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SAT bars SEBI from initiating proceedings after moratorium declared under IBC

Finsec Law Advisors

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In its order dated October 09, the Securities Appellate Tribunal (SAT) ruled that SEBI cannot initiate or continue with existing proceedings against a company once a National Company Law Tribunal (NCLT) declares a moratorium in relation to the entity under the Insolvency and Bankruptcy Code, 2016 (IBC).

On November 29, 2019, the Reserve Bank of India had filed a company petition before an NCLT to initiate corporate insolvency resolution process against Dewan Housing Finance Corporation Ltd. (DHFL). The petition was admitted and subsequently, the NCLT imposed a moratorium in relation to DHFL to inter alia prohibit the institution or continuation of proceedings against DHFL. However, on December 24, 2019, an adjudication officer of SEBI (AO) issued a show-cause notice to DHFL for allegedly violating various securities laws. Though DHFL had argued that a moratorium had been declared under the IBC, the AO rejected DHFL’s contention and held the company liable for contravening the provisions of several securities laws. In the order, the AO imposed a penalty of INR 20 lakh and directed DHFL to pay the amount within 45 days from the receipt of the order. Being aggrieved by the same, DHFL filed an appeal before SAT challenging the validity of the order.

In its reply, SEBI argued that even if a moratorium is declared in relation to a corporate debtor, SEBI could initiate or continue with proceedings against the entity to determine its liability and impose a penalty on it. However, the moratorium would restrict SEBI from initiating subsequent enforcement and recovery proceedings for against the corporate debtor. To defend its stance, SEBI relied upon the Insolvency Law Committee Report dated March 2018, wherein the committee had inter alia analysed section 14 of the IBC. In the report the committee had observed that a moratorium on proceedings against a corporate debtor to merely assess or determine its liability may not have been the intent of the IBC.

SAT disagreed with the arguments made by SEBI and took note of various Supreme Court judgements including the Alchemist Asset Reconstruction Company Ltd. v. Hotel Gaudavan Pvt. Ltd. and the M/s. Innoventive Industries Ltd. vs. ICICI Bank Ltd., wherein the apex court had clarified that the overriding effect of a moratorium declared under the IBC over other existing and potential suits/proceedings against a corporate debtor. Further, SAT opined that SEBI could not take the help of any external aid to interpret the scope of section 14 when there is no ambiguity in the law. SAT held that once a moratorium is declared under section 14 in relation to a corporate debtor, SEBI will not have any jurisdiction to institute or continue existing proceedings against the corporate debtor. In light of the above, SAT set aside SEBI’s impugned order and quashed the show cause notice.

This order will help to preserve the asset of corporate debtors and allow available resources to be utilised effectively towards completing the insolvency resolution process as stipulated under the IBC.