SEBI swerved on non-interference in Winding Up matters

This article is authored by Shubham Gupta, a 4th year student the Institute of Law, Nirma University.

Introduction

In the recent Adjudication officer (‘AO’) order dated on 31^st December2019, SEBI took a stand that it can proceed with the adjudication proceedings against a company even though the company is under liquidation. This stand is inconsistent with the approach adopted by SEBI till now and is likely to be non-est. in law.

In this matter of Rajadhiraj Industries Ltd., AO had initiated adjudication proceedings against Rajadhiraj Industries Ltd for non-redressal of investor grievances on SCORES platforms within the stipulated time, and failure to submit to Action Taken Report. When SCN notice was issued to the company, and it was found that company is into closure since 1996, and from MCA records, it was observed that the company has been provisionally wound up by the order of Indore High Court, MP. The appointed official liquidator informed AO that the company is under liquidation, and thus, no legal proceedings can be initiated against it.

Taking U-turn from the existing approach, AO ordered that it can proceed with the adjudication proceedings- banked on that the adjudication proceedings as to determine whether the SEBI laws were violated or not and, to impose penalty. Taking reference to the apex court judgment in SV Kondaskar, OL v VM Deshpande[1] – ruling that liquidation court would have full power to demand the penalty from the liquidator, AO held that adjudication proceedings wouldn’t be hampered by the appointment of an Official liquidator.

Analysis

At the outset, this order is contrary to stand taken by SEBI till now. Previously, the position in respect to adjudication proceedings was different and had a radical inclination towards the halting and  prohibiting the institution of any new proceedings by SEBI without the approval of the appropriate authority. Earlier, M/s Nova Surgikos Limited, the similar facts were arrayed with respect to non-redressal of SCORES complaints, and AO ordered the non-continuation of proceedings owing to the company is under liquidation. Likewise, in Everonn Education Ltd, yielding to the fact that liquidator has been appointed to overlook the affairs of the company, AO desisted from a continuation of the said proceedings owing to non-approval from the court. It was further reaffirmed in ABG Shipyard Ltd  that leave of the appropriate is a sine qua non for the continuation of the proceeding if the company is under liquidation, and thus proceedings against the company become not est.

Furthermore, arguably, this order is in direct conflict to Section 33(5) of IBC and Section 279 of Companies Act, 2013. Section 33 (5) IBC, 2016 envisages that in case of liquidation order is passed, no suit or proceeding shall be instituted against or by a corporate debtor whereas Section 279 CA, 2013 which states that  when a winding-up order is passed, no suits or other legal proceedings shall be instituted against the concerned company. Under IBC, an only liquidator with the prior approval shall institute suit against the corporate debtor, not any other creditor.[2] In Murgan Oil Industries (P.) Ltd. Re,[3] the word “suit” or “proceedings” not restricted to any class of creditors, or plaintiff and, it is wide enough to encompass all to cover all suits and other legal proceedings who-ever may be plaintiffs.

It is imperative that SEBI has also held that ‘adjudication proceedings’ are within the purview of ‘other legal proceedings’ under Section 446 of the Companies Act, 1956.[4] Thus, in no case, SEBI cannot institute or continue any suit or proceedings against the corporate debtor. Contrastingly, under Section 279 of the Companies Act leverages institution or continuation of suits or proceeding with the prior approval of the tribunal. Therefore, the whole purpose of IBC – to prevent the multiplicity of suits in the multiple forums – is questioned by this order.

It is to reiterate or reaffirm that, once the court has taken the assets of a company under its control or has passed an order for its being wound up, it will not be proper to allow proceedings to be started or continued against the company.[5] Thus, the regulatory proceedings by the various regulators would not only hamper the liquidation process but would intrinsically vitiate corporate structure in the market.

Conclusion

In the light of above, the appropriate approval under the Companies act must have taken by SEBI and therefore, it’s profusely against the spirit of the existing laws. This has again posed a serious question on ‘AO power to conduct adjudication proceedings. The regulators have been bestowed power which must be used cautiously and with all due regard to existing norms.

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[1] (1972) 1 SCC 438.

[2] Section 33(5), IBC

[3] 1970) 40 Com. Cases 77, 82 (Mad)

[4] Adjudication Order in respect of Lakhani India Ltd.,

[5] Central Bank of India v. Elmot Engineering Co., 1994 AIR 2358; 1994 SCC (4) 159