How the moratorium and overriding effect provisions under the IBC can be assessed to dilute the capacity of the SEBI to recover the penalty amount or to comply with any direction under Section 28A of SEBI Act 1992 form Corporate Debtor – By Adv Shivam Jaiswal & Mr. Gautam Mittal

How the moratorium and overriding effect provisions under the Insolvency and Bankruptcy Code 2016 (“Code”) can be assessed to dilute the capacity of the Securities and Exchange Board of India (“SEBI”) to recover the penalty amount or to comply with any direction under Section 28A of SEBI Act 1992 form Corporate Debtor

IBC’s immediate aim is to save distressed corporate debtors. The Code sets out a time-limited insolvency resolution process that needs to be completed within 330 days, including any litigation. However, it is seen in many cases where due to pending litigation against the corporate debtor, attachment of properties by Enforcement Directorate, attachment and freezing of bank accounts by authorities such as SEBI to recover the past dues in form of penalty, etc creates a hurdle and obstruction in running the CIRP process which finally results into delaying the process, even though the code had crystal clear provisions such as Moratorium and overriding effect. 

The present article is about how to deal with the issue wherein the SEBI issue notice to recover the pending dues under Section 28A of the SEBI Act to the companies, which are into the CIRP.

Moratorium and it’s objective 

As per section 14 of the code, a moratorium when declared by the bench the execution of any judgment, decree, or order in any court of law tribunal, arbitration panel, or other authority including the recovery of any property by any owner or lessor where such property is occupied by or is in the possession of the corporate debtor is prohibited. 

The main purpose of declaring the moratorium period is to keep the Corporate Debtor’s assets intact during the CIRP, which otherwise may be attached by any competent court of law during the pendency of proceedings against the Corporate Debtor. In other words, the moratorium ensures that the time-bound completion of the CIRP and also that the corporate debtor may continue as a going concern. Apart from staying the pending proceedings, the moratorium also casts a bar upon the directors of the company, who cannot use or take the amount available on the date of declaration of the moratorium in the company. If the moratorium period is not declared, the insolvency process will be frustrated which in turn will fail the objective of the Code.

Section 14(1) (a) of the ‘I&B Code’ relates to ‘Moratorium’ and reads as follows: 

“14. Moratorium.—(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely: — (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;” 

Section 17 while deals with ‘management of affairs of Corporate Debtor’ by ‘Interim Resolution Professional’

Sub-section (2) of Section 17 empowers the ‘Interim Resolution Professional’ to act in terms of the provisions therein including clause (e) of Section 17(2) which reads as follows: 

17. Management of affairs of corporate debtor by interim resolution professional.—(1) From the date of appointment of the interim resolution professional,— (a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional; xxx xxx (2) The interim resolution professional vested with the management of the corporate debtor shall— xxx xxx xxx (e) be responsible for complying with the requirements under any law for the time being in force on behalf of the corporate debtor.” 

From the aforesaid provisions, it is clear that the ‘Interim Resolution Professional’ is responsible for complying with the requirements under any law for the time being in force on behalf of the ‘Corporate Debtor’, which includes the ‘SEBI Act, 1992’ and ‘Securities Exchange Board of India (Listing Obligations and Disclosure Requirements), Regulations, 2015’ framed therein. 

The question that arises for consideration is whether on failure to perform the duties, if any, penal order is passed for the penalty imposed on the Corporate Debtor’ or any recovery can be made in terms of Section 28A of the SEBI Act, 1992’.

The Section 28A of ‘SEBI Act, 1992’ relates to ‘recovery of amounts’ and reads as follows:

 “28A. Recovery of amounts.─ 

(1) If a person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any direction of the Board for refund of monies or fails to comply with a direction of disgorgement order issued under section 11B or fails to pay any fees due to the Board, the Recovery Officer may draw up under his Company Appeal (AT) (Insolvency) No. 665 of 2018 signature a statement in the specified form specifying the amount due from the person (such statement being hereafter in this Chapter referred to as certificate) and shall proceed to recover from such person the amount specified in the certificate by one or more of the following modes, namely:–

(a) attachment and sale of the person’s movable property;

(b) attachment of the person’s bank accounts;

(c) attachment and sale of the person’s immovable property;

(d) arrest of the person and his detention in prison;

(e) XXXXXX. 

Explanation 1—- XXXXXX

Explanation 2. — XXXXXX

Explanation 3. — XXXXXX

(2) XXXXXX

(3) Notwithstanding anything contained in any other law for the time being in force, the recovery of amounts by a Recovery Officer under sub-section (1), pursuant to non- Company Appeal (AT) (Insolvency) No. 665 of 2018 compliance with any direction issued by the Board under section 11B, shall have precedence over any other claim against such person.

(4) XXXXX

Overriding effect

As per the rules of interpretation the provisions of an Act are to be interpreted keeping in view the object of enactment of that Act. The important aspect to notice is that the overriding effect of the provisions of the Act, scheme, or rules made thereunder would be that only when there is anything inconsistent in the said Act or rules or scheme vis-a-vis the other laws or provisions. If the rules or schemes made under the Act are silent on any particular subject matter and the other law requires any particular action being taken in respect thereof, such a law would have to be complied with.

The provision has a non-obstante clause and states that notwithstanding anything inconsistent therewith in any other law for the time being in force or any instrument affecting by virtue of any other law, the provisions of the Code shall have full effect. Section 238 of the code essentially grants the IBC an overriding effect by insertion of a non-obstante clause by ensuring that provisions of the Code will continue in full force even if they were inconsistent with any other law.

