SEBI Cannot initiate proceedings against Companies during Insolvency Proceedings: IBC panel

SEBI Cannot initiate proceedings against Companies during Insolvency Proceedings: IBC panel

"The exemption under Section 14(3)(a) (exemption from moratorium) should be exercised only in exceptional circumstances, which may not hinder the smooth conduct of the CIRP and hence, should not be relaxed until found necessary from the implementation experience of the code," said the report submitted by the Insolvency Committee.

The Insolvency Committee has refused to give any relief to the Securities and Exchange Board of India (SEBI) from the moratorium clause under the Insolvency and Bankruptcy Code, 2016.

According to the Code, once a Corporate Insolvency Resolution Process is initiated against a company, a blanket moratorium bars regulators from initiating any fresh proceedings against the company.

Upon a representation made by SEBI, the matter was referred to the Insolvency Committee and it was noted that any exemption from the rule would hinder the IBC process.

The Central Government is granted the power to exempt a regulator from the rule.

However, in several cases, it was noted that the interest of the general public is put at risk. In view of, this, said Manoj Kumar, partner, Corporate Professionals was of the view that "Many firms continued to be listed on stock exchanges while going through resolution process and, at the same time, such companies might not be fully compliant with securities laws. Hence, Sebi wanted the exemption from moratorium to protect the interests of public investors."

The Committee has nonetheless clarified that a regulator is banned from initiating proceedings against a Company, but action can be taken against the individuals of a Company.

It has also been stated that an effective insolvency process must protect the "value of the insolvency estate against diminution by the actions of multiple stakeholders to insolvency proceedings." The moratorium helps in achieving this purpose and ensures that the assets of the debtor are kept together to facilitate the maximisation of value.

In several instances, the SEBI has nonetheless initiated proceedings against Companies, however, the Securities Appellate Tribunal (SAT) has time and again upheld the moratorium period. It has also been held that in the event there is a delay in initiating the proceedings by SEBI and by then even though the IBC proceedings have been initiated, the moratorium will always prevail.