2025 (10) TMI 1197 - AT - IBC

Demat account freeze quashed: Section 14 moratorium bars recovery steps; exchange failed to file ALF claim

Spice Energy Pvt. Ltd. Versus BSE Ltd., Mumbai

SAT (LB) allowed the appeal and quashed the impugned order freezing demat accounts. The tribunal held the stock exchange's circular did not apply after ... Freezing the demat account(s) for non-payment of the outstanding dues of Annual Listing Fee (ALF) - respondent BSE failed to make claim of ALF dues before the IRP through legal remedies under the IBC during CIRP and later during Cals’ liquidation process - HELD THAT:- The BSE Circular dated June 25, 2021 shall have no application, once the Adjudicating authority has admitted applications by a creditor for insolvency resolution of a corporate debtor. The erstwhile promoters of the company have no role in the management of affairs of the company once a company is under CIRP. We also note that, in terms of the process of CIRP laid down in IBC, just like any other creditor, the respondent BSE was also required to file its claim in the prescribed form and manner before the IRP within the due date in response to the public notice in terms of Section 15 of the IBC. Undisputedly, no such claim was lodged by the respondent BSE. While the claim of the respondent was in the nature of recovery of outstanding dues of ALF fee of a non-functional company for providing services of the stock exchange platform for allowing trading, the other statutory creditors (including the Income Tax department) who had a much higher claim for their statutory liabilities, properly filed claim in terms of IBC. In fact, the appellant company itself, as a financial creditor, made a claim in pursuance of the said pubic notice. Both the appellant and income tax department were eventually made members of the Committee of Creditors (CoC), under whose directions IRP had to undertake the CIRP process. The provisions of the Section 14 of the IBC prohibit initiation / continuation of any ‘suits or proceedings’ after commencement of CIRP. Undisputedly, no communication was made whatsoever, in terms of the SOP for graded action with the IRP who was undisputedly in charge of the management of the affair of the company. Therefore, the appellant, an unrelated entity could not be charged for non- compliance for the default. The respondent’s submission that freezing of the demat accounts of the erstwhile promoters of the company for non-payment of ALF dues of the listed entity does not constitute ‘recovery proceeding’ against the company under Section 33(5) of the IBC, is untenable, since the embargo in terms of Section 14 covers ANY ‘suit or proceeding’ (which includes recovery proceeding or otherwise). Ostensibly freezing of demat accounts is also in the nature of a ‘proceedings’ under the SOP circular. In view of the above, there are no legal basis for freezing the demat accounts of the appellant for non- payment of ALF by Cals, while it was undergoing resolution / liquidation. Thus, relying upon the over-riding provisions of IBC it is not required to dwell into the factual matrix whether the appellant was a ‘promoter group’ entity or a ‘promoter’, following the Tripartite Agreement of March 2017. It is found that soon after, the signing of the said agreement, the company went into CIRP in October 2017, and no subsequent annual financial statements were filed. While reiterating that the respondent disregarded the overriding provisions of IBC altogether from November 2017, it is noted that respondent has repeatedly mentioned that a number of communications were made with the listed company in the month of October - November 2022, which is admittedly much beyond October 2019, while the order for liquidation was already got passed by the adjudicating authority under IBC. It is unfortunate that the respondent took coercive actions against the appellant as well as those, who do not hold any stakes nor responsible for management of a company under liquidation by virtue of the specific order of the adjudicating authority passed under IBC. The impugned order itself does not disclose the names and designations of the members of the said committee. Under the circumstances, the said impugned order deserves to be quashed. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether freezing of the appellant's demat account by the stock exchange pursuant to its circular for non-payment of Annual Listing Fee (ALF) of a listed company undergoing CIRP/liquidation violates the moratorium under Section 14 and the overriding effect of the IBC. 2. Whether the moratorium under the IBC applies so as to bar enforcement or graded action against erstwhile promoters/promoter-group entities of a corporate debtor during CIRP/liquidation, or is it confined only to the corporate debtor. 3. Whether a recognised stock exchange or SEBI SOP/circular can be invoked to recover ALF from a listed company under CIRP/liquidation without filing a claim before the IRP/liquidator under the IBC, and whether freezing a promoter's demat account constitutes a 'suit or proceeding' or a recovery proceeding under the IBC. 4. Whether the stock exchange's review process complied with principles of natural justice and jurisdictional limits when it applied its circular in a manner inconsistent with the IBC. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of moratorium / overriding effect of IBC to bar ALF recovery by stock exchange during CIRP/liquidation Legal framework: Section 14 (moratorium) prohibits initiation or continuation of suits or proceedings against the corporate debtor after commencement of CIRP; Section 15 public notice and filing of claims; Section 33 (liquidation) and Section 238/Section 238(1) establish IBC's overriding effect over other laws. Precedent Treatment: Reliance placed on authorities affirming IBC's overriding effect and that recovery actions outside the insolvency process contravene IBC (authorities followed). Interpretation and reasoning: Once the adjudicating authority admitted insolvency resolution and later ordered liquidation, the IRP/liquidator replaced management and was the proper forum to receive and adjudicate claims. The exchange did not file any claim before IRP/liquidator despite public notice and opportunities; nor