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IBC Versus SEBI Act: Supreme Court To Decide On Primacy

The Supreme Court agreed to hear SEBI’s plea against NCLT which had ruled that bankruptcy proceedings will override the SEBI Act.

(Image: Supreme Court of India website)
(Image: Supreme Court of India website)

The Supreme Court on Thursday agreed to hear the dispute over which of the two laws have the primacy: the new bankruptcy law and the SEBI Act.

The National Company Law Tribunal had ruled that the bankruptcy proceedings will override the SEBI Act. After the appellate tribunal only reiterated the view, the Securities and Exchange Board of India moved the apex court.

The dispute stems from attachment of properties of HBN Dairies & Allied Ltd., which the regulator found was operating an unauthorised collective investment scheme. That delayed recovery by creditors, who moved the NCLT under the insolvency law.

The business of collecting funds by HBN Dairies wasn’t genuine and that argument can be put forward by the market regulator in the top court, Moin Ladha, partner at Khaitan and Co., told BloombergQuint. SEBI can argue a business which is not genuine cannot go through insolvency proceedings, he said.

Advocate Karthik Seshadri said SEBI can also argue that a moratorium under the insolvency law applies only to legitimate dues and not penal action. “It’s a penalty claim and not a tax due or any other due. Therefore, it can argue that this being in nature of a penalty claim, you cannot seek protection of the IBC provisions. IBC provisions will be applicable in respect of creditors. SEBI is not sitting there as a creditor,” he said.

The apex court hasn’t provided any date for the hearing.

Backstory

In 2015, SEBI had found that HBN Dairies investment scheme was unauthorised. “collective investment scheme”. The regulator issued a recovery certificate in September 2017, and then ordered attachment of immovable properties of the company for recovering money to pay off investors.

Frustrated by long delay in recovery due to SEBI’s actions, a group of investors had approached the NCLT, which admitted an insolvency petition. The market regulator then moved the appellate tribunal.

The National Company Law Appellate Tribunal, in its judgment, said the Section 14 of the insolvency law bars the institution or continuation of pending suits or proceedings in any other court, tribunal, arbitration panel or other authority once the insolvency proceedings against the corporate debtor have been initiated.

Thus, the Section 28A of the SEBI Act, which relates to the recovery proceedings, will be in contravention of the IBC, it said. Also, due to the Section 238 of the IBC, which gives primacy to provisions of the bankruptcy code over any other law, SEBI cannot proceed with the recovery proceedings, the NCLAT said in its judgment—that was challenged in the top court.

The appellate tribunal, however, directed the resolution professional to act keeping in mind the directions of the regulator. It also granted liberty to SEBI to proceed against the individuals, including former directors and shareholders of the company.