2025 (9) TMI 339 - HC - SEBI

Jurisdiction to supervise Special Committee; embargo on ex-management payments remains; prioritize individual investors, transfer unclaimed funds to Investor Protection Fund

Securities & Exchange Board Of India (Trust Pet. No. 3/1997) Versus CRB Capital Markets Ltd.

HC held it had jurisdiction to substitute and supervise the Special Committee overseeing winding-up and disbursements of the mutual fund scheme. The court ... Jurisdiction of the Company Court - Company petition (earlier Trust Petition 3/1997) filed by SEBI u/s 11B of SEBI Act, 1992 and Indian Trusts Act, 1882 - seeking to appoint any fit and proper person/entity to take charge of all the property and assets of Respondent No. 2, 3 and 4 i.e., CRB Trustees, CRB Asset Management Company, and IIT Corporate Services respectively - assets of the Mutual Funds and the Arihant Mangal Growth scheme - setting up a Special Committee - challenges to proper functioning of the said Special Committee - unclaimed redemption amounts that arise from Mutual Funds - Applicability of Doctrine of Merger - principles of equity - Maxims - Nullus commodum capere potest de injuria sua propria - Commodum ex injuria sua nemo habere debet - Whether, the interim order dated 25th January, 1999, particularly the embargo placed against making payments to the CRB group, can be construed to have merged into the final order dated 29th May, 2013 which is silent on the said aspect. HELD THAT:- The narration of the events would show that the entire mutual fund - Arihant Mangal Growth Scheme, which was a scheme floated by the Ex-management [Respondent No. 2 (CRB Trustees) & Respondent No. 3 (CRB Asset Management Company)], was found to be ridden with irregularities, which eventually led to regulatory action being initiated by both SEBI and the RBI. Finally, the Ex-Management, over and above common grounds already raised by the Special Committee, had also raised a preliminary objection on the maintainability of the present case. It was submitted that the SEBI Act, 1992 and the 1996 Regulations form a complete code governing mutual funds. Therefore, matters relating to winding-up fall exclusively within the domain of SEBI, and not the jurisdiction of the Company Court. Further, any failure to wind up the scheme as per the 1996 Regulations must be addressed under Regulation 68 of the 1996 Regulations or through the SEBI (Enquiry and Penalty) Regulations, 2002. A collective reading of the provisions reveals that, beyond the general powers, SEBI’s authority is confined to the registration and regulation of trustees under a trust deed, and does not extend to the appointment or substitution of such trustees in the event of disqualification. Whereas on the other hand, the 1996 Regulations mandate that Mutual Funds be constituted in the form of trusts, and the appointment of trustees is governed by the provisions of the Indian Trusts Act, 1882. The said act empowers the Principal Civil Courts with Original Jurisdiction the power to appoint trustee. This Court has no hesitation in holding that it possesses jurisdiction to substitute the Special Committee and to define the scope of its mandate. Furthermore, once a Committee is constituted by the Company Court for effecting disbursals and overseeing compliance with regulatory obligations, it becomes subject to the continuing supervisory jurisdiction of the Court, particularly in a case involving the protection of investor interest in a winding up process. Thus, the preliminary objection regarding the lack of jurisdiction is devoid of any merit. The rejection order dated 29th November 2023 was passed at a time when the tenure of the Special Committee had already lapsed, and Co. Appl. 351/2023 seeking its extension was still pending consideration. In the absence of any subsisting order extending the Committee’s mandate, its actions cannot be retrospectively validated. Accordingly, the said rejection order is set aside, and the claim of M/s NCM International shall be remitted for fresh consideration to the authority that may be designated in accordance with the present judgment. Supreme Court has also clarified in a number of Judgments, including in Commissioner of Central Excise, Delhi v. Pearl Drinks Limited [2010 (7) TMI 10 - SUPREME COURT] that the Doctrine of Merger is not one of rigid and universal application. Its applicability, the Court held, depends upon the nature of jurisdiction exercised and the content and subject matter of challenge laid or capable of being laid. A bare perusal of the final order dated 29th May, 2013, reveals that, surprisingly, none of the parties raised the issue concerning the embargo imposed by the interim order. In fact, the embargo imposed by the Bombay High Court, as was being agitated by the P.A., even in the pleadings, appears to have gone unnoticed. The reasons why SEBI & the P.A. did not highlight the same is unclear. It is possible that parties may have proceeded on the assumption that the said embargo would continue to