A Tale of Non-obstantes: Scrutinizing the IBC’s (Supposed) Primacy over the SEBI

[By Shubh Jaiswal & Mayannk Sharma]

The authors are students at Jindal Global Law School.



A division bench of the Apex Court is set to hear the applicant on 26th July in the case of SEBI vs Rohit Sehgal, which has been pending before it since 2019. The appeal arises out of an order by the NCLAT, which had previously upheld an order of the NCLT admitting an insolvency application under Section 7 of the IBC and subsequently declaring a moratorium under Section 14 of the act. The SEBI had contended that the Corporate Debtor had violated Regulation 3 of the Collective Investment Scheme Regulations and consequently, had attached the debtor’s properties. While the Securities Appellate Tribunal had upheld this direction, the NCLT (and NCLAT) had observed that SEBI could not recover their dues (as per the procedure laid out in Section 28A of the SEBI Act) during the imposition of a moratorium due to the non-obstante clause present in the IBC—which postulates that the provisions of the IBC shall have effect even if they are inconsistent with another law.

It is precisely this position of the NCLT that this article intends to critique. After exploring the arguments furthered by proponents of this position vis-à-vis Section 238 of the IBC (i.e., the non-obstante clause) that assert that the IBC should prevail as it was enacted after the SEBI Act, we take the opposite stance. We contend this position on the primary ground that the IBC would prevail over the SEBI Act only if there were a manifest inconsistency between the 2 acts—however such is not the case as the IBC and SEBI Act deal with entirely different subject matters. Furthermore, we elucidate how allowing the SEBI to recover its dues as an operational creditor barely benefits the watchdog and instead, propose a harmonious interpretation of the two statutes that would ensure that the legislative intents of both the statutes is furthered.

Battle of the Non-Obstantes: the Conundrum Explained

In essence, the dispute between the legislations arises due to the IBC’s creditor in control regime, that empowers the “Adjudicating Authority” to issue a moratorium on the NCLT’s admission of an application of the Corporate Insolvency Resolution Process (“CIRP”). This power, enshrined in Section 14 of the IBC, prohibits inter alia the institution of fresh suits, continuation of pending suits and the execution of any judgement, decree, or order till the culmination of the CIRP, i.e., till the resolution plan is approved by the NCLT or liquidation proceedings are initiated. Thus, once the moratorium period kicks in, the corporate debtor (i.e., the corporate person that owes the debt) is protected from all proceedings, including those that demand the recovery of dues before a court of law, tribunal or “any other authority”.

The efficacy of such shielding under Section 14 is catalysed when read with Section 238 of the IBC, which contains a non-obstante clause and consequently, authorises the IBC to have primacy (and an over-riding effect) over all existing laws, provided they are “inconsistent” with its provisions.

On the contrary, Section 28A of the SEBI Act allows the SEBI to recover proceeds or any other penalties imposed by it via attachment and sale of property, bank accounts etc. The SEBI does so when a perpetrator is unable to pay a penalty/dues or fails to comply with an order issued by it. This provision is further bolstered by a non-obstante clause of its own—Section 28A (3)—which postulates that the recovery of any amount under Section 28A (1), would precede over “any other claim” against the said person.

The conundrum, thus, is plainly apparent. Can the SEBI exercise its power to recover penalties/dues from corporate debtors even when a moratorium (that expressly prohibits such action) has been imposed? The jurisprudence on this issue has not been established concretely—while the decisions of the NCLT have held the IBC to be supreme, a catena of other decisions have opined otherwise.

When Late is Great: Analysing the intent behind Section 14

Academicians assert that the SEBI’s power under Section 28A is rendered void (and futile) against companies undergoing CIRP and base their claim on 2 primary contentions—the legislative intent behind Section 14 and the principle of generalia specialibus non derogant.

The Apex Court, in Rajendra K. Bhutta, has previously affirmed that the objective behind the introduction of Section 14 was to maintain a “statutory status quo” on the Corporate Debtor and his assets, to ensure that the Resolution Professional could fulfil his role effectively—without any outside intervention or impediments. Along similar lines, in the case of Bhanu Ram, the NCLT stipulated that the legislature intended that the Interim Resolution Professional carry out the day-to-day affairs of the corporate debtor, and accordingly drafted Section 14 in a manner that allowed him to do so effectively. As the possession of the debtor’s property is sine qua non for the Interim Resolution Professional (“IRP”) to effectively carry out their function, the NCLT Bench unanimously held that Section 28A could not be imposed by the SEBI during a moratorium on the debtor.

Furthermore, the NCLAT in Anju Aggarwal, posited that regulatory entities such as SEBI and the Bombay Stock Exchange fit within the contours of “other authority. In that regard, the tribunal declared that Section 14 (1) (a) of the code included the SEBI (Listing Obligations and Disclosure Requirements) Regulations within its ambit, and a corporate debtor need not comply with them after a moratorium had been issued in light of Section 238 of the IBC. It is precisely in this regard that innumerable academics contend that the objects and purposes of the IBC, when read with the aforementioned precedents, unequivocally showcase that the moratorium period hinders all statutory bodies, including the SEBI from collecting their dues. The NCLT also placed reliance on the Supreme Court decision in Monnet Ispat and Energy Limited which had  held that the IBC would prevail over all inconsistent laws (including the Income Tax Act),  while acknowledging the supremacy of the non-obstante clause in Section 238 of the IBC.

Another argument postulated by proponents of the IBC is that of generalia specialibus non derogant—which means that the legislation enacted later shall prevail when there exists “any inconsistency” between 2 laws. The principle underlying this is that the legislature, while drafting the newer statute, was aware of the non-obstante clause present in the older statute. Consequently, by adding a non-obstante clause in the newer statute, the drafters intended that the newer law prevail. Accordingly, as the IBC was enacted in 2016, while Section 28A of the SEBI was introduced in 2014, the court in Maharashtra Tubes limited held that the IBC’s drafting committee aspired for it to override the SEBI Act.

