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SEBI’s U-turn on non-interference in winding up matters

Finsec Law Advisors

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On December 31, 2019, an adjudicating officer (AO) held that SEBI could proceed with adjudication proceedings against a company even though the company was under liquidation. This is contrary to the stance adopted by SEBI till now.

In the matter of Rajadhiraj Industries Ltd. (RIL), SEBI had initiated adjudication proceedings against the noticee company, RIL, for non-redressal of investor complaints within the stipulated period of time and failure to submit the action taken report to SEBI. During the proceedings, the Official Liquidator (“OL”) in the matter had inter alia informed the AO that RIL had been provisionally wound up by an order of the High Court of Madhya Pradesh. However, contrary to the stance taken by SEBI in the past, the AO came to the conclusion that SEBI’s adjudication proceedings against RIL would not be hampered on account of the appointment of the OL with respect to the liquidation of RIL. In the order, the AO held RIL liable for failing to redress investor complaints and imposed a penalty of Rs. 2,00,000/- on RIL.

In the past, with respect to adjudication proceedings against companies undergoing liquidation, pending proceedings have been halted and new proceedings have not been initiated by SEBI without seeking the leave of the liquidation court (presently the National Company Law Tribunal). For instance, in the matter of Everonn Education Ltd. (Everonn), during adjudication proceedings, it had come to the knowledge of the AO that the noticee company in that matter, Everonn, was under liquidation and that a liquidator had been appointed to inter alia take charge of the assets of Everonn. The AO held that as no approval had been taken from the appropriate court the adjudication proceedings against Everonn cannot be continued. Further, in the recent matter of ABG Shipyard Ltd. (ABG), the AO had opined that as liquidation proceedings had been initiated against ABG, it was mandatory and a pre-condition to obtain the leave of the National Company Law Tribunal (“NCLT”) for commencing any proceedings against ABG. As no leave was taken from NCLT, the AO held that the adjudication proceedings initiated against ABG was infructuous and could not be proceeded with. The present order does not seem to fall in line with the stance taken by SEBI in the past.

Further, the order seems to directly contradict section 33 of the Insolvency and Bankruptcy Code 2016 (“IBC”) and section 279 of the Companies Act, 2013 (“CA 2013”). The IBC, inter alia, provides that when a liquidation order is passed no suits or other legal proceedings shall be instituted against the concerned company. The CA 2013 stipulates that when a winding-up order is passed or an OL has been appointed no suits or other legal proceedings shall continue or be instituted against the company without the permission of the NCLT, and subject to the terms and conditions imposed by the NCLT. Furthermore, it is pertinent to note that SEBI has, in the past, considered adjudication proceedings of AOs to fall under the category of ‘other legal proceedings’ as provided under the Companies Act, 1956, CA 2013 and the IBC. In light of the above, in the present matter, the action taken by SEBI seems to be contrary to the powers granted to the regulator under the law.

Once liquidation proceedings are initiated in relation to a company, continuation or initiation of regulatory proceedings by various regulators against the said company has the potential to hamper the smooth conduct of liquidation proceedings under the law. Therefore, with regard to companies under liquidation, appropriate approvals should be taken by SEBI from the NCLT to continue with or to initiate fresh proceedings against a company.