operate. As a result, the final order remains silent on this aspect and does not contain any discussion signifying an intention to modify or lift the earlier embargo. In effect, there is neither an express affirmation nor an implied setting aside of the interim restraint against payments being released to CRB and connected individuals and entities. This Court is of the opinion that the priority of the Special Committee ought to have been to firstly disburse to individuals, small unit holders & non CRB corporate entities and thereafter by way of abundant caution approach the Court seeking clarification as to whether any disbursements ought to be made to the CRB Group or not. However, on the contrary, the Special Committee has remained silent over the years, even before this Court, by not highlighting the fact that such substantial sums have been paid to the CRB Group. The Special Committee not only had a duty but an obligation to function as a Trustee of the investors and the Court and NOT as a Trustee of the CRB group and its family members. The provision and the circulars make it evident that residual amounts disgorged pursuant to a direction under Section 11B are required to be credited to the Investor Protection and Education Fund (‘IPEF’) and utilised for the purpose of investor education. Moreover, specifically in respect of incomes from the unclaimed redemption amounts from a Mutual Fund, after the three-year period shall be used to investor education. Following the above provisions, the Court has no doubt in holding that the Investor Protection and Education Fund, constituted on 23rd July 2007 under Section 125 of the Companies Act, 2013 read with the SEBI (Investor Protection and Education Fund) Regulations, 2009 shall be the appropriate body to which such transfer ought to be effected. Court passed the following conclusions and issues the ensuing directions - Applications are disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether the Company Court has jurisdiction to supervise, substitute or dissolve a court-constituted committee acting as trustee for winding up a mutual fund scheme, notwithstanding the SEBI Act and SEBI (Mutual Funds) Regulations, 1996 purportedly forming a 'complete code'. 2. Whether an interim judicial embargo (prohibiting payments to certain connected persons) imposed by an earlier interlocutory order merged into or was extinguished by a later final order silent on that embargo (applicability and limits of the Doctrine of Merger). 3. Whether the court-constituted Special Committee (functioning as trustee) breached fiduciary duties and principles of transparency by making substantial disbursements to persons/entities connected to the erstwhile management, and if so, what remedial measures are appropriate (forensic audit, recovery powers, suspension/replacement of the Committee). 4. Whether the court may direct transfer of funds held with the Registrar General to a sectoral regulator's specially constituted cell, and vest that cell with authority to verify claims, disburse funds, and represent the scheme in pending litigation (including procedural safeguards and timelines). 5. Treatment of unclaimed redemption amounts: whether such amounts may be transferred to the Investor Protection and Education Fund (IPEF) and on what legal basis and conditions (including possibility of limited retention for litigation/expenses). 6. Propriety and validity of actions taken by the Special Committee after expiry of its mandate (e.g., rejection of specific claims) and whether those decisions must be set aside or remitted. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Jurisdiction to substitute/dissolve court-constituted trustee/committee Legal framework: Company Court's inherent and supervisory jurisdiction; Indian Trusts Act (sections on appointment of trustees and appointment by court); Sections 11 and 11B SEBI Act (regulatory powers); SEBI (Mutual Funds) Regulations, 1996 (procedure for winding up and trustee role). Precedent treatment: Court recognised that SEBI's statutory powers regulate trustees and mutual funds but do not, by express provision, empower SEBI to appoint or replace trustees where disqualification arises; trustee appointment/removal falls within the domain of civil courts (Indian Trusts Act, sections 73-74). Company Court rules and supervisory jurisdiction permit appointments and replacements for protection of beneficiaries. Interpretation and reasoning: The Court held the Company Court possessed jurisdiction to substitute the Special Committee because (a) the Committee was itself appointed by court order to perform trustee functions; (b) the Indian Trusts Act envisages principal civil courts exercising such powers; and (c) the SEBI Act/regulations do not oust the court's power to appoint or replace trustees in appropriate cases. Estoppel prevents former parties from asserting SEBI's 'complete code' argument after accepting the Court's supervisory structure. Ratio vs. Obiter: Ratio - Court has jurisdiction to