Demystifying the Interface between Securities Law and the IBC

[Hitoishi Sarkar and Yash More are II year students at Gujarat National Law University, Gandhinagar]

On June 16, 2020, a high-level committee constituted by the Securities and Exchange Board of India (“SEBI”) under the chairmanship of Justice Anil R. Dave released its report titled Measures for Strengthening the Enforcement Mechanism of the Board and Incidental Issues (“SEBI Report”). The SEBI Report, inter alia, discusses how the moratorium provisions under the IBC can be interpreted to curtail the ability of SEBI to protect the interests of investors.

This post aims to analyze the jurisdiction and powers of SEBI to adjudicate upon the liabilities of a corporate debtor undergoing moratorium under section 14 of the Insolvency & Bankruptcy Code (“IBC”). It also discusses the framework for the recovery of penalties imposed by SEBI and the difficulties involved in the recovery of ‘assets in trust.’ In order to do so, the authors first expound and resolve the conflict between the SEBI Act and the IBC in light of the overriding powers of the IBC under section 238.

The Conflict between section 238 of IBC and section 28A of the SEBI Act

Section 28A of the SEBI Act empowers SEBI to recover any penalty imposed by it, through attachment and sale of the person’s movable and immovable property, bank accounts, etc. However, such recovery is subject to section 238 of the IBC, which stipulates that the provisions of the IBC shall prevail over any other law inconsistent with any of its provisions. Therefore, the relevant question is whether any recovery can be made by SEBI under section 28A bearing in mind the non-obstante clause under section 238.

The courts have often adopted an asymmetric approach while adjudicating upon the overriding power under section 238. The National Company Law Appellate Tribunal (“NCLAT”) in Ms. Anju Agarwal v. Bombay Stock Exchange., held that section 14 of IBC would, by virtue of the non-obstante clause in section 238 of IBC, prevail over section 28A of the SEBI Act. Similarly, in Mr. Bohar Singh Dhillon v. Mr. Rohit Sehgal, the NCLAT held that SEBI could not recover any amount nor can sell the assets of the corporate debtor. The Supreme Court laid down the foundation for such observations in Innoventive Industries Limited v. ICICI Bank Limited where it opined that the non-obstante clause, in the widest terms possible, is contained in section 238 of the IBC so that any right of the corporate debtor under any other law cannot come in the way of the IBC.

However, there is a growing body of case law where the courts have refused to recognize such an interpretation of the law. For instance, in Roofit Industries Ltd. v. BSE Limited, the National Company Law Tribunal (“NCLT”), Mumbai ruled that the non-obstante clause under section 238 can be invoked only when any other law, which deals with the core issues the IBC deals with, is inconsistent with the provisions of the IBC. Likewise, the NCLT in Shobha Ltd. v. Pancard Clubs held that the non-obstante clause does not override all existing laws, but only those provisions which are repugnant to the effective functioning of the IBC.

Supreme Court’s Jurisprudence on Non-Obstante Clauses

It is a settled rule of interpretation that in case there exists conflict between two special legislations, the later piece of legislation must prevail. This is because, at the time of enactment of the later statute, the legislature is deemed to be aware of the earlier legislation. If the legislature does not intend the later enactment to prevail, then it would provide in the later enactment that the provisions of the earlier enactment continue to apply. If we extrapolate the same reasoning, then the IBC, by virtue of it being enacted much later in time, must prevail over the SEBI Act in cases of conflict between the two.

However, such a conclusion is dispelled by the Supreme Court’s ratio in Kishorebhai Khamanchand Goyal v. State of Gujarat wherein the Court necessitated the existence of a subject matter conflict in order for the provisions of a later statute to prevail over those of an earlier one. The Court ruled that to determine whether a later statute prevails over the former, it is necessary to scrutinize the terms and consider the true meaning and effect of the earlier law. Until this is done, it is impossible to ascertain whether any inconsistency exists between two enactments.

To better understand the nuances in the application of these principles in the context of the insolvency regime, we must look at Supreme Court’s ruling in Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd., where the Court was called upon to adjudicate a conflict between section 65-A of the Transfer of Property Act and section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (the “SARFAESI Act”). The Court laid down in unambiguous terms that although assets governed by both the statutes are the same, the operation of law being on different fields renders the non-obstante clause under section 35 of SARFAESI Act unenforceable.

In the backdrop of the Supreme Court’s jurisprudence regarding non-obstante clauses, it is evident that the SEBI Act cannot be overridden by the IBC as there exists no inconsistency between the two statutes. The SEBI Act aims to protect the interest of investors in securities and promote the development, regulation and the sanctity of the securities market. In contrast, the IBC regulates the reorganization and insolvency resolution of corporate persons in a time-bound manner. Therefore there is no subject matter conflict between the two statutes, and both operate in different spheres.

