Dewan Housing Finance Corporation Ltd. vs Sebi
- CitationAppeal No.206 of 2020
Ratio decidendi
The rule this decision rests on
Where a moratorium has been declared under section 14(1) of the Insolvency and Bankruptcy Code, 2016, the adjudicating authority or regulator (here SEBI/AO) has no jurisdiction to institute proceedings against the corporate debtor, and a proceeding instituted after the moratorium has come into effect cannot be continued; the prohibition on institution of proceedings applies to the initiation of adjudicatory proceedings under the SEBI laws, not only to their enforcement or recovery. External aids to construction, such as a committee report, may be considered only where the statutory provision is ambiguous; where section 14 is clear and explicit and has been authoritatively explained by the Supreme Court, the adjudicating authority cannot resort to such aids to conclude that it may proceed notwithstanding the moratorium.
Written by Miss Lucy from the judgment below, not taken from a headnote.
Judgment
As delivered
BEFORE THE SECURITIES APPELLATE TRIBUNALMUMBAIOrder Reserved on: 15.9.2020Date of Decision: 09.10.2020Appeal No.206 of 2020Dewan Housing Finance Corporation Ltd.1.Registered office at Warden House,2nd Floor, Sir P.M. Road,Fort, Mumbai - 400001.2. National Office at HDIL Tower,6th Floor, Anant Kanekar Marg,Bandra (East), Mumbai 400051. ... AppellantVersusSecurities and Exchange Board of India1. SEBI Bhavan, Plot No.C4-A,G Block, Bandra Kurla Complex,Bandra (East), Mumbai - 400051.2. Mittal Court 'B' & 'C', 1st Floor,224 Nariman Point, Mumbai - 400021,Maharashtra. ... RespondentMr. Ashish Kamat, Advocate with Mr. Vivek Shetty andMr. Nishant Upadhyay, Advocates i/b AZB & Partnersfor the Appellant.Mr. Mustafa Doctor, Senior Advocate with Mr. MihirMody and Mr. Shehaab Roshan, Advocates i/b K. Asharand Co. for the Respondent.2CORAM: Justice Tarun Agarwala, Presiding OfficerDr. C.K.G. Nair, MemberJustice M.T. Joshi, Judicial MemberPer : Justice Tarun Agarwala, Presiding Officer1. The present appeal has been filed questioning thelegality and validity of the order dated 29th May, 2020passed by the Adjudicating Officer under section 15-1of the Securities and Exchange Board of India Act,1992 (hereinafter referred to as 'SEBI Act') wherebythe authority has imposed a penalty on the appellantfor a sum of Rs.20 lakhs under section 15A(b) and15HB of the SEBI Act. By the impugned order, theappellant was directed to pay the amount within 45days from the receipt of the impugned order failingwhich recovery proceedings would be initiated undersection 28A of the Act.2. The facts leading to the filing of the present appealis, that the appellant is a housing finance company, andat present, is undergoing corporate insolvencyresolution process. On 20th November, 2019, the3Reserve Bank of India (hereinafter referred to as'RBI') suspended the board of directors of theappellant under section 45-IE(2) of the Reserve Bankof India Act, 1934 and appointed an administrator tomanage the affairs of the company. On 29thNovember, 2019 RBI filed a Company Petition beforethe NCLT under Rule 5(a)(1) of the Insolvency andBankruptcy (Insolvency and liquidation proceedings offinancial service provider and application toAdjudicating Authority) Rules, 2019 to initiatecorporate insolvency resolution process against theappellant under the provisions of The Insolvency andBankruptcy Code, 2016. The petition was admitted byNCLT by an order of 3rd December, 2019 and theadministrator was appointed as the resolutionprofessional. The moratorium provided under section14 came in force upon the filing of the application byRBI under Rule 5(a)(i) of the Insolvency andBankruptcy (Insolvency and liquidation proceedings offinancial service provider and application to4Adjudicating Authority) Rules, 2019 on 29thNovember, 2019 in view of Rule 5(b) of the said rules.3. On 24th December, 2019, the adjudicating officerissued a show cause notice to the appellant under Rule4 of the Securities and Exchange Board of India(Procedure for Holding Inquiry and Imposing Penaltiesby Adjudicating Officer) Rules, 1995 to show cause asto why penalty should not be imposed for non-compliance of the provisions of Regulation 16(1) ofSecurities and Exchange Board of India (Issue ofListing of Debenture Securities) Regulations, 2008(hereinafter referred to as 'ILDS Regulations') readwith Rule 18(7)(b)(ii) and 18(7)(c) of Companies(Share Capital and Debentures) Rule, 2014 (hereinafterreferred to as 'Share Capital and Debenture Rules")and Regulation 52(1) read with Regulation 52(4) ofSecurities and Exchange Board of India (ListingObligations and Disclosure Requirements)Regulations, 2015 (hereinafter referred to as 'LODRRegulations").54. The show cause notice alleged that the appellantfailed to create requisite debenture redemption reserveand failed to invest 15% of the amount of non-convertible debentures maturing as on 31st March,2020 as required under the ILDS Regulations andfailed to submit the audited financial result and lineitems as prescribed in the LODR Regulations.5. In response to the show cause notice, the appellantsubmitted a reply dated 9th January, 2020 pointing outthat in view of section 14 of Insolvency andBankruptcy Code (hereinafter referred to as 'IBC') noproceedings could be instituted or continued during thecurrency of the moratorium period. In support of hissubmission the appellant also placed reliance uponcertain decisions of the Supreme Court.6. The adjudicating officer, after considering thematter, passed the impugned order imposing a penaltyof Rs.20 lakhs upon the appellant. The adjudicatingofficer while imposing the penalty held that themoratorium declared under section 14 of the IBC6would not prevent the adjudicating officer fromdetermining the liability of the corporate debtor andthat the moratorium declared under the IBC would beapplicable to the enforcement/recovery of thedetermined liability and that the instant proceedingsare in the nature of determining the liability for thealleged non-compliance of the LODR Regulations andother Rules. For facility, the relevant finding of theadjudicating officer in this regard is extractedhereunder:-"I note from the above observations of theInsolvency Law Committee that a proceeding forassessing or determining the liability is differentfrom a proceeding initiated to recover the assessedor determined liability. The Committee furtherobserves that a moratorium on determination of theliability may not have been the intent of the IBC.Hence, I am of the view that the moratoriumdeclared under section 14 of the IBC will notprevent instant proceeding from determining theliability of the corporate debtor and themoratorium declared under the IBC will beapplicable to the enforcement/recovery of thedetermined liability. I note that the instantadjudication proceedings against the Noticee are inthe nature of determining the liability of theNoticee for the alleged non-compliance of relevantprovisions of the ILDS Regulations, 2008 andLODR Regulations, 2015 and hence the same canbe continued."77. We have heard Mr. Ashish Kamat, Advocateassisted by Mr. Vivek Shetty and Mr. NishantUpadhyay, Advocates for the Appellant and Mr.Mustafa Doctor, Senior Advocate assisted by Mr.Mihir Mody and Mr. Shehaab Roshan, Advocates forthe Respondent through video conference.8. The contention of the learned counsel for theappellant is, that the impugned order passed by theadjudicating officer is not only illegal but perverse andis directly against the judgement of the Supreme Courtin the case of Alchemist Asset ReconstructionCompany Ltd. vs. Hotel Gaudavan Pvt. Ltd & Ors.(2018) 16 SCC 94 and in the case of Rajendra K.Bhuta vs. Maharashtra Housing and AreaDevelopment Authority (2020) SCC Online 292. Itwas contended that the adjudicating officer haspatently ignored the decision of the Supreme Courtinspite of it being cited and has ventured into giving afinding that he has the power to proceed which isdirectly against the decision of the Supreme Court and8amounts to contempt of the decision of the SupremeCourt. The learned counsel further contended that theprovisions of section 14 is patently clear and explicitand is not vague which requires use of an external aid.It was submitted that when the provision is clear andthere is a direct decision of the Supreme Court it wasnot open to the adjudicating officer to use external aidin interpreting the provisions of section 14 of the IBC.The learned counsel contended that the use of externalaid by the adjudicating officer while relying upon theInsolvency Law Committee's Report dated March,2018 was wholly erroneous and amounts to contemptof the decision of the Supreme Court.9. On the other hand, the learned senior counsel for therespondent submitted that he has instructions to statethat the order of the adjudicating officer to the extentof directing the appellant to pay the amount and onfailure to pay the amount the recovery proceedingswould be initiated was incorrect and against the tacitprovisions of section 14 of the IBC. It was contendedthat to that extent the respondent will not seek to9recover the amount during the moratorium period. Thelearned senior counsel however contended that theambit of the word 'proceedings' under section 14(1)(a)of the IBC needs to be given a wider meaning and ifone considers the Insolvency Law Committee Reportof March, 