The Principal Bench of National Company Law Tribunal (NCLT) recently ordered de-attachment of properties belonging to a corporate debtor, which were attached as part of execution proceedings by the Securities and Exchange Board of India (SEBI). The attachment order was also upheld by the Securities Appellate Tribunal (SAT). This particular case highlights the inherent conflict between provisions of the Insolvency and Bankruptcy Code (IBC) and the SEBI Act.

The interplay of IBC with the SEBI Act has so far been largely limited to the admission of a SEBI case into the Corporate Insolvency Resolution Process (CIRP). Insofar as a Collective Investment Scheme (CIS) is concerned, NCLT’s stance has been that once the case has finally been adjudicated upon by SEBI, insolvency can be triggered but while it is pending SEBI investigation/final verdict, the NCLT will not interfere despite the overriding nature of Section 238 of the IBC.

In this particular case, the corporate debtor HBN Dairies and Allies Ltd, an investment scheme operating as an unregistered CIS,  was admitted into CIRP based on an application filed by some investors. Almost one year before HBN was admitted into CIRP, a SEBI Recovery Officer had passed an attachment order, based on an order passed by the Adjudicating Officer in 2015. Subsequently, the SAT had upheld SEBI’s decision and ordered the sale of the assets as part of recovery proceedings.

At the time of admission by the NCLT, HBN, in its defence, had a raised a plea that its admission into CIRP would lead to conflict since recovery proceedings had already been initiated against by SEBI. At that point, the NCLT noted the overriding nature of Section 238 of the IBC and admitted the application. With respect to the ongoing recovery proceedings, the NCLT opined that it would henceforth be the Resolution Professional’s (RP) mandate to take action. The present application follows from this very issue.

The RP of HBN made an application to the NCLT requesting de-attachment of properties in view of Section 14 of the IBC, which imposes a moratorium prohibiting alienation of the corporate debtor’s properties.

The NCLT once again relied on Section 238, and the Supreme Court’s ruling in the case of Monnet Ispat and Energy to rule that anything inconsistent in any other law will be overridden by the IBC. The NCLT further found that Sections 11 & 11B of the SEBI act read with Reg 65 of the SEBI (CIS) Regulations, 1999 would directly be in conflict with Section 238 of the IBC, as well as many other sections, particularly Section 14  since execution proceedings can’t take place while CIRP is underway.

The order certainly reaffirms the supremacy of the IBC over other laws which may act as hurdles during the CIRP.  One of the key objectives of the CIRP is to enable the RP to retain a cohesive estate of the corporate debtor and this order certainly upholds that principle.

At the same time, however, this case raises questions over whether the NCLT as a tribunal, can pass orders invalidating orders of the SAT. Given that there is no clear hierarchical delineation between the NCLT and the SAT, the dispute may once again bounce back to the SAT for further instructions. Perhaps, the SEBI might choose to take this one to the Supreme Court for a conclusive judgment.