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TMI Blog2024 (12) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... propriate, there is no question of SEBI acting ultra vires. Accordingly, the Impugned Regulation, i.e. Regulation 3 (2) (b) (i), providing that the Delisting Regulations shall not apply in the case of delisting of equity shares pursuant to a resolution plan approved under Section 31 of the IBC cannot be regarded as ultra-vires the SEBI Act or the rules made thereunder. Respondent contention about harmonious construction of the SEBI Act, 1992 provisions, the Delisting Regulations, the IBC and CIRP Regulations has considerable merit. By striking down the Impugned Regulations, we would introduce a conflict between the SEBI Act/Regulations on the one hand and the IBC/CIRP Regulations on the other. Even in such a conflict, in all probability, the provisions of the IBC/CIRP Regulations would prevail, given that the IBC is later legislation that has been given an overriding effect. In contrast, the SEBI is an earlier legislation, and Section 32 of the SEBI Act, as noted earlier, provides that the provisions of the SEBI Act, 1992 shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force. The arguments based on the consultation paper or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Parliament passed the draft code as the Insolvency and Bankruptcy Code, 2016. The aim of the IBC is to rehab a company rather than liquidate it. The legislature made a conscious decision to accord priority to the financial creditors. A moratorium is provided during which period the company's creditors cannot sue it. However, some provisions effectively exclude the erstwhile owners from management. The Committee of Creditors (CoC), which comprises the corporate debtor s financial creditors, can make significant decisions during the CIRP process. One of the most important decisions is considering and approving the resolution plan proposed by the prospective buyer. This resolution plan is expected to contain details about the company's revival, how various creditors would be paid off, the treatment of shares, and other financial decisions. Once approved, the resolution plan will bind all creditors and stakeholders. The challenge to the NCLT s impugned order dated 27 February 2024 was premised upon such an order being based on the Impugned Regulation, which, according to the Petitioner, was ultra vires. This premise was misplaced. Still, now that we have found no infirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as the Resolution Professional ( RP ) for RCL s CIRP. 5. The Resolution Plan submitted by Respondent No.3 ( R3 ) was approved by the Committee of Creditors ( CoC ). The NCLT, vide the impugned order dated 27 February 2024, has also approved the plan, which, among other things, nullifies 98.49% of RCL s public shareholding. According to the Petitioner, the plan is currently pending implementation. The Petitioner has been an investor in the securities market since 2013 and acquired 6,700 shares (o.oo3%) of RCL in November 2022, well after the company was admitted to CIRP on December 6, 2021. 6. Ms Goradia learned counsel for the Petitioner, submitted that the Impugned Regulation is ultra-vires the Securities and Exchange Board of India Act, 1992 ( SEBI Act ). She submits that the object of the SEBI Act is to protect the interests of the investors, and it is the duty of SEBI to protect the interests of investors in the securities market. The Delisting Regulations are made in pursuance of SEBI's primary function, which is to protect the interests of investors. The Impugned Regulation provides for delisting equity shares pursuant to a resolution plan approved under the Insolvenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sting without any procedure. She submitted that allowing such delisting without any procedure or procedural safeguards prejudicially affects the interest of public equity shareholders and investors. Accordingly, at least under the SEBI Act, no such regulations could ever have been framed. The Impugned Regulations are ultra-vires the SEBI Act and travel way beyond the scope and import of the SEBI Act. 10. Ms Goradia pointed out that in the review of the 2009 Regulations, which led to the enactment of the 2021 Delisting Regulations, a recommendation was made for deleting Regulation 3(2). However, there was no recommendation for replacing Regulation 3(2) with the impugned regulation. Therefore, the replacement of former Regulation 3(2) with the impugned Regulation 3 (2) (b) (i) is patently illegal and ultra-vires since the same is not backed by any recommendation based upon which the impugned regulation could have been enacted. 