This question will now be decided by the Hon’ble Supreme Court in July 2019 in an Appeal filed by SEBI.

An interesting issue having wide ramifications over the interpretation of provisions of Insolvency & Bankruptcy Code (IBC) has reached Hon’ble Supreme Court.  In the year 2015 SEBI directed attachment of properties belonging to HBN Dairies and Allies Ltd. (HBN Diaries) which was allegedly running an unauthorized Collective Investment Scheme (CIS). As per SEBI’s order, HBN Dairies had collected approx. Rs. 1136 Crores under the said scheme from lakhs of investors. SEBI directed attachment of properties of HBN Dairies in order to return of dues to the depositors.

Some of the investors approached NCLT by initiated proceedings under IBC against HBN Dairies. On 14th August 2018, NCLT admitted the Application and appointed Mr. Rohit Sehgal as a Resolution Professional (RP) and directed de-attachment of HBN’s properties.  The said order was challenged before NCLAT. In the meantime, RP wrote to SEBI for de-attachment of properties as directed by NCLT. Since no action was taken by SEBI, RP filed an Application before NCLT, arraying SEBI as a party. After hearing the parties, NCLT held that in view of Section 238 of IBC, provisions of IBC will override provisions of SEBI Act and as such directed SEBI to handover title deeds of properties of HBN to RP.

Subsequently, on 9th May, Appeal filed against NCLT’s order of admission has been rejected by NCLAT taking the same view that IBC will have an overriding effect over provisions of SEBI Act.

Orders passed by NCLT and NCLAT have been challenged by SEBI before Supreme Court. The interesting issue which now arises before Hon’ble Supreme Court is whether depositors of a CIS can be treated as Financial Creditors under IBC, and whether provisions of IBC can be invoked in case of CIS which is regulated by the SEBI Act, 1992 and its Regulations.

Interestingly, it is SEBI’s argument that the two acts can co-exist since there is no conflict between the two, and that insofar as a CIS is concerned, SEBI alone will have jurisdiction as the dispute will not fall within the purview of IBC at all. 

Notices were issued by a vacation bench of the Supreme Court on 12th June 2019, only to the RP Mr. Rohit Sehgal. Court also directed Status Quo to be maintained and listed the matter on 17th June.

The case thus came up on 17th June’19 before the Hon’ble Supreme Court. RP Mr. Rohit Sehgal was represented by Ms. Meenakshi Arora, Senior Advocate along with Mr. Abhinav Shrivastava of GSL Chambers. SEBI was represented by Mr. C U Singh Sr. Adv along with Mr. Bhargava Desai. Advocates for some of the investors also appeared.

SEBI argued that assets of a CIS held by the Company in Trust on behalf of the investors. Thus, the Company has nothing to do with this Trust and that provisions of IBC are excluded insofar as these Schemes are concerned. SEBI has further argued that the depositors/investors in the scheme are not lenders but holders of units which are tradable in nature and as such they are not financial creditors under IBC. 

The said argument was opposed on behalf of RP and it was argued that the primary object of IBC is Resolution and not winding up. RP’s attempt is to save the company and not to kill it.  It was argued that CIS investors are also Financial Creditors and IBC will apply on them. In any event IBC is a much faster and speedier mechanism and overrides any other proceeding or statute in view of Section 238 of the Code.  As on date approx. 3 lakhs investors have already filed their claims before the RP.

After hearing the matter for some time, the Vacation Bench of Hon’ble Supreme Court has directed the matter to be placed before appropriate bench in July 2019 for hearing. Court has clarified that Status Quo is with regard to handing over of title deeds by SEBI to RP. However, SEBI will also not create any encumbrance over the properties. RP can continue with his proceedings under IBC.

It will be interesting to what view does the Hon’ble Supreme Court take in this matter.  Pertinently, Hon’ble Supreme Court has already held that the overriding provision of IBC is very wide and will exclude every other statute.