltd., where properties of the corporate debtor were attached by SEBI, observed that statutory duties imposed on the Interim Resolution Professional (“IRP”) require him to run the affairs of the corporate debtor on a day-to-day basis, for which possession of the debtor’s property is a must. Accordingly, NCLT overruled the decision given by SAT and ordered SEBI to de-attach the properties of the corporate debtor. SEBI filed an appeal against this order before the SC. By an order dated 17/06/2019, the SC though granted a stay on NCLT’s decision mandating SEBI to hand-over the title deeds but cautioned SEBI against creating any encumbrance on the properties held by them by virtue of the title deeds. Till date, this is the only order passed by the SC in a case pertaining to conflicting provisions of SEBI and IBC.


While adjudging a conflict between the Maharashtra Housing and Area Development Act, 1976 and IBC, the SC in Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority and Ors. highlighted that the purpose of Section 14 was to introduce a ‘statutory status quo’ which will enable the IRP to perform his duties in an efficient and time-bound manner, without any hindrance from third parties. Observing, that as opposed to the Sick Industrial Companies Act, 1985 (“SICA”) – which formed a major part of the erstwhile insolvency regime, the statutory freeze under IBC is a ‘temporary one’ (from the admission of insolvency petition to the approval of resolution plan or liquidation), the SC held that it should be ‘strictly adhered’.


Thus, reading Section 14 in light of the Object and Purpose of the IBC, undoubtedly conveys that the bar imposed during moratorium shall be applicable to all regulatory bodies including SEBI and Stock Exchanges.


III. Non-obstante clauses under SEBI Act and IBC: Conflicts and Consequences

There is an apparent conflict between the non-obstante clauses under Section 28-A (3) of the SEBI Act and Section 238 of the IBC.


It is a settled principle of law that when there exists any inconsistency between two legislations, each special in character, the one enacted later in time shall take precedence over the previous one (generalia specialibus non derogant). It is argued that with respect to the legal issues at hand, IBC should be considered a special statute as opposed to the general provisions under the SEBI Act. This is premised on the ground that SEBI’s power under Section 28-A(3) is a general power exercisable irrespective of whether the entity against which SEBI is taking action, is undergoing insolvency process or not. Whereas, the legal bar imposed under Section 14(1) is a special provision applicable only during the limited time for which the CIRP is in place. Thus, Section 14(1) of IBC should override Section 28-A(3) of SEBI.


Even if both IBC and SEBI Act are considered special statutes, it is argued that IBC should override SEBI Act considering IBC is a later enactment. This is because when two special legislations contain non-obstante clauses, the later statute must take precedence. This emanates from the presumption that the legislature was aware of the previous statute and its non-obstante clause at the time of enactment of the later statute. If the legislature still confers a non-obstante clause on the later enactment, it implies that the legislature intended for that enactment to prevail.


However, objections have been raised against this argument by several academicians, contending that this principle is applicable only in scenarios where there is a direct subject-matter conflict between the special legislations in question. For this, reliance has been laid on the judgement of the NCLT in Shobha Ltd. v. Pancard Clubs Ltd. (“Shobha”) to argue that since the SEBI Act and the IBC differ in their Object and Purpose, no direct subject-matter conflict exists. We disagree with these objections and argue that assuming even if, these objections are valid, Section 14(3) shall still override Section 28-A(3) on the following grounds.


Firstly, it is argued that the approach of NCLT in Shobha is erroneous in light of SC’s verdict in Maharashtra Tubes Ltd v. State Industrial & Investment Corp of Maharashtra Ltd, (“Maharashtra Tubes”). In Maharashtra Tubes, the SC dealt with the State Finance Corporation Act, 1951 and SICA, 1985; both special statutes dealing with different situations (as per their respective Object and Purpose clauses). Despite this, the Court held that the non-obstinate clause under the later enacted statute shall prevail over the previous one. Therefore, where harmonious interpretation is not possible, even in absence of a direct subject-matter conflict, the special legislation enacted later in time takes precedence.


Secondly, since the Apex Court has recognised IBC as a complete Code in itself, it will apply exhaustively to a corporate debtor in insolvency. This implies that SEBI can ensure compliance of its rules & regulations ‘only’ through the procedure made available under the IBC. The recourse available to SEBI under IBC was explored by NCLAT in Anju Agarwal. Premising on Section 17(2)(e) of IBC which mandates IRP to ensure compliance with other laws on behalf of the corporate debtor, SEBI in Anju Agarwal argued that for non-compliance with its regulations, a penalty can be imposed and recovery be made. The NCLAT rejecting this contention, held that if any penalty is imposed by SEBI, it can claim the same as an operational creditor but it does not have the power to recover any amount under Section 28(A) of SEBI Act during the CIRP. The Tribunal further clarified that SEBI is not barred from taking action against individuals such as the former shareholders or directors of the debtor. This decision is in line with NCLAT’s verdict in Pr. Director General of Income Tax v. Synergies Dooray Automotive Ltd. & Ors. and was reiterated in Bohar Singh Dhillon v. Rohit Sehgal. Therefore, once a moratorium is in place, SEBI can claim the penalty amount only by filing a claim as an operational creditor.