2018 one would find that the IBC Act andmoratorium prescribed under section 14 was basicallyfor the creditors and not for the regulators/statutoryauthorities, namely, the respondent. It was submittedthat the proceedings for assessing or determining theliability was different from proceedings initiated todetermine the assessed liability. The learned seniorcounsel contended that the moratorium declared undersection 14 of the IBC does not prevent the adjudicatingofficer from determining the liability of the corporatedebtor and that the moratorium declared under IBCwould be applicable only to the enforcement/recoveryof the determined liability. The learned counsel thuscontended that the adjudicating officer had full powersto proceed against the appellant for the purpose ofdetermining the liability for the alleged non-10compliance of the ILDS Regulations and the LODRRegulations. In support of his submission the learnedsenior counsel placed reliance on a decision ofSupreme Court in the case of Babu Lal vs. M/s. HazariLal Kishori Lal & Ors. (1982) 1 SCC 525 and in P.L.Kantha Rao and Others vs. State of A.P. & Ors. (1995)2 SCC 471 wherein the word 'proceedings' have beenexplained.10. Having heard the learned counsel for the parties atsome length it would be appropriate to peruse section14(1) of the IBC which is extracted hereunder:-"Moratorium14(1). Subject to provisions of sub-sections (2) and(3), on the insolvency commencement date, theAdjudicating Authority shall by order declaremoratorium for prohibiting all of the following,namely: -(a) the institution of suits or continuation ofpending suits or proceedings against thecorporate debtor including execution of anyjudgement, decree or order in any court of law,tribunal, arbitration panel or other authority;(b) transferring, encumbering, alienating ordisposing off by the corporate debtor any of itsassets or any legal right or beneficial interesttherein;11(c) any action to foreclose, recover or enforceany security interest created by the corporatedebtor in respect of its property including anyaction under the Securitisation andReconstruction of Financial Assets andEnforcement of Security Interest Act, 2002;(d) the recovery of any property by an owner orlessor where such property is occupied by or inthe possession of the corporate debtor.11. A perusal of the aforesaid provision indicates thatthe adjudicating authority by order declaremoratorium for prohibiting the institution of suits orcontinuation of pending suits or proceedings againstthe corporate debtor including execution of anyjudgement or order in any court of law, tribunal,arbitration panel or other authority.12. In our view, the provision is clear and explicitand needs no further elaboration. Pursuant to amoratorium declared under section 14 the institutionof suits or proceedings against the corporate debtoris prohibited or continuation of a suit orproceedings. Further, execution of any judgementor order in any court of law, tribunal, arbitrationpanel or other authority is also prohibited.1213. Thus, where a moratorium has been declaredunder section 14 of IBC, the authority which in theinstant case is SEBI/AO will have no jurisdiction toinstitute any proceedings. Where a proceeding hasalready been instituted and during the pendency ofthe proceedings a moratorium order is passed undersection 14 then the authority is prohibited fromcontinuing with the proceedings. This is clear froma bare reading of the provisions of section 14(1) ofthe IBC.14. In Alchemist (supra) the facts in brief are thatdespite a moratorium issued under section 14(1)(a)of the IBC an arbitrator was appointed who enteredupon reference and issued notices to the parties.The Supreme Court held :-"4. The mandate of the new Insolvency Code isthat the moment an insolvency petition isadmitted, the moratorium that comes into effectUnder Section 14(1)(a) expressly interdictsinstitution or continuation of pending suits orproceedings against corporate debtors.5. This being the case, we are surprised that anarbitration proceeding has been purported tobe started after the imposition of the saidmoratorium and appeals under Section 37 of13the Arbitration Act are being entertained.Therefore, we set aside the order of the DistrictJudge dated 6.7.2017 and further state that theeffect of Section 14(1)(a) is that the arbitrationthat has been instituted after the aforesaidmoratorium is non est in law."15. In Rajendra K Bhutta (supra) the Supreme Courtwhile considering the provisions of section 14(1)(d)of the insolvency code held as under:-"However, when it comes to any clash betweenthe MHADA Act and the Insolvency Code, on theplain terms of Section 238 of the InsolvencyCode, the Code must