did it engage the IRP/liquidator before initiating graded action under its circular. The exchange's unilateral invocation of its circular to effect recovery (freeze) bypassed the IBC-mandated claims process and thereby interfered with the moratorium and liquidation proceedings. Ratio vs. Obiter: Ratio - The IBC's moratorium and overriding character prevent stock-exchange-initiated recovery/grading action for ALF against a listed company in CIRP/liquidation unless the exchange properly files and adjudicates its claim within the insolvency/liquidation process. Obiter - Observations on commercial character of listing fees and GST treatment contextualising the nature of ALF. Conclusion: The freezing action in respect of ALF recovery during CIRP/liquidation was inconsistent with the IBC and therefore unlawful. Issue 2 - Whether moratorium extends to promoters/promoter-group entities Legal framework: Section 14 moratorium protects corporate debtor; the statutory scheme of IBC aims to centralise claims, maximize asset value and prevent collateral proceedings that would frustrate insolvency resolution/liquidation. Precedent Treatment: Authorities dealing with IBC's overriding effect and scope were followed; authorities cited by respondent concerning specific statutory liabilities (e.g., negotiable instrument provisions) were distinguished as fact- and statute-specific and not general propositions authorising action against promoters during moratorium. Interpretation and reasoning: Although moratorium language expressly protects the corporate debtor, allowing continuation of suits or coercive measures against erstwhile promoters for dues of the corporate debtor would subvert the IBC scheme by permitting piecemeal enforcement outside the insolvency estate. Where a claim arises from the corporate debtor's obligations (e.g., ALF), the correct mechanism is filing a claim in the insolvency process. Precedents addressing penal or personal liability under other statutes (e.g., Section 138 NI Act) are inapposite where liability is not specifically made personal by statute or incorporated in the resolution/liquidation scheme. Ratio vs. Obiter: Ratio - The moratorium's object and IBC scheme prevent actions that would undermine collective and consolidated resolution, and consequently, enforcement steps intended to recover corporate dues effected against promoters pursuant to exchange circulars are not permissible when they bypass insolvency procedures. Obiter - Remarks distinguishing suits for statutory or personally imposed liabilities under other Acts. Conclusion: The stock exchange's contention that moratorium does not affect actions against promoters is misplaced where the action seeks to recover corporate debtor's dues and bypasses the insolvency/ liquidation mechanism. Issue 3 - Necessity to file claim before IRP/liquidator and whether freezing constitutes a recovery/proceeding Legal framework: Section 15 public notice invites claims; claim filing before IRP/liquidator is the procedural route for creditors; Section 14 prohibits suits or proceedings after commencement of CIRP; SOP/circulars permit action but allow abeyance/withdrawal where exemptions or moratorium exist. Precedent Treatment: Authorities recognizing that statutory or administrative actions that infringe IBC moratorium must yield to IBC's primacy were followed; exchange circulars were interpreted in light of IBC (circulars subordinated). Interpretation and reasoning: The stock exchange did not file a claim during CIRP or liquidation and did not communicate with the IRP/liquidator regarding graded action. Freezing of demat accounts is a coercive administrative measure that constitutes 'proceedings' or recovery steps under the SOP and therefore falls within the bar of Section 14 where it aims to recover dues of the corporate debtor. The exchange's own circular contemplates abeyance/withdrawal where moratorium/exemption is provided; the moratorium under IBC operates as such an overriding exemption. Ratio vs. Obiter: Ratio - Failure to file claim and to act through insolvency/liquidation processes renders exchange-initiated freezing unlawful; freezing is a proceeding/recovery step caught by the moratorium. Obiter - Comments on timeline of SEBI/BSE SOP evolution and that prior to specific SOPs exchanges nonetheless took graded action. Conclusion: Exchange should have filed claim and engaged IRP/liquidator; freezing demat accounts without doing so constituted an impermissible recovery/proceeding under the IBC. Issue 4 - Natural justice and limits of exchange's review process Legal framework: Principles of natural justice require fair hearing and disclosure of decision-making composition; subordinate bodies cannot interpret/apply law in manner inconsistent with statutory scheme. Precedent Treatment: General administrative law principles applied; IBC's hierarchy and exclusive insolvency processes emphasised. Interpretation and reasoning: The exchange and its review committee applied the circular in disregard of IBC's overriding effect, failed to engage the IRP/liquidator, and did not disclose committee composition or follow due process in deciding review, amounting to denial of natural justice. The committee exceeded its jurisdiction by interpreting and applying the IBC contrary to its legislative scheme. Ratio vs. Obiter: Ratio - The impugned review order was vitiated for denial of natural justice and misapplication of legal scheme; accordingly it could be quashed. Obiter - Observations on inadequacy of communications and procedural failures by the exchange during the insolvency timeline. Conclusion: The review process was procedurally flawed and the impugned order could not stand. Final Disposition (as derived from reasoning) Because the IBC's moratorium and overriding provisions preclude exchange-initiated recovery proceedings in respect of corporate debtor dues during CIRP/liquidation absent filing and adjudication of claims within the insolvency process, the exchange's freezing of the appellant's demat account under its ALF recovery circular was unlawful; the impugned order was quashed, amounts recovered were to be refunded with interest, and the demat account ordered to be defreezed. These conclusions form the operative ratio of the decision.