SEBI penalties qualify as excluded debt under Section 79(15)(a) of I&B Code, cannot be included in bankruptcy proceedings

The NCLAT Chennai dismissed an appeal challenging the admission of bankruptcy applications under Section 122(1) of the I&B Code, 2016. The appellant, a personal guarantor to BRG Energy Limited, contested the treatment of SEBI penalties as 'excluded debt'. The tribunal held that penalties imposed by SEBI constitute 'fine' under Section 79(15)(a) of the I&B Code, 2016, which defines excluded debt as "liability to pay fine imposed by a court or tribunal." The court ruled that SEBI penalties, being regulatory in nature, fall within the exclusion provision and cannot be included in bankruptcy proceedings. The tribunal found the lower court's exclusion of SEBI penalty from bankruptcy proceedings legally sound and consistent with statutory provisions.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the penalty imposed by the Securities and Exchange Board of India (SEBI), being pecuniary in nature, can be classified as a 'fine' under Section 79(15)(a) of the Insolvency and Bankruptcy Code (I & B Code), 2016, and thereby treated as an 'excluded debt' outside the scope of bankruptcy proceedings initiated under Section 122 of the I & B Code;

(b) Whether the observation in the impugned order that such penalty is excluded from bankruptcy proceedings is legally sustainable and consistent with the legislative intent and judicial precedents;

(c) The applicability and interpretation of Section 79(15)(a) of the I & B Code, 2016, vis-`a-vis penalties imposed by regulatory authorities like SEBI;

(d) The effect of overriding provisions under Section 238 of the I & B Code, 2016, on the interplay between the I & B Code and other statutes such as the Securities and Exchange Board of India Act, 1992;

(e) The scope and binding nature of judicial precedents, including decisions of the Hon'ble High Court of Telangana and the Apex Court, on the classification of such penalties as 'excluded debts';

(f) The correctness of the appellant's challenge to the impugned order, considering that the appellant's application for initiation of bankruptcy proceedings was allowed in toto, and the challenge was limited to the exclusion of SEBI penalty from the bankruptcy process.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Classification of SEBI penalty as 'fine' and 'excluded debt' under Section 79(15)(a) I & B Code

The Tribunal examined the definition of 'excluded debt' under Section 79(15)(a) of the I & B Code, 2016, which explicitly includes "liability to pay fine imposed by a court or tribunal." The impugned order held that the penalty imposed by SEBI falls within this definition and thus is excluded from the bankruptcy proceedings initiated under Section 122 of the Code.

The appellant contested this classification, arguing that the penalty imposed by SEBI should not be equated with a 'fine' and thus should not be excluded from bankruptcy proceedings. The appellant relied on a judgment of the Hon'ble High Court of Telangana in a writ petition challenging the recovery notice issued by SEBI, which was held to be illegal and arbitrary. However, the Tribunal clarified that the High Court's judgment was confined to the facts and context of that particular demand notice and could not be generalized to all SEBI penalties or bankruptcy proceedings.

The Tribunal further noted that the legislative intent behind Section 79(15)(a) is to exclude liabilities arising from fines or penalties imposed by courts or tribunals from the insolvency estate, recognizing their penal or statutory nature. This exclusion is consistent with the principle that certain obligations are personal or punitive and should not be discharged through insolvency processes.

Issue (c): Interpretation of Section 79(15)(a) of the I & B Code in context of regulatory penalties

The Tribunal analyzed the scope of Section 79(15)(a), which excludes from bankruptcy proceedings any liability to pay a fine imposed by a court or tribunal. SEBI, being a statutory regulator, imposes penalties under the Securities and Exchange Board of India Act, 1992, which are regulatory and penal in nature. The Tribunal held that such penalties fall squarely within the definition of 'fine' for purposes of Section 79(15)(a).

The Tribunal also referenced the judgment of the Hon'ble High Court of Telangana where it was held that the moratorium under the I & B Code does not apply to amounts recoverable under Section 28A of the SEBI Act, 1992, reinforcing the exclusion of such penalties from insolvency proceedings.

Issue (d): Overriding effect of Section 238 of the I & B Code

The appellant argued that the provisions of the SEBI Act should prevail over the I & B Code. The Tribunal referred to Section 238 of the I & B Code, which provides that the provisions of the Code shall override any inconsistent provisions in other laws. However, the Tribunal clarified that this overriding effect does not extend to liabilities expressly excluded under the Code itself, such as fines under Section 79(15)(a).

Thus, while the I & B Code prevails over other laws generally, it expressly excludes certain debts, including fines, from the insolvency process, and this exclusion must be respected even when other statutes impose penalties.

Issue (e): Judicial precedents and their applicability

The appellant relied on a decision of the Apex Court in a case involving penalties imposed by the National Consumer Disputes Redressal Commission, which held that such penalties are regulatory in nature and excluded from the moratorium under the I & B Code. The Tribunal found that this precedent supports the impugned order's classification of SEBI penalties as 'excluded debts'.

Regarding the High Court of Telangana's division bench decision, the Tribunal noted that the question whether the levy is a fine or penalty was left open for determination in appropriate proceedings. The Tribunal interpreted this as permitting the classification of SEBI penalties as fines for the purpose of exclusion under the I & B Code unless and until decided otherwise in a proper forum.

Issue (f): Challenge to the impugned order and scope of appeal

The Tribunal observed that the appellant's application for initiation of bankruptcy proceedings under Section 122 was allowed by the Adjudicating Authority, which is favorable to the appellant. The appellant's challenge was limited only to the observation excluding the SEBI penalty from the bankruptcy proceedings.

However, the appeal was framed as a challenge to the entire order, rendering it misconceived. The Tribunal emphasized that the part of the order excluding the penalty as an 'excluded debt' was consistent with statutory provisions and judicial precedents and was not arbitrary or contrary to law.

3. SIGNIFICANT HOLDINGS

The Tribunal held that:

"The penalty imposed by R3/SEBI, being pecuniary in nature, will come within the meaning of 'fine'. This is to be treated as the 'excluded debt' under Section 79(15)(a) of IBC and thus outside the scope of the bankruptcy proceedings."

This finding aligns with the statutory definition of 'excluded debt' under Section 79(15)(a) of the I & B Code, 2016, which excludes liabilities to pay fines imposed by courts or tribunals from insolvency proceedings.

The Tribunal reiterated the principle that the provisions of the I & B Code override inconsistent provisions of other laws, as per Section 238, but that the Code itself excludes certain debts from insolvency, including fines and penalties.

It was also held that penalties imposed by regulatory authorities like SEBI are regulatory and penal in nature, akin to fines, and hence fall within the exclusion.

Regarding judicial precedents, the Tribunal noted that the Apex Court's judgment supported the exclusion of such debts, and the High Court of Telangana's decisions were limited to their factual contexts and did not preclude the classification of SEBI penalties as excluded debts.

Finally, the Tribunal dismissed the appeal for lack of merit, holding that the impugned order's exclusion of the SEBI penalty from bankruptcy proceedings was legally sound and consistent with the legislative framework and judicial authority.

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