11. Ms Goradia submitted that in enacting the Impugned Regulation, the SEBI has deviated from putting mechanisms in place where promoters are personally liable to offer an exit route to shareholders if the company is driven to the ground by them. Such departure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mproper or false in this Petition in the absence of the Petitioner producing any material or filing any appeal before the National Company Law Appellate Tribunal ( NCLAT ) to impugn the order dated 27 February 2024 by which the NCLT accepted such valuation. Given this admitted position, the Petitioner would stand to no benefit if RCL were to be wound up. He submitted that the Petitioner could not be said to be prejudiced by the Impugned Regulations and maintain a Petition to challenge the same. 16. Mr Doctor submitted that before the introduction of the Impugned Regulations, there were similar provisions concerning delisting in the erstwhile Sick Industrial Companies Act of 1985. He submitted that the IBC has an overriding effect over other enactments. He submitted that the IBC is a complete code, and the resolution plan, approved under the IBC, binds the Corporate Debtor, its employees, members, creditors, etc. He submitted that the Impugned Regulations accept this legal position and exclude delisting under the IBC. He submitted that even without the impugned regulations, the IBC and the orders made under the IBC would prevail over the Delisting Regulations. He relied on Ghanashya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, including members like the Petitioner. He submitted that these are statutory consequences that would override and prevail over anything inconsistent or contrary thereto contained in any other law, given the provisions of Section 238 of the IBC. He submitted that the Impugned Regulations, by exempting the delisting pursuant to a resolution plan approved under Section 31 of the IBC from the applicability of the Delisting Regulations, only recognises this legal position and, therefore, there is nothing ultra-vires or arbitrary in these Impugned Regulations. 23. Mr Kadam also pointed out that IBC is a complete code, being an amending and consolidating act. He submitted that the maximisation of the value of assets and the expeditious resolution of the corporate debtor are the core objects of IBC. He submitted that to achieve these objects, Section 30 (2) of the IBC enacts that the resolution professional shall examine each resolution plan received by him and confirm that the same conforms to the requirements prescribed under clauses (a) to (f) of Section 30 (2). He also referred to the provisions of Section 30 (4), 53 (1) and 240(1) of the IBC to support his arguments. He relied on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authority approved the resolution plan on 27 February 2024. In any event, he submitted that such a contention was misconceived since Sections 30 and 31 of the IBC do not provide for any prior notice to the equity shareholders of the CoC voting on the plan or sanctioning it by the Adjudicating Authorities. 29. Mr Kadam submitted that the Petitioner was almost a busybody. Otherwise, he would have appealed to NCLAT, raising valuation issues, etc., within the prescribed limitation period. He submitted that the Petitioner, who invested after the CIRP was reasonably advanced, cannot now complain about the legal consequences or challenge the Impugned Regulations and the NCLT s order. 30. Mr Kadam submitted that the Article 14 challenge, which was not even seriously pressed, is entirely misconceived. He submitted that likes have been treated alike, and neither the Petitioner nor any other shareholders have been discriminated against. He referred to the former provisions applied to seek an insolvent company and pointed out that there was no appreciable difference. 31. Mr Kadam finally submitted that the SEBI Act, the Delisting Regulations, the IBC and CIRP Regulations were all economic legi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is based upon the Impugned Regulations, would not survive and will have to be set aside. 37. For all the above reasons, Ms Goradia submitted that this Petition be allowed, and the reliefs prayed for be granted. 38. The rival contentions now fall for our determination. 39. The admitted facts relevant to appreciating the Petitioner s challenges in this Petition are as follows: - (a) The RBI, in exercising its powers under Section 45-IE of the Reserve Bank of India Act, 1934 by order dated 29 November 2021, superseded the Board of Directors of RCL and appointed R2 as the Administrator. (b) On 2 December 2021, the RBI filed C.P.