Thirdly, SC has consistently held in various cases that the ‘non-obstante clause’ under Section 238 is of the ‘widest amplitude’, giving the provisions of IBC such as Section 14(1), overriding effect over every other statute. The same approach should be followed for SEBI Act as well. The aforementioned cases include Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd. (in reference to the Income Tax Act, 1961), Innoventive Industries Limited vs. ICICI Bank & Anr. (in reference to the Maharashtra Relief Undertakings (Special Provisions) Act, 1958), Duncans Industries Limited v. A J Agrochem (in reference to the Tea Act, 1953), et al. Further, analysing the contradictions between the SEBI Act and the IBC, the Finance Minister in the Rajya Sabha debate dated July 29, 2019, also commented that IBC shall majorly override SEBI by virtue of Section 238. In sum, since the non-obstante clause under IBC has a wider amplitude than the clause under SEBI Act, moratorium issued under IBC shall take precedence.


IV. Report of Insolvency Law Committee: A Labyrinth?

Many, including SEBI (In Re: Dewan Housing Finance Corporation Ltd), have placed reliance on the 2018 Report of the Insolvency Law Committee, which creates a distinction between ‘a proceeding to assess/ determine liability’ and ‘a proceeding to recover the assessed/determined liability’, to argue that IBC Section 14 bars only the latter. They propose this interpretation on the ground that claims to be filled in liquidation should stand determined on the liquidation date, but there might arise a scenario where owing to the bar imposed during the CIRP, such claims could not be determined. Moreover, since no legal proceedings can be instituted against the corporate debtor during liquidation without the prior approval of the NCLT by virtue of Section 33(5), a purposive interpretation of Section 14 in favour of the creditors would strengthen the argument that judicial authorities should be allowed to assess/determine liability during CIRP but not enforce any such liability to ensure minimum hindrance to the functions performed by the IRP.


However, we disagree with this proposition and rebut it on the following grounds.


Firstly, Section 33(5) does allow instituting suits during liquidation albeit with approval of NCLT. In this regard, the Committee itself observed that no hardship has been faced by any type of creditor for pursuing this path, which was the precise reason that even after being under consideration, this distinction was not incorporated under the Code.


Secondly, Section 33(6) acts as an exception to Section 33(5) providing that legal proceedings can be instituted during liquidation in relation to such transactions as may be notified by the Central Government in consultation with any financial sector regulator. Similarly, an exception is available under Section 14(3) against a moratorium during CIRP. Section 2(18) defines financial sector regulators to include SEBI. Thus, there are sufficient alternatives available to SEBI to initiate proceedings or continue pending ones, during CIRP or in liquidation, and these alternatives are rightly subject to the opinion of NCLT and the Central Government to prevent SEBI from taking precedence over financial creditors or interfere with the efficient conclusion of CIRP/liquidation process.


Thirdly, as noted by NCLAT in Anju Agarwal and Bohar Singh, SEBI still has the option of claiming penalty owed to it, as an operational creditor.


Fourthly, rejecting the contention of SEBI, the SAT in Dewan Housing Finance Corporation Ltd. and Ors. v. SEBI & Ors., held that the provisions of Section 14 were patently clear and simple with no degree of ambiguity. It held that in absence of any ambiguity, it was erroneous to rely on an external aid like the Report of the Insolvency Law Committee. It further held that the provision was clear in stipulating that (i) no proceedings can be initiated, and (ii) no pending proceedings can be continued. Therefore, a petition for assessing/ determining the liability was barred under Section 14. Furthermore, SAT held that there were direct decisions of the SC on the overriding nature of the moratorium, and placing reliance on an external aid over and above such decision would amount to contempt. Thus, it can be concluded that SEBI’s reliance on Insolvency Law Committee’s Report to justify its actions, is bad in law.


V. The Way Forward

It can thus be concluded from the legislative scheme of IBC and the above analysed judicial precedents and reports, that SEBI’s power to recover penalty and attach assets of the corporate debtor under Section 28-A of SEBI Act, cannot be exercised while a moratorium has been issued under Section 14 of the IBC.


Once a moratorium has been issued, SEBI can claim the penalty amount owed to it, only by filing a claim as an operational creditor in Form B under Regulation 7 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Accordingly, SEBI is advised to respect the duties of the resolution professional and the judgement of the Courts by neither instituting nor continuing with proceedings (including those for recovery of amounts) against the corporate debtor while a moratorium is in place.



†Siddharth Jasrotia and Ayush Bagrodia are penultimate year students at Maharashtra National Law University, Mumbai.






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