prevail. This is for the verygood reason that when a moratorium is spoken ofby Section 14 of the Code, the idea is that, toalleviate corporate sickness, a statutory statusquo is pronounced under Section 14 the moment apetition is admitted under Section 7 of the Code,so that the insolvency resolution process mayproceed unhindered by any of the obstacles thatwould otherwise be caused and that are dealtwith by Section 14. The statutory freeze that hasthus been made is, unlike its predecessor in theSICA, 1985 only a limited one, which is expresslylimited by Section 31(3) of the Code, to the dateof admission of an insolvency petition up to thedate that the Adjudicating Authority either allowsa resolution plan to come into effect or states thatthe corporate debtor must go into the liquidation.For this temporary period, at least, all the thingsreferred to under Section 14 must be strictlyobserved so that the corporate debtor may finallybe put back on its feet albeit with a newmanagement."1416. Reliance was also made by the counsel for theappellant to the two decisions of NCLT in Ms. AnjuAgarwal vs. Bombay Stock Exchange & Ors.Company Appeal (AT) (Insolvency) No.734 of2018 decided on 10th September, 2018 and Mr.Bohar Singh Dhillon vs. Mr. Rohit SehgalCompany Appeal (AT) (Insolvency) No.665 of2018 decided on 14th August, 2018 wherein theNCLT held that Section 28A of the SEBI Act wasinconsistent with Section 14 of the IBC and,therefore, section 14 would prevail and SEBI cannotrecover any penalty from corporate debtor.17. In addition to the aforesaid in M/s. InnoventiveIndustries Ltd. vs. ICICI Bank Ltd. (2018) 1 SCC407 the Supreme Court held that any proceedingsunder any law against a corporate debtor cannot beproceeded once moratorium is in effect. It isapparently clear that once moratorium has beendeclared under section 14, SEBI/AO cannot proceedunder the SEBI laws against a corporate debtor.1518. In the light of the aforesaid, the contention of therespondent that the word 'proceedings' depicted insection 14(1) has to be given an expansive meaningcannot be considered either by the adjudicatingofficer as it would amount to contempt of court. Inany case, the prohibition is on the institution of aproceeding. In the instant case, the moratoriumkicked in when the petition was filed on November,2019 under Rule 5(a)(i) of the Insolvency andBankruptcy (Insolvency and liquidation proceedingsof financial service provider and application toAdjudicating Authority) Rules, 2019 and thereafterit was admitted on 3rd December, 2019. Theadjudicating officer issued notice subsequently on24th December, 2019. It is quite clear that theproceedings was initiated by the adjudicating officerafter the moratorium had come into effect. In ourview no proceedings could be instituted in view ofsection 14(1) of the Act.19. We are also of the opinion that external aid canonly be considered when there is an ambiguity in16the provision. In this regard, the provision ofsection 14 is very clear and explicit and there is noroom for any ambiguity. Further, the SupremeCourt has categorically explained the effect ofsection 14 of the IBC. We, therefore, find that theadjudicating officer could not have considered thereport of the insolvency committee to come to theconclusion that he had the power to proceed underSEBI law inspite of a moratorium having come intoeffect under section 14 of the IBC.20. For the reasons stated aforesaid, the impugnedorder imposing a penalty and proceeding to recoverunder section 28A of the Act upon failure to paycannot be sustained and is quashed. Since theproceedings could not be instituted, we also quashthe show cause notice and the entire proceedings.The appeal is allowed.21. The present matter was heard through videoconference due to Covid-19 pandemic. At this stageit is not possible to sign a copy of this order nor acertified copy of this order could be issued by the17registry. In these circumstances, this order will bedigitally signed by the Presiding Officer on behalfof the bench and all concerned parties are directedto act on the digitally signed copy of this order.Parties will act on production of a digitally signedcopy sent by fax and/or email.
Justice Tarun Agarwala Presiding Officer
TARUN Digitally signed by TARUN AGARWAL DN: c=IN, o=PUBLIC WORKS DEPARTMENT UTTAR PRADESH, postalCode=221505, st=Uttar Pradesh, 2.5.4.20=30fcf68685192bbc53e6ff1608a83fb3881de7ac2ab7
AGARWAL 954d509c85ed6e0f7c41, serialNumber=095f8b286bb0b1cd07ff676611f4f5e7999727d 404aa38ca422f9d3529bdb8a3, cn=TARUN AGARWAL Date: 2020.10.09 13:02:51 +05'30'
Dr. C. K. G. Nair Member
Justice M.T. Joshi Judicial Member
09.10.2020 RHN
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