This article has been written by Ms. Aarsha Prem, a 5th year LL.B. student from CLS GIBS college.

Introduction

A paradigm shift has been brought about by the Insolvency and Bankruptcy Code, 2016 (the “IBC”), particularly in the way debt collection procedures are started against insolvent corporate entities. It is recognised as the whole code in and of itself, modernising the outdated legal framework governing the insolvency of indebted businesses. Despite this, the Code’s jurisprudence is still hotly debated.

IBC

The 2016 Insolvency and Bankruptcy Law has changed the legal landscape. This code was adopted in response to many committee recommendations, including the Bankruptcy Law Reforms Committee’s report from November 2015. Due to the numerous provisions in various acts, such as the Companies Act of 2013, Recovery of Debt Due to Banks and Financial Institutions Act of 1993, Sick Industrial Companies (Special Provisions) Act of 1985, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002, and Presidency Towns Insolvency Act of 1919, insolvency cases in India used to take years to resolve. Due to the numerous proceedings caused by these regulations, case resolution was significantly delayed. This thorough code has been implemented to speed up resolution and streamline the entire process. In a timely way, this code aims to harmonise and reform the rules governing the reorganisation and bankruptcy resolution of corporate entities, partnership businesses, and individual debtors. 

The Indian government passed the Insolvency and Bankruptcy Code (IBC) in 2016, which codifies the laws governing corporate and individual insolvency and bankruptcy. The National Company Law Tribunal (NCLT) and the Insolvency and Bankruptcy Board of India (IBBI) were created by the law to serve as the administrative bodies in charge of managing the insolvency and bankruptcy procedure in India. The Insolvency and Bankruptcy Code (IBC) is a comprehensive piece of legislation that seeks to timely combine and change the laws governing the reorganisation and resolution of insolvency for corporate entities, partnership businesses, and private individuals.

SEBI

The Indian securities market is governed by the Securities and Exchange Board of India (SEBI). It was founded in 1992 with the intention of advancing the growth of the securities market and defending the interests of investors in securities. Regulation of the securities market, registration of securities market intermediaries, and enforcement of adherence to securities laws are all duties of SEBI. 

SEBI’s primary responsibilities include promoting the growth of the securities market, protecting the interests of investors in securities, and regulating the securities market, which encompasses: 

1. Registering and overseeing stock exchanges and other securities markets’ operations 
2. Mutual funds, venture capital funds, and other collective investment schemes should be registered, and their operation should be governed
3. Registering depositories and depositor participants, and governing their operations 
4. Registering and overseeing how credit rating agencies operate 
5. Regulating the significant purchase of shares and corporate takeovers 

Similarity between IBC and SEBI

IBC and SEBI are similar in that both regulations seek to safeguard the interests of stakeholders. Throughout the insolvency and bankruptcy resolution process, IBC tries to safeguard the interests of creditors, employees, and shareholders whereas SEBI aims to safeguard the interests of stockholders. 

Although both laws function independently, there are several instances where they intersect. For instance, in situations where a firm is on the verge of insolvency, the securities market regulator, SEBI, may also need to intervene to safeguard the interests of holders of that company’s securities. In a similar vein, IBC may need to intervene to safeguard the interests of a securities market intermediary’s creditors in situations when that intermediary is in danger of going bankrupt.

The fact that the IBC has simplified the procedure for handling insolvency and bankruptcy cases in India is one of its key effects. This has resulted in a resolution process that is more effective and efficient, which has helped make doing business in India easier. 

IBC has also resulted in a decrease in the amount of time needed to process bankruptcy and insolvency cases, which has improved India’s overall credit culture. On the other hand, SEBI is crucial in fostering the growth of the securities market, regulating the securities market, and defending the interests of investors in securities. This serves to safeguard the securities market’s fairness and integrity, which in turn supports investor confidence and draws in outside capital. In addition to protecting investors and preserving the general integrity of the securities market, SEBI’s regulations and oversight work to stop fraudulent and manipulative activities in the securities market.

Difference between IBC and SEBI

The scope of activities between IBC and SEBI is one of their main differences. IBC is applicable to partnerships, corporations, and people, whereas SEBI is concentrated on the securities industry. IBC has the authority to reorganise or dissolve a corporation, whereas SEBI has the authority to oversee the securities market. Their respective authorities also differ. The procedures used by SEBI and IBC to resolve non-compliance are also different. Whereas SEBI uses its own enforcement agency to deal with non-compliance, IBC handles it through the National Company Law Tribunal. 

In order to ensure that India’s overall financial and economic environment is favourable for businesses and investors, the Indian government has been taking steps to improve coordination between the various regulatory authorities, including IBC and SEBI. To coordinate the efforts of various regulatory bodies and make sure they are directed towards the same objective of fostering financial stability and economic growth in India, steps like the creation of the National Financial Reporting Authority (NFRA) and the Financial Stability and Development Council (FSDC) have been taken. While IBC aims to assist the prompt resolution of bankrupt enterprises, Sebi’s main goals are to protect the interests of investors in securities, promote the development of and regulate the securities market. Sebi and the IBBI have signed a Memorandum of Understanding to improve coordination between the two agencies. This may result in the 2016 Insolvency and Bankruptcy Code and Securities legislation being implemented effectively.

