"Will the Insolvency and Bankruptcy Code (IBC) override Securities and Exchange Board of India (SEBI) Act? Whether depositors of a Collective Investment Scheme (CIS) can be treated as Financial Creditors under IBC and whether provisions of IBC can be invoked in case of CIS which is regulated by the SEBI Act, 1992?"
The Supreme Court will be considering these issues in July in an appeal by SEBI against an NCLT order..
SEBI has come challenging the April 30 order of the National Company Law Tribunal, New Delhi directing the market regulator to de-attach the properties of a corporate debtor -HBN Dairies and Allies Ltd- which was running a Collective Investment Schemes and hand them over to the Resolution Professional (RP) to enable him to conduct the insolvency proceedings on the reasoning that IBC will override SEBI Act.
SEBI told the SC that the direction of NCLT to hand over the properties to RP is totally "uncalled for" because there is no conflict or inconsistency between IBC and SEBI Act. It argued that assets of a CIS are held by the Company in Trust on behalf of the investors and that the Company has nothing to do with this Trust. It argued that provisions of IBC are excluded insofar as these schemes are concerned and depositors/investors in the scheme are not lenders but holders of units which are tradable in nature and as such they are not financial creditors under IBC.
The argument was opposed by RP Rohit Sehgal contending that the primary object of IBC is resolution and not winding up and the resolution professional, who in this case has received claims of 3 lakh investors, attempts to save the company. They further argued that CIS investors are also Financial Creditors under IBC which overrides any other statute in view of Section 238 IBC . In any event IBC is a much faster and speedier mechanism and overrides
After hearing the matter, the vacation bench of the Supreme Court directed the matter to be placed before appropriate bench in July.
The bench, however, clarified that the status quo ordered by it earlier was with regard to handing over of title deeds by SEBI to RP and that SEBI will not create any encumbrance over the properties while RP can continue with his proceedings under IBC.
In its appeal, SEBI has contended that the NCLT completely ignored the fact that the corporate debtor in this case was a business activity in complete violation of law and therefore, no resolution of such corporate debtor under the Code which is only for the resolution of corporate debtor engaged in lawful activity.
HBN Diaries was running a CIS without getting it registered with SEBI as per the law and had collected nearly Rs 1,136 crores from investors. In year 2015, SEBI directed attachment of properties belonging to HBN Dairies in order to return the dues to the depositors.
Due to delays in recovery, some of the investors approached NCLT for initiation of insolvency proceedings against HBN Dairies. On August 14, 2018, NCLT admitted the Application and appointed Sehgal as RP and directed SEBI to de-attach the properties of HBN and hand them over to the RP.
The RP wrote to SEBI for detachment of properties. Since the order was not complied with, RP moved NCLT and arrayed SEBI and the Income Tax Department as parties. The NCLT, thus, held that in view of Section 238 of IBC, provisions of IBC will override provisions of SEBI Act. On May 9, the National Company Law Appellate Tribunal also upheld the order of NCLT.