substitute/dissolve a court-constituted trustee/committee despite regulatory regime, where necessary to protect investors and administer the trust; Obiter - observations on estoppel regarding earlier acquiescence by regulator. Conclusion: The court retained power to dissolve/replace the Special Committee and define the successor body's mandate. Issue 2 - Doctrine of Merger and the survival of an interim embargo Legal framework: Doctrine of Merger as developed in case-law; principles of equity (nullus commodum capere de injuria sua propria; actus curiae neminem gravabit); distinction between interlocutory and final orders; scope of superior forum's adjudication. Precedent treatment: The Court surveyed authorities holding the Doctrine of Merger is not of universal application and is subject to exceptions where final order is non-speaking, where superior court did not adjudicate the specific question, or where equity prevents a party benefiting from its own wrong. Interpretation and reasoning: Applying the authorities, the Court found the final order (constituting the Special Committee) was silent on the earlier embargo and contained no reasoned acceptance or modification of the interim restraint. Given the equities (serious allegations against connected persons and the purpose of the interim embargo to protect investors), the Court held merger did not operate to extinguish the earlier embargo. The doctrine must yield to equitable considerations and cannot legitimise unjust enrichment arising from procedural silence. Ratio vs. Obiter: Ratio - An interlocutory embargo does not automatically merge into a subsequent final order that is silent and non-decisional on the embargo when equity and investor protection require its continuance; Obiter - general commentary on merger exceptions. Conclusion: The interim embargo continued to bind the trustee/committee until affirmatively lifted; payments to connected persons therefore required scrutiny and could not be legitimised simply because the later order did not repeat the embargo. Issue 3 - Fiduciary duties, transparency, impropriety of disbursements and remedial measures Legal framework: Trustee duties under Indian Trusts Act; obligations of court-appointed committees acting as trustees to act in best interests of beneficiaries and with transparency; SEBI Act/regulations as sectoral overlay but not substituting fiduciary obligations; court's inherent powers to order inquiries, audits and provisional remedies. Precedent treatment: Court relied on equitable principles requiring trustees to avoid conflicts, disclose relevant connections, and maintain transparent accounts; failure to do so justifies forensic scrutiny, suspension or replacement. Interpretation and reasoning: The Court identified multiple indicia of problematic functioning - large proportionate payments to connected entities, failure to disclose recipient details in interim reports, presence of a nominee on the committee with undisclosed connections, use of ex-management premises/staff, and repeated extensions without adequate explanation. Given these facts and the fiduciary mandate, the Court concluded that a forensic audit and suspension/replacement were warranted as proportionate measures to protect beneficiaries and the public interest. The Court also set limits on further payments to connected persons until audit completion. Ratio vs. Obiter: Ratio - Court may direct forensic audit, suspend/replace a court-constituted trustee/committee, and restrain payments where credible evidence shows lack of transparency, conflicts and potential unjust enrichment of accused/connected persons; Obiter - discussion on the appropriateness of internal audit vs. forensic audit. Conclusion: Forensic audit ordered within a fixed timeframe; payments to specified connected persons stayed pending audit; liberty given to regulator to pursue recovery if audit discloses violations. Issue 4 - Transfer of funds and constitution of a regulator-supervised Special Cell Legal framework: Court's supervisory powers over funds held pursuant to its orders; SEBI's statutory role (Sections 11, 11B) permitting regulatory directions and disgorgement mechanisms; mechanisms for verifying and disbursing investor claims (role of Registrar & Transfer Agents and QRTA as appointed). Precedent treatment: Courts may transfer control of court-held funds to an appropriate agency under supervision where fiduciary concerns and need for sectoral expertise exist, subject to judicial safeguards, accounting and time limits. Interpretation and reasoning: The Court concluded that vesting day-to-day administration of remaining corpus with a Special Cell under the regulator (with specified composition, QRTA appointment, escrow/dedicated bank account, reporting lines and timelines) provided necessary sectoral expertise, transparency and enforceable accountability. Conditions imposed included: transfer mechanics, preservation of amounts earmarked for pending third-party claims, internal controls (two