[Bhavin Gada is a Partner at Economic Laws Practice, Advocates and Solicitors (“ELP”), and Manendra Singh is a Senior Associate at ELP. The views and opinions expressed are those of the authors and do not reflect the view of their firm nor do they constitute any legal opinion/
On October 3, 2018 the Securities and Exchange Board of India (“SEBI”) notified the SEBI (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018 (“Administrator Regulations”) with the aim of appointing administrators to regulate the process of refund of monies to the investors by the defaulters against whom the SEBI has passed orders for recovery of monies under the relevant provisions of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”), the Securities Contracts (Regulations) Act, 1956 and section 19-IB of the Depositories Act, 1996 (collectively referred to as “Securities Legislations”). The “administrator” contemplated under the Administrator Regulations is required to be an insolvency resolution professional registered with the Insolvency and Bankruptcy Board of India (“IBBI”) and empanelled with the SEBI.
Each of the Securities Legislations contains provisions wherein an order could be passed by SEBI for recovery of money and the following modes can be adopted for the same:
- attachment and sale of the defaulter’s movable property;
- attachment of the defaulter’s bank accounts;
- attachment and sale of the defaulter’s immovable property;
- arrest of the defaulter and his detention in prison; and
- appointing a receiver for the management of the defaulter’s movable and immovable properties.
In furtherance of the aforementioned powers, applicability of the Administrator Regulations has been provided for all or any of the following:
- appointment of administrator pursuant to failure to comply with disgorgement or refund orders passed by the SEBI;
- sale of properties attached by the recovery officer of the SEBI under the SEBI Act;
- collection of claim documents and verification of claims of investors for the purpose of effecting refunds;
- refund of monies to the investors pursuant to disgorgement or refund orders passed by the SEBI;
- recovery of disgorgement amounts directed by the SEBI; and
- any act incidental or connected thereto.
Interestingly, section 28A(3) of the SEBI Act reads as (the language here is pari materia to provisions in other Securities Legislations):
Notwithstanding anything contained in any other law for the time being in force, the recovery of amounts by a Recovery Officer under sub-section (1), pursuant to non-compliance with any direction issued by the Board under section 11B, shall have precedence over any other claim against such person.
Though there are judicial precedents where the Insolvency and Bankruptcy Code, 2016 (“IBC”) has been clarified to be a legislation not for recovery of money but for the resolution or insolvency of corporate debtors, however, with both IBC and Securities Legislations (vis-à-vis the Administrator Regulations) being non-obstante in nature, they result in an uncertainty in relation to the person with whom the right to payment lies (i.e., a creditor under the IBC and investor under the Administrator Regulations).
The IBC also seeks to provide resolution of corporate debtors by taking into consideration the claims of financial and operational creditors and, if the resolution is not so obtained, the corporate debtor is referred to liquidation, where specific waterfall is provided for various claimants to be a part of the monies that they can receive during such process. The juxtaposition of the process under the IBC and the Administrator Regulations can be understood with the help of an example; let’s consider a scenario where an order is passed by the recovery officer for payment of money to investors by a particular company (“Target Company”) and the Target Company has failed to repay that money. If the administrator has initiated the process of recovery under the Administrator Regulations and, in the meantime, if an application has been moved and admitted under the IBC before the National Company Law Tribunal (“NCLT”), resulting in a moratorium under Section 14 of the IBC, whether such a situation frustrate the recovery process initiated under the Administrator Regulations by the administrator, will be the pertinent concern.
In this context, attention needs to be also drawn to regulation 3(2) of the Administrator Regulations, which reads:
Unless otherwise specifically ordered, these regulations shall not be applicable to cases where the Securities Appellate Tribunal or a Court has appointed an administrator or any other person for the purposes of recovery and/or repayment to investors.”
The above provision contemplates inapplicability of the Administrator Regulations in cases where an administrator or any other person is appointed by a Court for the purposes of recovery and / or repayment to investors. The term “Court” is not defined in the Administrator Regulations nor in the Securities Legislations, thus leaving ambiguity as to the applicability of this provision in a case where an insolvency professional is appointed by a tribunal being NCLT. The popular known legal maxim ‘eiusdem generis’ can be used to interpret that the term “Court” has been used just after Securities Appellate Tribunal (which is a tribunal); therefore, even NCLT should be covered. Interestingly, the kind of roles and duties assigned to the administrator under the Administrator Regulations look similar to that of a resolution professional appointed under the IBC by the NCLT.
Further, as stated above, since the IBC is a statute not for recovery of money but for the corporate insolvency resolution process of corporate debtors, regulation 3(2) of the Administrator Regulations may not come into play, thus resulting in a stalemate between the Administrator Regulations and the IBC.
Though the Supreme Court has in many rulings reiterated that the IBC is a non-obstante law in light of section 238 of the IBC, the Administrator Regulations which have been now introduced with a bona fide intent of protecting the interest of investors in the securities market may result in inadvertently assisting the defaulters in prolonging and frustrating the IBC proceedings.
– Bhavin Gada & Manendra Singh