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‘Bankruptcy code will prevail over SEBI Act in disposing of assets attached for CIS fraud’

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The National Company Law Tribunal (NCLT) order in the matter of collective investment schemes has acknowledged the overriding nature of Indian Bankruptcy Code (IBC) and has ruled that it may prevail over the SEBI Act.

Legal experts say SEBI’s low success rate in disposing of assets attached under collective investment scheme (CIS) fraud cases and returning money to investors could have prompted the NCLT’s move. SEBI has attached assets worth thousands of crores amassed under CIS in the past seven to eight years but its disposal is abysmally slow, experts say.

The Principal Bench of the NCLT presided by MM Kumar and SK Mohapatra ordered the release of assets belonging to corporate debtor HBN Dairies and Allied, which were attached as part of execution proceedings by SEBI.

The NCLT said, “SEBI is directed to de-attach properties of HBN and hand over its possession to the resolution professional (RP) to conduct corporate insolvency resolution process (CIRP) expeditiously, in accordance with the timeline in the Code.”

The Securities Appellate Tribunal (SAT) had upheld SEBI’s attachment order but experts have a different take on the conflict between the two tribunals. The question is one of disposing CIS assets expeditiously, they say.

Need for speedy justice

“Under Section 32 of the SEBI Act, application of other laws is not barred. Also, IBC Section 238 has overriding nature. The debate is not about superiority of NCLT versus SEBI or SAT. It needs to be looked into how to compensate investors or carry out the resolution process expeditiously and whether continuation of SEBI attachment advances or impedes that object. The balance of convenience should be seen,” said Sumit Agrawal of Regstreet Law Advisors and author of a book on the SEBI Act.

The IBC Act was so far limited to admission of SEBI case into insolvency proceedings. The NCLT’s stance was that once SEBI adjudicates a case, only then can insolvency be triggered and the tribunal did not look into cases pending SEBI investigation/final verdict despite the overriding nature of IBC Section 238.

The HBN Dairies case was admitted by the NCLT as investors cited delay in getting back their money. Nearly a year before HBN was admitted for CIRP, SEBI had passed asset attachment order after the 2015 adjudication. Yet recovery lagged. The NCLT has said it would henceforth be the RP’s mandate to take action.

Reaffirms supremacy

The NCLT found Sections 11 & 11B of SEBI read with Regulation 65 of (CIS) Regulations, 1999, in direct conflict with many IBC Sections. The NCLT order reaffirms IBC’s supremacy over other laws that could hurt insolvency proceedings.