In the matter of Karunanidhi vs. UOI (1979) 3 SCC 431; Hoechst Pharmaceuticals Ltd vs. State of Bihar AIR (1983) SC 1019 and other cases, the Hon’ble supreme Court had held that the material test of inconsistency is that both the provisions under consideration should not be able to stand together i.e. if one is followed, the other, in the result, would be violated.

Further in the matter of Principal Commissioner of Income Tax v. Monnet Ispat and Energy Limited, [2018] ibclaw.in 30 SC the short issue before the Hon’ble Supreme Court in the SLP was whether the Insolvency and Bankruptcy Code, 2016 would override the provisions of the Income Tax Act. The Hon’ble Supreme Court affirmed the view taken by the Hon’ble Delhi Court and dismissed the special leave petition stating that given Section 238, it was obvious that the Code would override anything inconsistent in any other enactment including the Income Tax Act and that income tax dues, which are in the nature of Crown debts, would not take precedence even over secured creditors, who are private persons.

Thus, the overriding position of the Code had ensured that insolvent companies are provided another chance to continue as a going concern.

As per the reading of Section 28A of the SEBI Act, 1992 including sub-Section (3) therein is in contravention of Section 14 of the ‘I&B Code’ and thus as per Section 238 of the ‘I&B Code’ is overriding effect and reads as follows: 

“238. Provisions of this Code to override other laws.—The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.” 

Section 28A of the SEBI Act, 1992’ is inconsistent with Section 14 of the ‘I&B Code’, Section 14 of the ‘I&B Code’ will prevail over Section 28A of SEBI Act, 1992’ and ‘Securities Exchange Board of India’ cannot recover any amount including the penalty from the ‘Corporate Debtor’ 

Relevant Judgments 

The Hon’ble National Company Law Appellate Tribunal In the matter of Bohar Singh Dhillon vs Rohit Sehgal (Interim R.P.) & Ors [2019] ibclaw.in 61 NCLAT had held that ‘Securities Exchange Board of India’ cannot recover any amount including the penalty from the ‘Corporate Debtor’ in light of section 14 of the IBC 2016. The relevant part of the said judgment is quoted below: 

Section 28A of the SEBI Act, 1992′ being inconsistent with Section 14 of the ‘I&B Code’, we hold that Section 14 of the ‘I&B Code’ will prevail over Section 28A of the ‘SEBI Act, 1992’ and ‘Securities Exchange Board of India’ cannot recover any amount including the penalty from the ‘Corporate Debtor’. The ‘Bombay Stock Exchange’ for the same very reason cannot take any coercive steps against the ‘Corporate Debtor’ nor can threaten the ‘Corporate Debtor’ for suspension of trading of shares.

Further, the Hon’ble Supreme Court in the matter of “Innoventive Industries Limited vs. ICICI Bank and Another─ [2017] ibclaw.in 02 SC had held that held that any proceeding under any law against the ‘Corporate Debtor’ cannot proceed once Moratorium is in effect.

Further, in the matter titled Dewan Housing Finance Corporation Ltd. Vs. SEBI, (2020) ibclaw.in 01 SAT, the Ld. Securities Appellate Tribunal Mumbai( SAT) had held, pursuant to a moratorium declared under section 14 the institution of suits or proceedings against the corporate debtor is prohibited or continuation of a suit or proceeding. Further, execution of any judgment or order in any court of law, tribunal, arbitration panel, or other authority is also prohibited. Thus, where a moratorium has been declared under section 14 of IBC, the authority including SEBI will have no jurisdiction to institute any proceedings. Where a proceeding has already been instituted and during the pendency of the proceedings a moratorium order is passed under section 14 then the authority is prohibited from continuing with the proceedings. The relevant part of the said Judgment is quoted below: 

“19. We are also of the opinion that external aid can only be considered when there is an ambiguity in the provision. In this regard, the provision of section 14 is very clear and explicit and there is no room for any ambiguity. Further, the Supreme Court has categorically explained the effect of section 14 of the IBC. We, therefore, find that the adjudicating officer could not have considered the report of the insolvency committee to come to the conclusion that he had the power to proceed under SEBI law inspite of a moratorium having come into effect under section 14 of the IBC.

20. For the reasons stated aforesaid, the impugned order imposing a penalty and proceeding to recover under section 28A of the Act upon failure to pay cannot be sustained and is quashed. Since the proceedings could not be instituted, we also quash the show cause notice and the entire proceedings. The appeal is allowed”.

How SEBI can recover the pending dues

In the matter of “Pr. Director General of Income Tax (Admn. & TPS) vs. M/s. Synergies Dooray Automotive Ltd. & Ors etc. (2019) ibclaw.in 443 NCLAT etc, the Hon’ble NCLAT had held that to recover the penalty amount, the department had to file a claim and cannot recover during the CIRP. The relevant part of the said Judgment is quoted below: 

21. At this stage, we may mention that in the case of “Pr. Director General of Income Tax (Admn. & TPS) vs. M/s. Synergies Dooray Automotive Ltd. & Ors. (2019) ibclaw.in 443 NCLAT etc., this Appellate Tribunal held that the statutory dues i.e. the dues to Central Government or the State Government arising under any law for the time being in force and payable come within the meaning of ‘Operational Debt’. If penalty is imposed or amount is payable to the ‘Securities Exchange Board of India’ in such case, it may claim as a Company Appeal (AT) (Insolvency) No. 734 of 2018 ‘Operational Creditor’ but cannot recover the same during the ‘Resolution Process’.

Therefore, to claim the amount pending, SEBI has to file an appropriate claim form. 

Conclusion; – In light of the moratorium and overriding effect provisions under Code  SEBI cannot recover the penalty amount or to comply with any direction under Section 28A of SEBI Act 1992 form corporate debtor and had to file a claim with the resolution professional.