IBC vs Sebi: Fight for primacy

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The Insolvency and Bankruptcy Code, 2016, has brought a paradigm shift in law. This code has been passed pursuant to various committee reports including the report of the Bankruptcy Law Reforms Committee of November, 2015. In the absence of a comprehensive law on insolvency and bankruptcy in India, insolvency cases used to take years for completion as there were multitude of provisions in various acts like the Companies Act, 2013, Recovery of Debt Due to Banks and Financial Institutions Act, 1993, Sick Industrial Companies (Special Provisions) Act, 1985, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. These provisions resulted in a multiplicity of proceedings, and therefore, a substantial delay in disposal of cases. To streamline the whole process and for quick resolution, this comprehensive code has been enacted. This code seeks to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms as well as individuals in a time bound manner.

In an interesting case, the National Company Law Tribunal (NCLT), has held that the laws of Insolvency and Bankruptcy Code would reign over the Securities and Exchange Board of India (Sebi) laws. In Bhanu Ram v. HBN Dairies & Allied Ltd., a case concerning running an illegal Collective Investment Scheme, the Principal Bench of NCLT has ordered the Sebi to de-attach the immovable property belonging to the corporate debtor who has been admitted to the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016.

A Collective Investment Scheme (CIS) is any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilised with a view to receive profits, income, produce or property, and is managed on behalf of the investors is a CIS. Running a CIS has various preconditions such as registration, mandated by Sebi. CIS has to comply with various Sebi regulations. Admittedly, such approvals were not taken before starting this scheme. Sebi had earlier attached the properties pursuant to its powers under sections 11 and 11B of the SEBI Act and the Securities & Exchange Board of India (Collective Investment Scheme) Regulations, 1999. The order was confirmed by the Securities Appellate Tribunal (SAT).

The company refuted Sebi’s stand that their schemes constituted a CIS. It argued that its schemes were not in the nature of CIS as the money is provided by the customers to facilitate its business. HBN further tried to argue that the money collected was not solely utilised for the purpose of purchase and rearing of cattle and maintenance of dairy farms. It tried to persuade that a part of the amount was used for investment in acquisition of fixed assets and investment of properties through its subsidiary companies. But Sebi, as well as SAT, considered the schemes as CIS, resulting in the attachment orders.

Investors then moved before the NCLT asking for initiation of insolvency against the delinquent company. Section 238 of the Code states ‘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’. NCLT overriding Sebi's concern observed that the Sebi cannot recover any money from HBN Dairies as the non obstante clause in the code prohibited Sebi from taking such action. This case is now before the Supreme Court.

The primary purpose of Sebi is to protect the interests of investors in securities and to promote the development of and to regulate the securities market, whereas IBC’s aim is to facilitate the timely resolution of debtor companies. For better coordination between the two authorities, Sebi has recently signed a Memorandum of Understanding with the IBBI. This can lead to effective implementation of Securities laws and Insolvency and Bankruptcy Code, 2016.

This is not the first case where provisions of the code have come in conflict with other laws. In fact, in its very first extensive Supreme Court judgment on the interpretation of the Code, the Apex Court had observed that this code brings a paradigm shift in law and economy. In this case (Innoventive Industries Ltd v ICICI Bank and Anr. (2017)) insolvency application was filed by ICICI Bank (Financial Creditor) before the Tribunal to initiate corporate insolvency resolution process of Innoventive Industries. Innoventive argued that as a relief order had been passed by the Maharashtra Government under the Maharashtra Relief Undertaking (Special Provisions Act) 1958 (MRUA), the liabilities stood suspended. But ICICI argued that IBC had an overriding effect over the provisions of the state legislation MRUA. The NCLT, NCLAT as well as the Supreme Court held that the Code would prevail over the provisions of MRUA as otherwise the provisions of the Code could not be implemented within the prescribed time limits.

While deliberating the test of repugnancy, the Supreme Court observed that if the subject matter of the State legislation is identical with that of the Central legislation, such that both cannot stand together, then the State legislation will be said to be repugnant to the Central legislation. The Supreme Court had also observed that the non-obstante clause contained in Section 4 of the Maharashtra Act could not override the application of the Central enactment as it was held that IBC, which was a later Central enactment being repugnant to the earlier State enactment by virtue of constitutional provisions would operate to render the Maharashtra Act void vis-à-vis action taken under the later Central enactment (IBC).

Recently, in another matter before the Mumbai Bench of the National Company Law Tribunal, SREI Infrastructure Finance Ltd. vs. Sterling SEZ and Infrastructure Ltd. (2019), the question before the Tribunal was the primacy of IBC over the provisions of the Prevention of Money Laundering Act 2002 (PMLA). The Tribunal, after considering various aspects, held that as the criminal proceedings before PMLA take a longer time and such time can lead to a tremendous decrease in the value of assets, considering the overriding provisions of Section 238 of IBC, when compared to the earlier legislation (i.e. PMLA), the provisions of IBC should prevail over PMLA. It has thus held that the Adjudicating Authority (under PMLA) has no jurisdiction to attach a corporate debtor’s properties and such an attachment order if passed would be a nullity and non-est in law.

Supreme Court in Pr. Commissioner of Income Tax vs. Monnet Ispat and Energy Ltd. (2018) has also observed that due to Section 238 of the Insolvency and Bankruptcy Code, the Code will override anything inconsistent contained in any other enactment, including the Income-Tax Act. Judgments rendered by various courts and tribunals have reinforced the primacy accorded to the IBC over certain legislations. Regarding its primacy over SEBI laws, it will now be tested by the Supreme Court.