SEBI's penalty of Rs.20 lakhs on DHFL quashed by SAT

SEBI's penalty of Rs.20 lakhs on DHFL quashed by SAT

The Appeal filed by Dewan Housing Finance Corporation Ltd(DHFL), questioning the legality of the order passed by the Adjudicating Officer(AO) of the Securities and Exchange Board of India(SEBI) imposing a penalty of Rs.20 lakhs, is allowed and the order of penalty is quashed by the Securities Appellate Tribunal.

This Appeal revolves around the fact that the appellant, which is undergoing corporate insolvency resolution process, failed to create requisite debenture redemption reserve and failed to invest 15% of the amount of nonconvertible debentures maturing as on 31st March, 2020 as required under the SEBI (Issue of Listing of Debenture Securities) Regulations, 2008(ILDS) and failed to submit the audited financial result and line items as prescribed in the (Listing Obligations and Disclosure Requirements) Regulations, 2015(LODR).

The Appellant has specifically submitted that in view of section 14 of the Insolvency and Bankruptcy Code (IBC) no proceedings could be instituted or continued during the currency of the moratorium period. Moreover, it was not open to the AO to use external aid while relying upon the Insolvency Law Committee's Report, in interpreting the provisions of section 14 and this was wholly erroneous. The cases of Alchemist Asset Reconstruction Company Ltd. vs. Hotel Gaudavan Pvt. Ltd & Ors, and Rajendra K. Bhuta vs. Maharashtra Housing and Area Development Authority were relied upon.

Respondents have vehemently contended that the moratorium declared under section 14 of the IBC does not prevent the AO from determining the liability of the Corporate Debtor(CD) and that the moratorium declared under IBC would be applicable only to the enforcement/recovery of the determined liability. The AO had full powers to proceed against the appellant for the purpose of determining the liability for the alleged non-compliance of the ILDS and the LODR Regulations.

The Tribunal has cleared the issue by observing that pursuant to a moratorium declared under section 14 the institution of suits or proceedings against the CD is prohibited or continuation of a suit or proceedings. Further, execution of any judgement or order in any Court of Law, Tribunal, Arbitration Panel or other authority is also prohibited.

The moratorium kicked in when the petition was filed under Rule 5(a)(i) of the Insolvency and Bankruptcy (Insolvency and liquidation proceedings of financial service provider and application to Adjudicating Authority) Rules, 2019 to initiate corporate insolvency resolution process against the appellant and thereafter it was admitted on 3rd December, 2019 by NCLT. The AO issued notice subsequently and so, it is clear that the proceeding was initiated by the AO after the moratorium had come into effect. Hence, no proceedings could be instituted in view of section 14(1).

As far as external aid is concerned, it can only be considered when there is an ambiguity in the provision. The Tribunal has also opined that the provision of section 14 is very clear and explicit and there is no room for any ambiguity.

So, the AO could not have considered the report of the Insolvency Committee to come to the conclusion that he had the power to proceed under SEBI law in spite of a moratorium having come into effect under section 14 of the IBC.