(IB)/1231/MB/2021 before the NCLT for admitting RCL to CIRP under the IBC. (c) On 6 December 2021, the NCLT admitted RBI s Petition and RCL was admitted to CIRP. In terms of the IBC, the date of admission i.e. 6 December 2021 is the Insolvency Commencement Date ( ICD ); (d) Almost a year after the ICD i.e. November 2022, the Petitioner purchased 6,700 shares of RCL, corresponding to a minuscule percentage (0.003%) of RCL s shareholding. This is significant because this purchase by the Petitioner, which claims to be an investor, was well after RCL was admitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, which holds that the liquidation value of the equity shareholders is nil and, therefore, the equity shareholders will not be entitled to any payment. Again, the impugned NCLT order dated 27 February 2024 directs delisting as per the conditions in the impugned order and the Delisting Regulations. Simply because the challenge to the impugned NCLT order dated 27 February 2024 was found difficult, mainly since the Petitioner failed to appeal the same to the NCLAT, the contention about liquidation value having no bearing or being irrelevant to the main challenge in the Petition cannot be raised or in any event, accepted. 43. On a cumulative consideration of significant facts like the Petitioner purchasing minuscule percentage of the RCL shares after RCL was admitted into the CIRP on 2 December 2021 and the failure to challenge the impugned NCLT order dated 27 February 2024 by instituting an appeal within the prescribed limitation period before the NCLAT, we are doubtful about the motives of the Petitioner in instituting the present Petition. In any event, the Petitioner may not be the proper relator in the facts of the present case to question the Impugned Regulations. Still, we do n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 30, Section 11 (1) and Section 11-A (2) of the Securities and Exchange Board of India Act, 1992 - SEBI Act. 47. SCRA was enacted to prevent undesirable transactions in securities by regulating the business of dealing therein and providing certain matters connected therewith. Section 21-A of SCRA is concerned with the delisting of securities. Section 31 (1) of SCRA empowers SEBI to make regulations consistent with the provisions of the Act and rules made thereunder to carry out the purposes of SCRA. Section 31 (2) provides that, in particular, and without prejudice to the generality of the powers conferred by Section 31 (1), such regulations may provide for all or any of the matters specified in clauses (a) to (d). 48. The SEBI Act was enacted to provide for the establishment of a Board to protect the interest of the investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto. Section 11 (1) of the SEBI Act provides that subject to provisions of the Act, it shall be the duty of the Board to protect the interest of the investors in securities and to promote the development of, and to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owers conferred by the two enactments upon the SEBI, which is constituted as the regulator to regulate the securities market and the matters incidental thereto or connected therewith. 54. Considering the objectives for enactment of SCRA and SEBI Act, the specific sections under which the Delisting Regulations have been framed by SEBI the width of the powers conferred upon SEBI for preventing undesirable transactions in securities, for protecting the interest of the investors in securities and to promote the development of and regulate the securities market, we are unable to accept the contention that the Impugned Regulation is ultra-vires the SEBI s powers conferred upon the SEBI by SCRA and the SEBI Act. 55. In Shilpa Stock Broker Pvt. Ltd. and another vs. Securities and Exchange Board of India 2012 SCC OnLine Bom 58 the Division Bench of this Court comprising D. Y. Chandrachud and A. A. Sayed, JJ (as their Lordships then were) explained that the securities market impinges upon investor wealth. Investors as a body represent the collective wealth of numerous individual investors. Trading on the stock exchanges and conducting business on the stock exchanges has a material impact on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a listed company made pursuant to a resolution plan approved under the IBC would result in entirely ignoring the investors' interest or withdrawing the greater protection earlier granted to the investors. 59. The above premise is incorrect because sufficient safeguards are also provided under the IBC to protect the interest of the shareholders and investors by at least attempting to maximise the corporate debtor's assets and resolve issues of insolvency or bankruptcy of a corporate debtor expeditiously. The extent of the protection to be granted or how such protection must be given are mainly legislative or quasi-legislative policy matters in which the Courts have a minimal role. As discussed later, this principle applies with even greater vigour when dealing with economic legislation. 