signatories), finality on QRTA/Cell decisions within specified periods, statutory compliance obligations and a one-year mandate to wind up (subject to forensic audit). The Court limited SEBI's expenditures to corpus and required reporting to judicial and SEBI hierarchies. Ratio vs. Obiter: Ratio - Court can direct transfer of court-held funds to a regulator-constituted cell with defined safeguards where investor protection and technical administration require it; Obiter - detailed SOP elements as adopted from regulator's proposal. Conclusion: Funds to be transferred to SEBI-escrow (after earmarks/taxes); Special Cell constituted with stated composition, powers and timelines; QRTA to handle verification and disbursal under Cell supervision. Issue 5 - Treatment of unclaimed redemption amounts (transfer to IPEF) Legal framework: SEBI Act (disgorged amounts and Investor Protection & Education Fund provisions), SEBI circulars on unclaimed redemption/dividend amounts (2000 and 2016), SEBI(IPEF) Regulations, 2009; regulatory practice permitting transfer/use for investor education after prescribed periods and disclosure requirements. Precedent treatment: SEBI circulars explicitly permit deployment of unclaimed amounts and prescribe treatment after three years; amounts disgorged under Section 11B are to be credited to IPEF as per statutory/regulatory scheme. Interpretation and reasoning: Given the lapse of the three-year period contemplated in the circulars and the statutory/regulatory framework, the Court found it appropriate to direct transfer of unclaimed redemption corpus to the IPEF (subject to SEBI's power to extend cut-off and retention of reasonable sums for litigation/expenses). This direction harmonises regulatory policy and investor protection objectives. Ratio vs. Obiter: Ratio - Unclaimed redemption amounts, after prescribed period and subject to verification/cut-off directions, may be transferred to the Investor Protection and Education Fund for investor education and related purposes; Obiter - suggestion of limited retention for expenses/defence. Conclusion: Unclaimed amounts to be transferred to IPEF after one year from Special Cell establishment, subject to SEBI's decisions on cut-off extensions; reasonable amounts may be retained for litigation/expenses. Issue 6 - Validity of Committee acts after expiry of mandate Legal framework: Limits of authority of committee appointed for fixed tenure; necessity of express extension for valid exercise of powers; principle that acts beyond mandate may be set aside or remitted. Precedent treatment: Actions taken after mandate expiry without extension are susceptible to being quashed or remitted for fresh consideration; court may set aside such acts and order reconsideration by appropriate authority. Interpretation and reasoning: The Court found that a particular rejection order dated after the Committee's mandate had lapsed was adopted without fresh authority and therefore could not be retrospectively validated; it set that decision aside and remitted the claim for fresh consideration by the authority designated under the judgment (the Special Cell/QRTA as applicable). Ratio vs. Obiter: Ratio - Actions taken by a court-appointed committee after expiry of its mandate are invalid and subject to setting aside; Obiter - counselling that interim continuance pending adjudication requires express court leave. Conclusion: Post-mandate decisions were set aside where shown to be beyond authority; affected claims to be reconsidered by successor authority. OVERALL CONCLUSIONS AND ORDERS (LEGAL EFFECTS) 1. Forensic audit of the Committee's records, bank accounts and documents ordered; SEBI authorised to conduct audit within a limited timeframe and to pursue recovery/litigation on audit findings. 2. The Special Committee was to be replaced by a regulator-constituted Special Cell with prescribed membership, control of a dedicated escrow/dedicated bank account, appointment of a Qualified Registrar & Transfer Agent, procedural timelines for verification/disbursal, internal audit and statutory compliance obligations; corpus transfer mechanics and earmarks specified. 3. Payments to identified connected persons/entities stayed until forensic audit completion; SEBI given liberty to seek recovery if violations are found. 4. Unclaimed redemption amounts directed to be transferred to the Investor Protection & Education Fund in accordance with statutory/regulatory provisions, subject to a short period for SEBI to deal with pending claims and retention of reasonable litigation/expense reserves. 5. Actions of the Committee beyond its expired tenure were vulnerable; specified decisions (e.g., a claim rejection) were set aside and remitted for fresh consideration by the designated successor authority. 6. The Court exercised its supervisory, equitable and trust jurisdiction to protect unit holders, harmonising court powers with regulatory functions and prescribing transparent institutional mechanisms to complete winding up within a fixed period.