The National Company Law Tribunal’s (NCLT) principal bench at Delhi was the first to point out the overriding effect of the Insolvency and Bankruptcy Code, 2016 (IBC) over the Securities and Exchange Board of India (SEBI) Act in the 2015 case of Bhanu Ram v. HBN Dairies & Allied Ltd. SEBI had approached the Hon’ble Supreme Court appealing against the same and the apex court too held the primacy of IBC over the SEBI Act, thus, causing a paradigm shift in the legal landscape.
Facts of the case of HBN Diaries & Allied Ltd.
The brief facts leading to the case involve a scheme floated by HBN Dairies & Allied Ltd., under which applications were invited from its customers and investors for the purchase and rearing of cattle, and guaranteed assured returns on completion of the term of the scheme. Now, SEBI held that the transaction was of the nature of Collective Investment Scheme (CIS) defined under Section 11AA of the SEBI Act, 1992.  (CIS refers to a scheme wherein which many individuals come together and pool their money to invest in a particular asset. The gains and profits arising from such investment was to be shared among the individuals according to the agreement between them. On a global scale, CIS involves mutual fund schemes and other schemes as well, which are excluded under SEBI.) SEBI termed the entire transaction to be an illegal CIS and attached the properties of the HBN Diaries to facilitate the pay back of Rs.1337 crores to the depositors. Now, in August 2018, around 40 depositors filed an application against the HBN Diaries under IBC before the NCLT and this application was admitted by NCLT without involving SEBI. Here, the court held that SEBI cannot recover the money from HBN Diaries, owing to the supremacy of the IBC over the SEBI. The National Company Law Appellate Tribunal (NCLAT) too upheld the order.
This order was challenged by SEBI at the Supreme Court on the grounds that the IBC cannot be invoked when the case involves a CIS and not a company. This was backed by the argument that a CIS is constituted in the form of a trust and is completely divorced from the Collective Investment Management Company which initiates the scheme. They further mentioned that the holders of the units of the company were depositors rather than lenders and that the units would become completely tradable commodities once the trust would be registered. This makes them distinct from financial creditors, which the depositors claimed to be, while they were filing the appeal at NCLT.
In July 2019, the Supreme Court bench consisting of Justice Indira Banerjee and Ajay Rastogi, refuted the claims of SEBI and reiterated the judgement passed by the NCLT. Section 238 of the Code states ‘The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law’. It is this non-obstante clause which overrides all other laws.
Instances of similar deadlocks in the past
Again, this wasn’t the first instance where the code came into conflict with other laws. The first time the Supreme Court had come across such crossroads was in the year 2017 in the case of Innoventive Industries Ltd v ICICI Bank and Anr., where the bank, being a financial creditor, had filed an insolvency application to initiate corporate insolvency resolution process of Innoventive Industries. Innoventive had argued that due to the relief order passed by the Maharashtra Government under the Maharashtra Relief Undertaking (Special Provisions Act) 1958 (MRUA), its liabilities would be disbanded. But ICICI argued that IBC had an overriding effect over the provisions of the state legislation MRUA. All the three judicial bodies i.e. the NCLT, NCLAT and the Supreme Court had then affirmed to the overriding effect of IBC. It was in this interpretation that the Court had observed the Code brings about major shifts in the legal and economic scenario of the country.
In another recent case, there was a question of whether Section 238 of IBC would override the provisions of the Prevention of Money Laundering Act 2002 (PMLA). This was before the Mumbai bench of NCLT in the case of SREI Infrastructure Finance Ltd. vs. Sterling SEZ and Infrastructure Ltd., (2019). The tribunal observed that since the proceedings under PMLA would take a much longer period of time, leading to the undervaluation of assets over the period of time, the provision of IBC would prevail over it.
Even in the case of Pr. Commissioner of Income Tax vs. Monnet Ispat and Energy Ltd. (2018), the Apex Court had held that the Code would override all provisions inconsistent with it, including the Tax Laws.
The primary purpose of SEBI is to protect the interests of investors in securities and to regulate the securities market, whereas IBC’s aim is to facilitate the timely resolution of debtor companies. For better coordination between the two authorities, SEBI has recently signed a Memorandum of Understanding with the IBBI. This can lead to effective implementation of Securities laws and Insolvency and Bankruptcy Code, 2016 even with its overriding effects on all laws inconsistent with it.
Abhishek Dutta, Manish Parmar and Sayli Petiwale, SEBI raises questions on IBC’s overriding provisions, India Business Law Journal, https://www.vantageasia.com/sebi-questions-on-ibc-provisions/ (August 22, 2019, 11:00PM).
 Innoventive Industries Ltd. v. ICICI Bank Ltd., (2018) 1 SCC 407 (India).
 Rajdeep Banarjee & Joyeeta Banarjee, IBC vs Sebi: Fight for primacy, Forbes India, http://www.forbesindia.com/blog/economy-policy/ibc-vs-sebi-fight-for-primacy/ (August 22, 2019, 10.30PM).
National Law University and Judicial Academy, Assam.
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