60. In State of Tamil Nadu and another vs. P. Krishnamurthy and others (2006) 4 SCC 517 , the Hon ble Supreme Court explained that there is a presumption in favour of the constitutionality or validity of subordinate legislation. The burden is upon the petitioner, who attacks the subordinate legislation to show that it is invalid, among other things, because it exceeds the limit of authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the Real Estate Regulatory Authority Act and the IBC, which the Hon ble Supreme Court had to resolve in the case of Jaypee Kensington Boulevard Apartments Welfare Association and others (supra). The Court, upon analysis of the two enactments and even in the absence of a provision like the Impugned Regulation, held that in the event of a clash, RERA must give way to IBC because RERA cannot be regarded as a Special statute that would override the IBC. The Court relied upon the decisions that have repeatedly held that the IBC is a complete code with an overriding effect using a non-obstante clause in Section 238 of the IBC. 66. Given the provisions of Sections 231 and 238 of the IBC, the Hon ble Supreme Court held that once the CoC and the Adjudicating Authority formulate a resolution plan, such resolution plan shall bind all stakeholders. The provisions of the IBC will prevail over other laws and instruments having effect under any such laws. The Court also held that the commercial wisdom of the CoC must be given some precedence in matters of approving a resolution plan. This is yet another reason to hold that the Impugned Regulation is not ultra-vires. 67. In Ghanashyam Mis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the SEBI Act/Regulations on the one hand and the IBC/CIRP Regulations on the other. Even in such a conflict, in all probability, the provisions of the IBC/CIRP Regulations would prevail, given that the IBC is later legislation that has been given an overriding effect. In contrast, the SEBI is an earlier legislation, and Section 32 of the SEBI Act, as noted earlier, provides that the provisions of the SEBI Act, 1992 shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force. 71. The arguments based on the consultation paper or the review of 2009 are not grounds for declaring the Impugned Regulations as ultra-vires. Ultimately, these are suggestions for the formulation of policy. It is not as if such consultation papers or reviews bind the SEBI, particularly in exercising its quasi-legislative powers of framing regulations. The suggestions in the consultation paper or the review must be considered from the perspective that we are dealing with economic legislation based on experimentation where wide latitude must be given to the legislative bodies. 72. The review of SEBI (Delisting of Equity Shares) Regulations, 2009 (Exhibit F ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 30 and 31 of the IBC cannot be ignored. The relative positions of the different enactments dealing with the protection of investors and the regulation and development of securities markets is also significant. The Petitioner has not challenged any provisions of the IBC, perhaps conscious that the Hon ble Supreme Court has already upheld the constitutional validity of the enactment comprehensively in Swiss Ribbons (Supra). Therefore, if the delisting is in pursuance of such an approved resolution plan, there is no question of arbitrariness or breach of the equality clause under the Constitution. 77. The SCRA, SEBI Act, IBC, and the rules and regulations framed thereunder are examples of economic legislation. The Hon ble Supreme Court has repeatedly held that when dealing with issues of constitutionality of economic legislation, the legislature must be given a wide berth and free play in the joints. Apart from the presumption of constitutionality, the Courts must defer to the economic choices made by the legislature. Even under inclusion would not result in a death knell of such laws on the anvil of Article 14 of the Constitution of India. 78. The Court has held that economic le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporate debtor s financial creditors, can make significant decisions during the CIRP process. One of the most important decisions is considering and approving the resolution plan proposed by the prospective buyer. This resolution plan is expected to contain details about the company's revival, how various creditors would be paid off, the treatment of shares, and other financial decisions. Once approved, the resolution plan will bind all creditors and stakeholders. [Saurabh Kirpal, Fifteen Judgments-Cases that Shaped India s Financial Landscape (VINTAGE, 2022).] 83. The challenge to the NCLT s impugned order dated 27 February 2024 was premised upon such an order being based on the Impugned Regulation, which, according to the Petitioner, was ultra vires. This premise was misplaced. Still, now that we have found no infirmity in the Impugned Regulations, the challenge to NCLT s impugned order dated 27 February 2024 fails and is liable to be rejected. 84. The argument that the Petitioner was not given notice before the CoC voted to approve the resolution plan is misconceived, given the facts of the present case referred to in paragraph 39 above, the provisions of sections 30 and 31 ..... 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