Disgorgement by SEBI under Section 32A of IBC: Death-Knell for Insolvency Resolution?

[Rongeet Poddar is a graduate of West Bengal National University of Juridical Sciences & Vishal Hablani is a final year student at West Bengal National University of Juridical Sciences] 

The Securities and Exchange Board of India (“SEBI”) has released a ‘Report on the Measures for Strengthening the Enforcement Mechanism of the Board and Incidental Issues’ on 16 June 2020. The Report has highlighted the definitional ambiguity under section 32A as a significant obstacle to the enforcement proceedings undertaken by SEBI.  The jurisdictional tussle between SEBI and the Insolvency and Bankruptcy Code, 2016 (“IBC”) has come to the fore in the recent past. The addition of section 32A by the Insolvency and Bankruptcy Code (Amendment) Act 2020 has been an ostensible attempt to resolve the conflict.

The non-obstante provision under section 32A provides immunity to the corporate debtor against prosecution for offences committed before the commencement of the corporate insolvency resolution process (“CIRP”) if the adjudicating authority has approved the resolution plan under section 31. It also insulates the property of the corporate debtor from punitive actions by regulators with respect to an offence committed before the commencement of CIRP.

The rationale behind inserting section 32A in the IBC

SEBI is an autonomous institution which has been afforded a wide range of powers of the Securities and Exchange Board of India Act, 1992 (“Act”) to protect the interests of investors in the capital market. It can impose disgorgement orders and recover undue gains from errant corporate entities to restore public confidence. However, SEBI’s intervention can be detrimental to the interest of a corporate debtor under the IBC as the acquired assets of the resolution applicant could be the subject of attachment under disgorgement orders to compensate investors.

The insertion of section 32A in the IBC has offered a safety-valve to bonafide resolution applicants. It seeks to nullify threats of attachment or sale of assets belonging to the corporate debtor and incentivize the bidders of distressed businesses. As a result, the acquirers would enjoy the benefit of a clean slate. 

Recommendation of the SEBI Committee

Section 24 of the Act defines an ‘offence’ as contravention of any provision under the Act. The Report has observed that the Supreme Court has clarified the definition of ‘offence’ in Standard Chartered Bank v. Directorate of Enforcement. The Supreme Court had held that the meaning of the ‘offence’ is not merely confined to a criminal offence alone. The recognition of such a precedent widens the ambit of section 32A.

As observed by the recent SEBI Report, the immunity under section 32A of the IBC would thus include a violation committed by the corporate debtor under securities laws. It would render penalties under securities law ineffective even after the moratorium period under section 14 of the IBC has lapsed. Therefore, the Report proposes the introduction of an exception under section 32A to offer scope for disgorgement or refund under securities law. However, the ostensible attempt to harmonize the IBC with SEBI’s role as a capital markets regulator could lead to unintended consequences.

Judicial Determinations

The contention over jurisdiction between IBC and SEBI has been adjudicated upon in several cases. In Sobha Limited v. Pancard Clubs Limited, the National Company Law Tribunal (“NCLT”) observed that the non-obstante clause under section 238 of the IBC would not override the provisions of the Act. The view was taken based on the distinction in subject matters that are governed by the two legislations. While IBC governs the relationship between the corporate debtor and the creditors for the revival of distressed business units, SEBI has been entrusted with the function of ensuring investor protection in the securities market.

In Bhanu Ram v. HBN Dairies & Allied Limited, HBN Dairies floated a Collective Investment Scheme (“CIS”) without obtaining registration from SEBI. When it came to SEBI’s notice, it passed an order to attach the properties of HBN Dairies to pay off the investors. However, investors filed an application under section 7 of the IBC for initiating CIRP against HBN Dairies. On acceptance of the application, the NCLT ordered SEBI to de-attach the properties that were attached earlier. The NCLT placed reliance on the non-obstante clause of section 238 of the IBC and held that the moratorium provision under section 14 of the IBC would override section 28A of the Act, which empowers the recovery process by selling the property belonging to the corporate entity. On appeal, the concerned order was upheld by the appellate body National Company Law Appellate Tribunal (“NCLAT”). Aggrieved by the order of the NCLAT, an appeal has been filed by SEBI before the Supreme Court in the case of SEBI v. Rohit Sehgal .

Critical Analysis

Case laws discussed above suggest that the NCLT has taken an inconsistent approach in relation to the scope of the non-obstante clause under section 238 of the IBC. Sobha Limited suggests that section 238 of the IBC cannot override the provisions of the Act. Whereas, in Bhanu Ram, NCLT took an opposite approach and observed that section 238 of the IBC would override section 28A of the Act. The NCLAT subsequently upheld the said view. However, both the decisions were passed before the introduction of section 32A under the IBC. The non-obstante provision under section 32A has further widened the scope of the overriding effect of the IBC. Since the power of attachment of properties conferred upon the Recovery Officer under section 28A of the Act stands directly in contradiction with the newly introduced section 32A of the IBC, it is difficult to conceive that the jurisdiction would fall within the ambit of the Act. 

Appeal filed by SEBI against NCLAT’s decision in Bhanu Ram is still pending for adjudication before the Supreme Court. SEBI has advanced arguments stating that the jurisdiction lies with SEBI, as the assets of the CIS are held in trust by the corporate debtor on behalf of the investors who subscribe to the scheme. It has been argued that investors are not lenders, and thus cannot file an application under the IBC in the capacity of financial creditors. If the Supreme Court upholds the arguments advanced by SEBI, it will disincentivize the bidders to put forth a resolution plan. In the absence of a specific judicial precedent which recognizes the disgorgement claims of SEBI as an operational debt, the amendment proposed in the Report facilitates a backdoor entry to recognize such claims.


In March 2019, a Memorandum of Understanding was entered into between SEBI and The Insolvency and Bankruptcy Board of India for the effective implementation of the IBC. In light of the same, it would be beneficial to look for the harmonization of interests of all the stakeholders. It is imperative to ensure that the provisions of the Act do not create bottlenecks in the implementation of IBC.  In case of an overlap between the two legislations, the rule of law is to ensure harmonious interpretation. However, in case of conflict, the later legislation, i.e., the IBC must prevail. 

Therefore, any insidious attempt to override the primacy of the IBC must be negated. The incorporation of the amendment proposed by the SEBI committee is likely to have a disruptive impact on the corporate insolvency landscape. At a time when the economy is already reeling under distress induced by the pandemic, the provision of such a sweeping regulatory power to SEBI would lead to a confidence deficit among potential investors and deter successful resolutions under the IBC. Thus lawmakers must strive to remove hardships for a resolution applicant and preserve the sanctity of the insolvency process in India by ensuring maximization of asset value.

– Rongeet Poddar & Vishal Hablani  

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