Superiority of the IBC over SEBI Act: Analysing the power of COC

The Insolvency & Bankruptcy Code (“Code” or “IBC”) was enacted in 2016 as a comprehensive law, consolidating the existing relevant laws. Each & every challenge coming ahead could not possibly have been contemplated at the time of the enactment and therefore the lawmakers were wise to incorporate a non-obstante clause under Section 238, mandating the superiority of the IBC over every other legislation in case of ‘inconsistencies’ or ‘conflict’. As intended, the superiority of Code in the case of ‘conflict’ has duly been upheld over various other legislations in numerous cases & the legal position in this regard has somewhere attained finality.  However, the conflict between the IBC & Securities & Exchange Board of India (“SEBI”) Act, ( “conflict”), pending adjudication before the Supreme Court, is a heated challenge for the IBC to win the claim of superiority & has assumed significance owing to the critical opinion targeting the very objective of the Code itself.

Therefore, in this blog, the author will first discuss the ‘conflict’ and the arguments favouring the SEBI Act as against the IBC, following which the author is will provide the readers with  counter-arguments based on the ‘power of Committee of Creditors (“COC”).

The Conflict

The conflict came into light with the National Company Law Tribunal (“NCLT”) ruling inBhanu Ram v. HBN Dairies & Allied Ltd. The authority after admitting the application under Section 7 of the Code, being bound by the mandate of Section 238 as noted above, went on to direct the SEBI to de-attach the properties of the Respondent. The said ruling was further confirmed by the National Company Law Appellate Tribunal (“NCLAT”) with the dictum that till the moratorium continues, SEBI can neither recover any amount nor can sell the assets of the ‘Corporate Debtor’, i.e., the Respondent The case on the question of law relating to ‘the conflict’ as petitioned by SEBI is currently sub judice before the Supreme Court.[i]

Those favouring SEBI & contending that SEBI Act is to prevail over the IBC in the present matter seek to rely upon the fact that the business of Collective Investment Scheme (“CIS”) run by the Respondent, HBN Dairies & Allied Ltd., was unauthorized since the very beginning as no registration as required under Section 12(1B) of the SEBI Act was obtained. The contention therefore conveys that when the very business was illegal, the company could not be resolved or reorganized through Corporate Insolvency Resolution Procedure (“CIRP”) under the Code. Liquidation cannot be jumped onto directly either, as doing the same would abrogate the very objective of the Code to consider CIRP as the first option against liquidation, which is a last resort. Hence, there is no room available under IBC, where such case may be dealt with.

Power of the COC under Section 33(2) & its Explanation

In order to prove the case favouring IBC over SEBI, the author will analyse Section 33(2) [and its explanation] (“the provision”) of the Code. The analysis is comprised of the following two questions, which arise out of the argument claiming the superiority of SEBI as discussed in the preceding paragraph:

A. Whether the ‘Committee of Creditors’ has the power to choose liquidation over resolution:

Section 33(2) reads as “Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors [approved by not less than sixty-six per cent. of the voting share]to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order”.

An observation that can be made therefore is that it was always permissible for the COC to opt for liquidation during CIRP but before the confirmation of resolution plan. We do have many NCLT rulings where the decision of COC for liquidation was approved as no prospective resolution applicant had come forward with the ‘expression of interest’ or appropriate ‘resolution plan’.[ii] Nonetheless, the provision, in the presence of immense importance being given to CIRP as the foremost objective of the Code, was exposed to the interpretation that liquidation could not be decided for unless an attempt at least is made for the resolution, further causing misperceptions regarding the ‘objective of the Code’ to prevail.

In the light of the confusion, a question remained almost unvocal: whether COC has the power to jump on to liquidation without even trying for resolution. Although the answer silently has been affirmative, as is visible from the approval of NCLT in Prakash Tekwani Resolution Procession for Taj Haberdashery Products Pvt. Ltd. v. COC for Taj Haberdashery Products Pvt. Ltd., given to the decision of liquidation taken by the COC in its very 2nd meeting. Finally, the legislator thought it fit to clarify the matter and came up with an amendment in 2019 adding an ‘Explanation’’ that COC could decide for liquidation even before the preparation of information memoranda, i.e., without even trying for resolution. Considering the same, NCLT in SPM Leasing & Finance Pvt. Ltd. v. Shubham Industries Ltd., gave approval to such decision taken by the COC in the 1st meeting itself. Since the answer is in affirmative, we can now consider the 2nd question-

B. Whether an application under the IBC would be maintainable with respect to a company or LLP carrying an illegal business:

To simplify, breaking the question further: ‘By what factors, COC may be driven to choose the liquidation over resolution?’, or in other words ‘What may be the scope of “commercial wisdom” employed by the COC while resorting to Sec.33(2) r/w its explanation?’; ‘Would a case of illegality of the business be covered under this scope?’.

