[Rongeet Poddar is a final year BA LLB (Hons.) student at the West Bengal National University of Juridical Sciences, Kolkata and Yashika Gupta a fourth year BA LLB (Hons.) student at Hidayatullah National Law University]
The Principal Bench of the National Company Law Tribunal (NCLT) has, in April this year, ordered the Securities and Exchange Board of India (SEBI) to de-attach the immovable property belonging to a corporate debtor admitted to the corporate insolvency resolution process (CIRP) under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) in Bhanu Ram v. HBN Dairies & Allied Limited. SEBI, in pursuance of its powers under sections 11 and 11B of the SEBI Act read with regulation 65 of the Securities & Exchange Board of India (Collective Investment Scheme) Regulations, 1999 had attached the assets of the corporate debtor. Appropriate directions had also been issued by the Securities Appellate Tribunal (SAT) to sell the assets of the corporate debtor. SEBI had contended before the NCLT that it is bound to abide by the SAT order. According to SEBI, section 15Z of the SEBI Act only allowed an appeal from SAT to be filed before the Supreme Court of India. However, the NCLT opined that the overriding power afforded by section 238 of the IBC nullified such an interpretation.
The NCLT reasoned that the object of the IBC could not be realized if SEBI created bottlenecks in the functioning of the resolution professional. On this basis, it was held that no execution proceedings initiated under the provisions of the SEBI Act or its ancillary regulations could take place during the operation of the CIRP under the IBC. The NCLT provided wide amplitude to section 238 by placing reliance on the Supreme Court decision in Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd. wherein it was held that the IBC will override anything inconsistent in any other legislation including the Income Tax Act. Section 238 has been inserted in the IBC to give effect to its provisions in the event of an inconsistency between the IBC and other legislation.
The limitation imposed by the NCLT on SEBI’s overarching jurisdiction is a welcome step towards ensuring the smooth operation of the IBC. The IBC and the SEBI Act are two specialized legislation that operate in separate spheres. While the IBC’s goal is to facilitate the timely resolution of debtor companies, the objective of the SEBI Act is to primarily protect the interests of investors in the securities market. Section 238 of the IBC eliminates the need for adjudicatory authorities to engage in harmonious interpretation to give effect to both these goals. The non-obstante clause clearly gives primacy to the IBC over the SEBI Act. The rationale, in the instant case, was that if the properties of the corporate debtor were not de-attached then the extended time frame taken by SEBI would have eroded the value of the properties and jeopardized the economic interest of the beneficiary creditors. On this basis, the NCLT ordered SEBI to hand over the concerned property to the resolution professional to ensure expeditious completion of the CIRP. The decision of the NCLT provides determinacy to the jurisdiction of SEBI and ensures efficacious resolution of commercial disputes.
It is interesting to note that an exception to the operation of section 238 of the IBC has been carved out by the National Company Law Appellate Tribunal (NCLAT) recently in the case of Varrsana Ispat Ltd v. Enforcement Directorate (ED) in the context of section 14 of the IBC. The concerned provision specifically provides for a moratorium period during which the institution of suits or proceedings against the corporate debtor, including execution of any judgment, decree or order of any court of law, tribunal or any other authority is prohibited. In this case, the NCLAT opined that the Prevention of Money-Laundering Act, 2002 (PMLA) is a criminal legislation and is thus distinct from civil legislation such as the IBC. Therefore, section 14 was held to be inapplicable to the confiscation of property derived from, or involved in, money-laundering when the confiscation took place prior to the operation of the moratorium period. However, as the Mumbai Bench of the NCLT held in SREI Infrastructure Finance Limited v. Sterling SEZ and Infrastructure Limited, section 238 will continue to have overriding effect in instances when there is an attachment order by the Enforcement Directorate during operation of the moratorium period. The NCLT in that case had highlighted the fact that the concerns of the corporate debtors would have to be placed at a higher pedestal over the completion of criminal proceedings under the PMLA. The interpretation rendered by both the adjudicatory authorities is again a significant step towards clear demarcation of the jurisdiction of the two dissimilar legislations.In this context, it is interesting to note that section 14(3) of the IBC allows the Central Government to consult with any ‘financial sector regulator’ to exempt application of the moratorium period to specific transactions as may be deemed fit.
Jurisdictional issues in other domains are also being spelled out in due course. As far as another notable regulator, the Competition Commission of India (CCI), is concerned, the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 offers a much needed clarification to the role of the CCI through the addition of section 31(4) to the IBC. This provision mandates that the resolution applicant obtain the approval of the CCI prior to the approval of such a resolution plan by the committee of creditors, if the resolution plan contains a provision for a ‘combination’ within the scope of section 5 of the Competition Act, 2002. In the context of takeovers, SEBI has amended the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 to allow open offer exemptions for acquisitions in listed companies made through IBC resolutions. However, SEBI has recently clarified that these exemptions will not be applicable to debt restructuring schemes which are not under the IBC. In such a scenario, the acquirer has to approach SEBI to seek a relaxation from making an open offer under the Takeover Regulations. The Insolvency and Bankruptcy Board of India has also signed a Memorandum of Understanding with SEBI recently in a bid to ensure better cooperation between the two entities for effective implementation of the IBC.
As observed, the interplay of the IBC with regulators and other law enforcement authorities is gradually being ironed out with necessary interventions from judicial forums as well as the lawmakers. Such interventions offer clarity to the jurisdiction of the IBC and hold it in good stead to offer concrete and time-bound resolutions to corporate debtors with minimum hassle. This holds great promise for the future in streamlining India’s insolvency conundrum.
– Rongeet Poddar & Yashika Gupta