MAINTAINABILITY OF PROVISIONS OF INSOLVENCY AND BANKRUPTCY CODE, 2016 OVER THE PROVISIONS OF SEBI ACT

[Mr. M. GOVINDARAJAN]

In MR. G. BALA REDDY VERSUS SECURITIES EXCHANGE BOARD OF INDIA - 2024 (3) TMI 1183 - TELANGANA HIGH COURT SEBI conducted an investigation into the trading in the scrip of ICSA (India) Limited for the period from 01.02.2009 to 28.02.2010.  Action was initiated against the company by SEBI.  Adjudication under Section 15-I of SEBI Act was conducted.  A penalty of Rs.40 crores was imposed on the appellant and also on some other persons by the Adjudicating Officer under Section 15G and 15-HA of SEBI Act.  It was directed to pay the said penalty by the appellant and other persons jointly and severally.  Appeal was filed against the said order by the appellant in the higher appellate authorities.  The Supreme Court, in the G. BALA REDDY & ORS. VERSUS SECURITIES AND EXCHANGE BOARD OF INDIA & ORS. - 2019 (10) TMI 1590 - SC ORDER, dismissed the appeal filed by the appellant.  Thus, the order impugned attained finality.

Since the order attained finality SEBI issued a recovery certificate, dated 23.11.2021,  for the recovery of the said amount.  SEBI directed the appellant and others to pay a sum of Rs.66.34 crores along with further interest, all costs, charges and expenses within a period of 15 days from the date of receipt of the said notice.

The appellants challenged the said notice before the High Court on the ground that the same cannot be enforced as the proceedings under the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) and the provisions of the Provincial Insolvency Act, 1920 initiated against the appellants are pending and the orders of interim moratorium have been passed.

The Single Bench of the High Court entertained the writ petition. 
The High Court held that-

• the provisions of IBC have an overriding effect over the provisions of the SEBI Act;
• no interim moratorium orders have been passed in favour of the appellants’
• the proceedings initiated by the appellant No.2 and respondents No. 3 to 5 are still pending;
• only in respect of the appellant No. 1, the interim moratorium order has been passed under Section 96 of Code;
• the penalty imposed and sought to be recovered from the appellants by issuing the impugned certificate fall within the meaning of ‘fine’ which is excluded under clause (a) of sub-section (15) of Section 79 of the Code;
• therefore, the interim moratorium order issued in favor of the appellant No. 1 has no application to the penalty sought to be recovered under the impugned certificate.

Therefore, the High Court dismissed the writ petition on 19.09.2023.  The said order was challenged before the Divisional Bench of the High Court.

The appellants submitted the following before the High Court-

• The Single Judge of the High Court has wrongly equated the penalty under Section 15-I of SEBI Act synonymous with fine provided under Section 79(15)(a) of Code.
• The Legislature has provided for distinction between the penalty and fine.
• In the instant case, the penalty was imposed on the appellants.
• The penalty is levied by the Adjudicating Officer under Section 13(1) of Code and under Section 11C(6) and Section 11B(2) of the SEBI Act for violation of the provisions of Chapter VIA of the SEBI Act.
• The Adjudicating Officer, while acting under Section 15-I of the SEBI Act, neither is a Court nor is a Tribunal as provided under Section 79(15)(a) of Code.
• The interim moratorium commences from the date of filing of application under Sections 94 and 95 of IBC and the SEBI Act does not specify the National Company Law Tribunal, as required, to pass any specific formal order declaring the moratorium.

The respondents submitted the following before the High Court-

• There is no moratorium in favor of the appellants.
• Therefore, the respondents No. 1 and 2 are well within their rights to issue the impugned certificate and recover the amount due from the appellants.
• In this case the issue to be examined is as to whether the impugned levy is a penalty or a fine need not be examined and the aforesaid question be kept open to be adjudicated in an appropriate proceeding.

The High Court considered the submissions made by both the parties.  The High Court analyzed the provisions of Section 95, 96 and 101 of the Code.  The High Court observed that from conjoint reading of the aforesaid provisions, it is evident that once an application is admitted under Section 100, a moratorium shall commence in relation to all the debts and shall cease to have effect at the end of the period of 180 days beginning with the date of admission of the application or on the date the adjudicating authority passes an order on the repayment plan under Section 114, whichever is earlier.

The High Court further observed that in this case so far as appellant No. 1 is concerned, the period of moratorium commenced on 04.02.2022 which cease to operate on expiry of 180 days i.e., 04.08.2022.  In respect of appellant No. 2, the period of moratorium commenced on 13.12.2022 and the same expired on efflux of 180 days on 13.06.2023.  The Single Judge heard the case on 19.09.2023.  It is evident that no moratorium was in force in favor of the appellants.  Therefore, the High Court held that the respondents No. 1 and 2 were justified in issuing the impugned certificate under Section 28A of the SEBI Act.  Sections 121 to 124 of the Code do not apply to the facts of the case as the application under Section 122 was not filed when the Certificate under Section 28A of the SEBI Act was issued.

The High Court further held that the issue as to  whether the impugned levy is a fine or a penalty is also not required to be decided in the facts and circumstances of the case and we keep the same open to be adjudicated in an appropriate proceeding.

The High Court did not find any grounds to differ with the view taken by the learned Single Judge.  The High Court dismissed the appeal filed by the appellants.