Determination of Liability by SEBI during Moratorium Period

It is pertinent to examine whether the ambit of a moratorium under section 14 of the IBC is broad enough to curtail the regulatory powers of an authority such as SEBI. The SEBI Report has rightly affirmed that there exists no bar on determination on the liability of a corporate debtor during the corporate insolvency resolution process (“CIRP”) under the scheme of section 14 of the IBC. In doing so, it has relied on the Report of the Insolvency Law Committee, which had reiterated in unambiguous terms that a moratorium under the IBC did not bar any proceeding for determination of liability of the corporate debtor. 

It must be recalled that the NCLT has no power to adjudicate upon certain issues, and the exclusive jurisdiction for such matters has been vested in specialized bodies and tribunals. The Supreme Court in Damji Valji Shah v. LIC of India had ruled that in proceedings before specialized tribunals with exclusive jurisdiction, the provision relating to the moratorium will not be applicable. Section 20A of the SEBI Act provides exclusive jurisdiction to itself and the adjudicating officer in respect of the issues that can be decided by them.

The issue also stands settled with Delhi High Court’s ruling in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. where it held that the moratorium provisions would apply only to “debt recovery actions” against the corporate debtor. It is copiously evident post the NCLT’s ruling in Roofit Industries that companies under CIRP cannot flout laws by virtue of a moratorium, as the prohibition under section 14(1)(a) is with regard to the dues payable by the corporate debtor and not in respect to other violations under various enactments such as the SEBI Act.

The NCLAT has upheld the same view in Bohar Singh Dhillon,where the tribunal ruled that the Resolution Professional is required to act in terms of section 17(2)(e) of the IBC for complying with the requirements under the SEBI Act and regulations framed thereunder, as well as the guidelines issued by the regulatory authority. Therefore, the enforceability of any order, judgment, or decree by a regulatory authority requiring the corporate debtor to comply with a particular law is not barred by virtue of a moratorium under the IBC as the appointed Resolution Professional has the competence to effect such compliance.

A similar conclusion can be drawn from an analysis of the legislative and judicial trend worldwide wherein the bankruptcy statutes generally contain a clear exception excluding actions from regulatory agencies from the ambit of a moratorium. For instance, section 362(b)(4) of the US Bankruptcy Code exempts the regulatory powers of a governmental unit from its ambit. The United States Court of Appeals (Second Circuit) in SEC v. Brennanhas had ruled that the regulatory power of its Securities Exchange Commission (“SEC”) cannot be curtailed by the automatic stay provision under the Code.

Mechanism for Recovery of Penalties under IBC

It is no longer res integra that statutory dues arising under any law are recoverable as an operational creditor under section 5(21) of the IBC. The NCLAT has affirmed this in Pr. Director-General of Income Tax (Admn. & TPS) v. Synergies Dooray Automotive Ltd.. However, there seems to be a lack of judicial clarity on whether penalties levied by regulatory authorities such as SEBI can be classified as operational debt considering operational creditors are not very high on the priority order either under the resolution plan or for distribution of assets under the IBC. The NCLAT has settled this issue through its ruling in Maharashtra Seamless Ltd. v. Shri Padmanabhan Venkatesh, when it held that penalties such as those imposed by SEBI can be claimed as operational debt but are not recoverable during the CIRP. Given the foregoing discussion, it is clear that recovery proceedings against the debtor during moratorium cannot lie.

However, the bigger problem arises in cases where ‘assets in trust’ have to be recovered. In such cases, the regulator or the beneficiaries may not be aware of any particular asset which would correspond to such description. Moreover, since the IBC does not have any particular mechanism for identifying ‘assets in trust’, the resolution professional or committee of creditors may knowingly or unknowingly authorize its use. This can severely prejudice the interests of investors whose right to recover may get severely compromised if the relevant assets are lost or co-mingled. In such cases, approaching the adjudicating authority itself may be a time-consuming process.

In this respect, the approach of the SEC and the US bankruptcy courts may be followed. In SEC v. Wyly, the Court upheld the powers of the SEC to issue a temporary freeze while the bankruptcy proceedings are ongoing, “since such a freeze is meant only to safeguard assets and not meant for recovery.” Similarly, in India, while dealing with specialized jurisdiction matters such as securities law, the moratorium under the IBC must mean to stay only recovery proceedings. It is imperative to render interim orders against ‘assets in trust’ during the CIRP till the filing of appropriate claims before the adjudicating authority. Once appropriate filings have been made, further dealing in the assets can be subject to the IBC or Companies Act’s relevant provisions.


The enactment of the IBC has a significant ongoing impact on the operation of several statutes, especially the SEBI Act. The SEBI Report has rightly expounded on the need to further define the contours of section 14 of the IBC so as to avoid curtailment of regulatory powers of SEBI. Further, since section 24 of the SEBI Act makes it an ‘offence’ to contravene any of the provisions of the Act, section 32A of IBC may render SEBI powerless to take necessary actions against any property of the corporate debtor that forms part of the resolution plan. Thus, section 32A must be amended to ensure that SEBI is not impeded from recovering penalty for violation of securities laws which it can otherwise recover after moratorium is revoked.

– Hitoishi Sarkar & Yash More

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