Conflict ground

The SEBI Act’s Section 28A gives SEBI the authority to seize and sell a person’s movable and immovable property, bank accounts, and other assets in order to recoup any fines it has imposed. However, section 238 of the IBC, which states that the provisions of the IBC must take precedence over any other legislation that is inconsistent with any of its provisions, applies to such recovery. As the non-obstante condition under section 238 applies, the pertinent question is whether SEBI can recover anything under section 28A. 

When deciding cases involving the overriding power under section 238 of the Constitution, the courts frequently took an asymmetrical approach. In Ms. Anju Agarwal v. Bombay Stock Exchange, the National Company Law Appellate Tribunal determined that section 14 of the IBC will take precedence over section 28A of the SEBI Act due to the non-obstante clause in section 238 of the IBC. Similar to this, the NCLAT ruled in Mr. Bohar Singh Dhillon v. Mr. Rohit Sehgal that SEBI was unable to recover any money or sell the corporate debtor’s assets. The non-obstante clause, in the broadest terms possible, is contained in section 238 of the IBC, according to the Supreme Court’s ruling in Innoventive Industries Limited v. ICICI Bank Limited, where it was stated that any right of the corporate debtor under any other law cannot conflict with the IBC. The adjudicating authority under Section 14 of the Insolvency and Bankruptcy Code, 2016 issues a moratorium upon admitting an application for the start of the corporate insolvency resolution process, prohibiting I the institution of suits, (ii) the continuation of pending suits, and (iii) the execution of any judgement, decree, or order against the corporate debtor. As a result, Section 14 offers the corporate debtor protection from all legal actions up until the conclusion of CIRP. By virtue of the non-obstante clause in Section 238 and the overriding effect it has over all other laws, the protection provided by Section 14 is further strengthened.

The overarching nature of the IBC and the provisions connected to the moratorium thereunder have generally been upheld by the courts in consistent fashion. The Securities and Exchange Board of India recently attempted to begin/continue proceedings or pursue the recovery of sums against the corporate debtor while a moratorium was in effect, and this resulted in a series of inconsistent judgements. Authorities including the Securities Appellate Tribunal, National Company Law Tribunal, and National Company Law Appellate Tribunal are responsible for these rulings. It is a well-established legal concept that the legislation passed later in time shall take precedence over the earlier one where there is any discrepancy between two laws, each of which has a unique character (generalia specialibus non derogant). It is maintained that the IBC should be viewed as an unique statute rather than the general provisions under the SEBI Act in light of the current legal concerns. The basis for this argument is that SEBI may exercise its broad power under Section 28-A(3) regardless of whether the entity it is pursuing action against is involved in an insolvency proceeding or not. The legal bar imposed by Section 14(1) is a unique rule that only applies for the brief period that the CIRP is in effect. IBC Section 14(1) should therefore take precedence over SEBI Section 28-A(3). 

Although if IBC and SEBI Act are both regarded as special statutes, it is argued that IBC should take precedence over SEBI Act because IBC was passed later. This is so that the later statute will always take precedence when two special laws have non-obstante clauses. This results from the assumption that the legislature knew about the earlier statute and its non-obstante provision at the time the later statute was passed. If the legislature continues to provide the later law a non-obstante provision, it is assumed that the legislature intended for that enactment to take precedence.

Case laws examined

In Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority and Ors., the SC noted that the intent of Section 14 was to establish a “statutory status quo” that would allow the IRP to carry out his duties effectively and on schedule, free from interference from outside parties. The case involved a conflict between the Maharashtra Housing and Area Development Act, 1976, and IBC. The SC held that the statutory freeze under the IBC should be “strictly adhered to,” noting that, unlike the Sick Industrial Companies Act, 1985 (“SICA”), which played a significant role in the previous insolvency regime, it is only in effect from the admission of the insolvency petition to the approval of the resolution plan or liquidation.

While reading Section 14 in light of the IBC’s Aim and Purpose, it is clear that all regulatory organisations, including SEBI and Stock Exchanges, will be subject to the ban imposed during the moratorium. 

The topic of whether the IBC’s provisions take precedence over those of the Prevention of Money Laundering Act of 2002 was recently presented before the National Company Law Tribunal in the case of SREI Infrastructure Financing Ltd. v. Sterling SEZ and Infrastructure Ltd. (2019). The Tribunal determined that the overriding provisions of Section 238 of IBC, when compared to the older legislation (i.e., PMLA), should prevail over PMLA because the criminal processes under PMLA take longer to complete and that delay can cause a significant decline in the value of assets. So, it has been determined that the Adjudicating Authority (under the PMLA) lacks the authority to seize the assets of a corporate debtor, and that any order for such an attachment that were to be made would be illegal and void.

Conclusion

By fostering an atmosphere that is favourable for businesses and investors to operate in, SEBI and IBC both have a positive impact on the Indian economy. IBC by providing a time-bound framework for bankruptcy and insolvency resolution, and SEBI by advancing the growth of the securities market and defending the interests of investors in securities. 

IBC and SEBI are two crucial regulations in India that have a big influence on the country’s economy. Although the IBC and SEBI are two separate statutes with different goals, they both aim to protect the interests of stakeholders. Although they have different mandates, authority, and procedures for handling non-compliance, they occasionally work together.

References

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