IBC 2016 provisions override SEBI Act 1992 under Section 238, SEBI penalties constitute fines exempt from moratorium

Telangana HC ruled that IBC 2016 provisions prevail over SEBI Act 1992 under Section 238. Court held that penalties imposed by SEBI adjudicating officers constitute "fines" under Section 79(15)(a) of IBC 2016, making them exempt from moratorium protection. SEBI adjudicating officers were deemed equivalent to courts/tribunals for this purpose. One petitioner's representation was found incompetent as company under liquidation must be represented by liquidator, not directors. Writ petition dismissed as interim moratorium under Section 96 did not apply to SEBI penalty recovery proceedings.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(i) Whether the provisions of the Insolvency and Bankruptcy Code, 2016 (the Code, 2016) override the provisions of the Securities and Exchange Board of India Act, 1992 (SEBI Act, 1992) in the context of recovery of penalties imposed under the SEBI Act;

(ii) Whether moratorium orders under the Code, 2016 or the Provincial Insolvency Act, 1920 (Act, 1920) have been passed in respect of all petitioners, and if so, whether such moratoriums bar enforcement of the recovery certificate issued under Section 28A of the SEBI Act, 1992;

(iii) Whether the penalty amount sought to be recovered under the impugned certificate qualifies as a "liability to pay fine imposed by a Court or Tribunal" under clause (a) of sub-section (15) of Section 79 of the Code, 2016, thus constituting an excluded debt not subject to moratorium protections.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Whether the Code, 2016 overrides the SEBI Act, 1992

The Court examined Section 238 of the Code, 2016, which explicitly states that the provisions of the Code shall have effect notwithstanding anything inconsistent in any other law for the time being in force. This provision grants overriding effect to the Code over other statutes.

The Court relied on authoritative precedents, including the Supreme Court's decision in the case of M/s. Innoventive Industries Ltd., which affirmed that Section 238 is categorical and that the Code prevails over inconsistent laws. The Delhi High Court's ruling in Principal Commissioner of Income Tax v. Monnet Ispat and Energy Ltd., which was upheld by the Supreme Court, further reinforced this principle, holding that the Code's moratorium provisions override other statutes, including the Income Tax Act.

Applying these precedents, the Court held that the Code, 2016, prevails over the SEBI Act, 1992, in case of any conflict, thereby answering this point in favor of the petitioners' contention that the Code's provisions should override SEBI Act enforcement mechanisms.

Issue (ii): Existence and impact of moratorium orders under the Code, 2016 and Act, 1920

The petitioners contended that moratoriums issued under the Code, 2016, specifically under Section 96 (interim moratorium), and under the Act, 1920, stay all legal proceedings against the debtor, including enforcement of recovery certificates.

The Court noted that only petitioner No.1 had an interim moratorium order dated 14.07.2021 issued by the National Company Law Tribunal (NCLT), Hyderabad, under Section 96 of the Code, 2016. This moratorium, by operation of Section 96(1)(b), stays all legal actions or proceedings in respect of any debt against the corporate debtor.

However, no moratorium orders had been passed for petitioner Nos.2 to 6. The petitions filed by petitioners Nos.3 and 4 under the Act, 1920, were pending without any orders or actions initiated. Petitioner No.5's insolvency application under Section 10 of the Code, 2016, was pending admission without any moratorium. Petitioner No.6 was already wound up by an order dated 21.08.2018, and the Court emphasized that only the liquidator, not the director, can represent a company under liquidation, rendering petitioner No.6's participation incompetent.

Consequently, the Court held that the interim moratorium under Section 96 of the Code, 2016, applies only to petitioner No.1 and bars proceedings against it, subject to the nature of the debt. The absence of moratoriums for the other petitioners means they cannot claim protection against enforcement of the recovery certificate. The Court also dismissed the writ petition filed on behalf of petitioner No.6 on grounds of improper representation.