These queries are bound to arise in the absence of the legislative guidance under the provision. Legislators should have provided some inclusive examples under the provision. Since no legislative guidance is available on such power of the COC in India, the author thinks it apposite to refer to the jurisdiction of the UK & the USA, to seek a support for the legislative intent behind such power under the provision in question, and find an answer for the queries posed above.

In the UK, the existing insolvency framework is defined by the Insolvency Act, 1986. According to the Act, failing companies are either liquidated (‘Winding Up’ under Part IV) or submitted to an insolvency process (‘Administration’ under Part II) that may allow them to be rescued as going concerns. Creditors may apply for the company to be liquidated via the courts, a compulsory liquidation (‘Winding-Up by the Court’ under Chapter VI, Part IV). Hence, in the UK, creditors may choose to get corporate debtor wound up if its unable to pay its debts inter alia on other grounds as well.[iii]The said power of the creditors is not restrained with the necessary prior failure in resolution process, i.e., ‘administration’ under the 1986 Act. The plain analysis of the scheme of the legislation does not sufficiently address the queries directly. Nonetheless, what is pertinent to mention here is that, indeed a wide power is conferred upon the court to initiate ‘winding up’ by merely requiring it to form an opinion that it’s just & equitable to do so.[iv] A company carrying on an unauthorised business is therefore most likely to fall under this wide scenario.

Moving further on to the USA jurisdiction, which is more upfront than the UK law with respect to the present queries, whose insolvency and bankruptcy matters are being governed under Title 11 of the US Code. The law under §1112 allows the conversion from ‘reorganization’ under Chapter 11 to ‘liquidation’ under Chapter 7, on inter alia the ‘cause’gross mismanagement of the estateunauthorized use of cash collateral substantially harmful to one or more creditors. It is in conjunction with these particular ‘causes’ pertinent to note that the definition of the ‘cause’ as given is inclusive & not exhaustive and therefore may even include cases like illegality of the business, which sufficiently relates to the mentioned clauses. Hence, it may be concluded that court on finding the business of the corporate debtor to be an unauthorized or illegal one, would be driven by this conversion provision & would order the initiation of liquidation instead of continuing with the reorganization.


Relying upon the discussion made above, the author is of the firm opinion that adjudicating authority under IBC is entitled to admit an application with respect to a corporate debtor carrying an illegal business in violation of SEBI Act. Further, COC should be made bound on coming across such circumstances to opt for the liquidation instead of resolution. The reason being that the IBC though superior, cannot be executed in such a manner so as to let the corporate debtors, under the protection of the Code, abrogate the substantial provision of other legislations. Therefore, a company which had carried on its business in violation of the SEBI Act, cannot continue with such illegal business as a going concern even under the IBC in the name of CIRP. When the COC has been very wisely vested with the power to choose liquidation over resolution, the case of the illegality of business of the corporate debtor stands fit to fall under the coverage of this commercial power. Accordingly, appropriate amendment should be made to the Code to add at least those mandatory cases like the present one, to bind COC & the adjudicating authority to convert proceedings from resolution to liquidation, similar to what is provided under §1112 under Title 11 of the US Code.

[i] Civil Diary No. 19613/2019.

[ii] Shri Tejas Shah V. Tanisa Denim Pvt. Ltd., IA 207/ 2019 in CP(IB) 378/2018; C. Ramasubramaniyan. MA/202/IB/2018 in CP/644/IB/CB/2017; Peerless Financial Services Ltd. V. Rasoya Proteins Ltd., MA/237/2018, MA/290/2018 in T.C.P (IB)-856(MB)/2017; Revathi Sridharan, MA/236/IB/2018 in CP/183/IB/CB/2018; Tractebel Engineering pvt. Ltd. V. Patnazi pvt. Ltd. CA.316/ND/2019IN(IB)-803/(ND)/2018; ICICI Bank ltd. V. Blue Past Industries Ltd. MA 654/2018 in CP 1407/I&BC/2017.

[iii] Insolvency Act 1986, Circumstances in which company may be wound up by the court, Section 122.

[iv] Id. Section 122(1)(g). Corresponds the provision of the Companies Act 2013, Section 271, although as against the provisions of UK Law, creditors in India cannot file an application for winding up, (see, section 272 of the 2013 Act), as the right was deprived with the enactment of IBC in 2016.

This article has been authored by Lubhanshi Rai, student at Amity Law School Delhi (GGSIP University).

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