SEBI’s Right of Recovery: Limited to One’s Lifetime or Beyond?

[Urvashi Misra is a Counsel and Arnab Ray an Associate at AZB & Partners, New Delhi]

Actio personalis moritur cum persona, i.e., personal actions die with the death of a person is a well-established legal principle, which is widely accepted by judicial and regulatory authorities, including  the Securities and Exchange Board of India (“SEBI”). While SEBI has been implementing this principle in case of pending investigations and adjudicatory proceedings wherein the guilt of a person is still to be determined, what happens if the defaulters in question pass away after SEBI passes an order crystallizing their guilt and liability? In such cases, can SEBI still continue proceedings to recover the amount due and payable by the defaulter? We throw light on this aspect in this post as well as the extent of the exposure, if any, of the defaulter’s legal heirs to meet the deceased’s liability.

Does SEBI have any power to continue proceedings after the demise of a defaulter? 

Until 2019, the response to this question would have been in the negative. However, in March 2019, the Finance Act, 2018 introduced section 28B in the Securities and Exchange Board of India Act, 1992 (“Act”). This was the first-time that SEBI was given an express right to proceed against legal representatives after a defaulter’s demise.

Section 28-B of the Act provides that “where a person dies, his legal representative shall be liable to pay any sum which the deceased would have been liable to pay, if he had not died, in the like manner and to the same extent as the deceased.” This provision is an important addition in SEBI’s armoury. It helps bolster SEBI’s power to claw back any advantage or benefit derived by a defaulter by acting in contravention of the statutory framework. As is clear from its plain language, the provision’s sole objective is to enable SEBI to complete recovery against a defaulter who passes away prior to making payment towards the liability imposed by SEBI.

Only one exception has been carved out: SEBI cannot proceed against legal representatives to impose penalties. However, if such penalty has already been imposed during the lifetime of the defaulters, then SEBI can pursue their legal representatives for recovering the said amount. This clearly demonstrates the legislature’s intent of ensuring that a third party is not saddled with the burden of showing cause for another’s action and their liability is limited to only remitting the amount crystallised during the lifetime of the deceased.

Moreover, since the objective is to only secure the amount due from the defaulter, and not to separately penalise their legal representatives, the liability of such representatives is limited to the extent of the deceased’s estate. This is an important safeguard which has been incorporated to ensure that legal representatives are not penalised and forced to go out of pocket for an act that they are not guilty of committing.  

Who is considered to be a legal representative?

Given the wide powers granted to SEBI under section 28-B, it becomes important to understand who falls within the definition of ‘legal representatives’ and, consequently, becomes susceptible to an action by SEBI. The Act defines a ‘legal representative’ as any person who in law represents the estate of a deceased person. This includes a person ‘who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character, the person on whom the estate devolves on the death of the party so suing or sued’. Thus, such proceedings can be initiated against any person who holds the assets of the deceased defaulter, so that such assets can be utilized to meet the defaulter’s liability. 

Extent of the exposure of legal representatives:

Having discussed SEBI’s power to proceed against legal representatives and the individuals who fall in this category, the next consideration that arises is the extent of their exposure. After the death of a person, can SEBI initiate an investigation or adjudicatory proceedings against his legal representatives and call upon them to prove that the deceased did not commit any default? Or is SEBI’s power limited to only securing from legal representatives any refund or disgorgement of amounts imposed upon a defaulter, after completion of the adjudicatory process, prior to his demise?  

As indicated above, SEBI has been following the principle of actio personalis moritur cum persona. Accordingly, when faced with cases wherein the noticee has passed away during pendency of proceedings, SEBI and the Securities Appellate Tribunal (“SAT”) have held that the adjudication proceedings will not survive. Instead, the proceedings would be liable to be abated without going into the merits of the case. Consequently, the question of such adjudicatory proceedings continuing against a person’s legal representatives does not arise. Thus, it is clear that a legal representative’s exposure is limited only to recovery of amounts already imposed upon the defaulter during their lifetime, after completion of the adjudication process.

This argument is further substantiated by a reading of section 28A of the Act. This is the principal provision empowering SEBI to recover amounts due (in the form of refund of monies/ a direction of disgorgement) from a defaulter. In case a defaulter fails to pay the amount due, a Recovery Officer is appointed to recover the said amount by inter alia attaching the defaulter’s movable and immovable properties as well as bank accounts. It is only when such a defaulter (against whom an adjudicatory order has been passed and the amount is due) dies that section 28-B gets triggered, allowing SEBI to continue the recovery proceedings against legal representatives.

Recently, though, there have been instances wherein SEBI has attempted to expand the scope of section 28-B and relied on the said provision to call upon legal representatives to show cause as to why an order should not be passed for defaults committed by the deceased during their lifetime. One such case wherein SEBI called upon the legal representative to show cause after the demise of the identified defaulter and imposed penalty on his legal representatives was in respect of Legal Representatives of Late Sh. Y.N. Saxena in the matter of SICCL. The legal representatives in this case challenged before SAT the order cum show cause notice of the Whole Time Member (“WTM”) directing them to discharge the liability of the deceased, who was their late father. As a counter to their challenge, SEBI placed reliance upon section 28-B.

SAT rejected this argument and held that a “perusal of the proviso makes it clear that a legal representative shall only be liable to pay where the penalty has been imposed before the death of the deceased person. In the instant case, Shri Y.N. Saxena died much earlier and the penalty has been imposed subsequently by the impugned order which is not permissible.” [emphasis added]

In the matter of Kirloskar Brothers Limited is another interesting case wherein the WTM assessed whether section 306 of the Indian Succession Act, 1925 (“ISA”), could be relied upon by SEBI to call upon the deceased’s legal heirs to show cause as to why disgorgement orders should not be passed against them for breaches committed by the deceased. This was a case wherein the defaulter was charged with insider trading.

The WTM analysed the maxim ‘actio personalis moritur cum persona’ through the lens of section 306 and observed that the scope thereof is limited. To this end, he touched upon judgments of the Supreme Court which held that “……Save and except the personal cause of action which dies with the deceased on the principal of ‘actio personal is moritur cum persona,’ i.e. a personal cause of action dies with the person, all the rest of causes of action which have impact on proprietary rights and socio legal status of the parties cannot be said to have died with such a person……”.

The WTM further observed that the sweep of section 306 is broad enough to cover “all demands whatsoever and all rights to prosecute or defend any action or special proceeding existing in favour of or against a person at the time of his decease”. He particularly observed that the inclusion of the word ‘special proceedings’ showed that section 306 could be relied upon by SEBI to initiate proceedings against legal heir. The WTM also considered section 32 of the Act which provides that provisions of the Act are in addition to any other law for the time being in force. After considering the above, the WTM concluded that SEBI could rely upon section 306 to initiate proceedings against legal heirs and call upon them to show cause for breaches committed by the deceased defaulter.

This order was subsequently appealed before SAT, which set aside the order on merits on the ground that there was no insider trading. Consequently, SAT did not have the opportunity to test the veracity of the section 306 argument.  


SAT’s decision in Y.N. Saxena has been challenged by SEBI before the Supreme Court and is currently pending consideration. In its challenge, SEBI has drawn the Court’s attention to section 306 of the ISA. It will be interesting to see the manner in which the Supreme Court interprets and reads section 306 along with the provisions of the Act, particularly section 28-B. Pending such consideration, however, SAT’s decision in Y.N. Saxena continues to hold fort, with SEBI not having the right to initiate or continue adjudicatory proceedings against the legal representatives for breaches committed by the deceased.

Urvashi Misra & Arnab Ray

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