Issue (iii): Whether the penalty amount is an excluded debt under Section 79(15)(a) of the Code, 2016

Section 79(15)(a) of the Code, 2016, defines "excluded debt" to include "liability to pay fine imposed by a Court or Tribunal." The respondents argued that the penalty amount imposed under Sections 15G and 15HA of the SEBI Act, 1992, is a fine and thus excluded from the moratorium provisions.

The Court undertook a detailed examination of the nature of the penalty imposed. It noted that the penalty was imposed by an adjudicating officer under Section 15I of the SEBI Act, 1992, who conducts an enquiry after giving the person an opportunity to be heard and has powers akin to a judicial forum, including summoning witnesses and documents. Therefore, the adjudicating officer qualifies as a "Court or Tribunal" for the purposes of Section 79(15)(a).

The Court distinguished between "penalty" and "fine," recognizing that while the term "fine" is generally associated with criminal proceedings, "penalty" is a broader term that can arise from failure to comply with statutory provisions, including civil adjudications. The Court referred to several Supreme Court decisions interpreting the terms "penalty" and "fine," including Shiv Dutt Rai Fateh Chand v. Union of India and others, which clarified the scope and effect of penalties.

Applying these principles, the Court concluded that the penalty imposed under the SEBI Act is effectively a fine imposed by a Tribunal and thus constitutes an excluded debt under Section 79(15)(a) of the Code, 2016. Consequently, the moratorium provisions, including the interim moratorium under Section 96, do not apply to this penalty amount, and enforcement proceedings under Section 28A of the SEBI Act can continue.

Additional Findings:

The Court also noted that the interim moratorium imposed on petitioner No.1 had already come to an end, further negating any stay on enforcement proceedings.

Regarding petitioners Nos.3 and 4, the Court found no merit in their claims as no moratorium orders or substantive actions had been taken in their insolvency petitions under the Act, 1920.

Petitioner No.2 had no moratorium order, and the insolvency petition filed by it was yet to be admitted, thus not attracting moratorium protections.

3. SIGNIFICANT HOLDINGS

"Section 238 of the Code is categorical that the Code will apply, notwithstanding anything inconsistent therewith contained in any other law for the time being in force."

"The adjudicating officer under Section 15I of the SEBI Act, 1992, was conferred with all the powers satisfying all the facets of a judicial forum and therefore, this Court has no hesitation to hold that the adjudicating officer under Section 15I of the SEBI Act, 1992, would definitely fall within the meaning of the Tribunal/Court for the purpose of clause (a) of sub-section (15) of Section 79 of the Code, 2016."

"The penalty imposed and sought to be recovered from the petitioners by issuing the impugned certificate fall within the meaning of 'Fine' excluded under clause (a) of sub-section (15) of Section 79 of the Code, 2016 and as such, the interim moratorium imposed under Section 96 has no application to the penalty sought to be recovered under the impugned certificate."

Core principles established include:

• The Code, 2016, overrides other inconsistent laws, including the SEBI Act, 1992, as per Section 238.
• Moratorium protections under the Code apply only to debts not excluded under Section 79(15), and penalties/fines imposed by Courts or Tribunals are excluded debts.
• Adjudicating officers under the SEBI Act possess judicial powers qualifying them as Courts or Tribunals for the purpose of the Code's provisions.
• Interim moratorium orders stay proceedings only in respect of debts that are not excluded; penalties imposed under SEBI Act are not stayed.
• Representation of a company under liquidation must be by the liquidator; directors cannot represent such companies in legal proceedings.

Final determinations:

• The provisions of the Code, 2016, prevail over the SEBI Act, 1992.
• Moratorium orders under the Code apply only where validly passed and in respect of non-excluded debts; here, only petitioner No.1 had a moratorium, which has ended.
• The penalty amount under the SEBI Act is an excluded debt and not subject to moratorium protections.
• The impugned recovery certificate issued under Section 28A of the SEBI Act, 1992, directing payment of the penalty amount, is enforceable.
• The writ petition is dismissed for lack of merit.

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