However, we submit that this position is exceedingly erroneous and warrants reconsideration.

Discarding the (flawed) traditionalist view: Arguments Favouring the SEBI

We contend that the court in Maharashtra Tubes wrongly assumed that the legislature is always aware of potential overlaps and conflicting provisions while enacting legislations (and inserting non-obstante clauses), even though that is not the case.

Furthermore, the Supreme Court in its landmark decision of Kishore Bhai Goyal vs State of Gujarat, had laid out a 3-pronged test in the context of inconsistency between 2 pieces of legislation. Firstly, whether there exists a direct conflict between the two impugned sections; Secondly, whether the intention of the parliament was to draft an exhaustive legislation in regards to the subject matter replacing the older legislation and finally, whether both the statutes operated in the same field of law. The court also postulated that the doctrine of generalia specialibus non derogant would only be applicable when there exists a manifest subject matter conflict between the two statutes. To that effect, the Supreme Court also held that the determination of whether a later legislation prevailed over the former entailed the analysis of the “true meaning and effect” of the older law. Without carrying out this essential step, the court stipulated that it was “impossible” to determine whether an inconsistency between the two statutes existed in the first place.

It is argued that an application of the three-pronged test of inconsistency irrefutably shows that there exists no conflict between the SEBI Act and the IBC. While the SEBI deals with investor protection issues, the IBC confines itself to issues related to creditors. Furthermore, even the jural relation between the subjects of the act differ greatly—while the SEBI Act regulates relations between investors and the company, the IBC is limited to governing issues that arise between the creditor and the corporate debtor. As the SEBI Act and the IBC operate in separate fields, it cannot be reasonably interpreted that Section 238 of the IBC was enacted to override the non-obstante clause present in the SEBI Act.

In fact, in Shobha vs Pancard Club Ltd, the NCLAT had expressly held that the provisions of the SEBI Act and the IBC were not conflicting. Accordingly, the Securities Appellate Tribunal affirmed SEBI’s order that had levied penalties for a violation of Regulation 3 of the SEBI (Collective Investment Schemes) Regulations, 1999 and held that CIRP could not begin against the corporate debtor as the interests of the investor were already under protection at the hands of the SEBI. It is imperative to note that the NCLAT upheld the said order.

Another prime specimen of the application of the aforesaid principles was the Supreme Court’s decision in the case of Harshad Govardhan v. International Assets Reconstructionwhich also dealt with Insolvency law. Herein, the Apex Court was tasked with deciding over a (potential) conflict between Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) (that deals with the enforcement of Security Interest) and Section 65-A of the Transfer of Property Act (which deals with a Mortgagor’s power to lease). To that effect, the court posited that while the assets that were governed by both the statutes were essentially the same, the statutes were not at odds with each other. This was primarily because the two statutes operated in completely different fields of law, which would ensure that the non-obstante clause given under Section 35 of the SARFAESI Act would be rendered unenforceable against the Transfer of Property Act.

In the context of the IBC and its non-obstante clause itself, this principle was applied by the NCLT in its ruling in Roofit Industries vs BSE Limited. The Mumbai bench of the tribunal had, in unambiguous terms, declared that Section 238 could only be invoked when the law that was allegedly incompatible with the IBC, dealt with the same core issues that the IBC governed.

In this regard, it is evident that the Supreme Court’s jurisprudence on non-obstante clauses favours a view which would not give Section 238 complete primacy over the SEBI Act. Accordingly, we contend that the power bestowed onto the SEBI by virtue of Section 28A cannot be stripped merely because the defaulter has been placed under moratorium during a CIRP. The aim and objective of the SEBI to safeguard the interests of investors in capital markets while maintaining its sanctity cannot be overhauled by the IBC—whose aim and objective of a speedy resolution of insolvent entities implies that the IBC’s sphere of law is greatly different.

SEBI as an operational creditor: an Insubstantial Solution

Academics rely of prior judicial decisions to contend that as the IBC is a “complete code”, it shall apply exhaustively to a corporate debtor faced with insolvency. This would mean that in order to extract penalties and dues from defaulters, SEBI can only rely on the recourse available under the IBC itself. To that effect, the NCLAT in Anju Agarwal, observed that any penalty that a corporate debtor was liable to pay could only be claimed by the SEBI as an operational creditor (i.e., a creditor that brings a claim for the provision of goods or services, including employment, or a debt for the repayment of dues arising under any law as under Section 5 (21)) and not under Section 28 (A) of the SEBI Act while a moratorium has been issued. This position was blindly reiterated by the tribunal in Bohar Singh Dhillon v. Rohit Sehgal. Furthermore, the SC in Maharashtra Seamless Ltd. v. Shri Padmanabhan Venkatesh had held that penalties imposed by SEBI and other regulatory bodies could be recovered as operational debt—however not during the CIRP.

While this position taken by the judiciary does provide some respite to SEBI, it falls flat in the larger picture. Firstly, operational creditors are not highly placed on the priority order, either under the resolution plan or for distribution of assets under the IBC.  Section 53 of the Code has assigned a specific order or priority for the distribution of liquidation assets owing to the corporate debtor. According to Sections 53(2)(b)(ii) and 53(2)(d), among both secured and unsecured financial and operational creditors, the secured financial creditor is given due prominence and importance, followed by the unsecured creditors, while obligations owed to operational creditors are impliedly interpreted as “any remaining debts and dues” and are given relatively less prominence under Section 53(2)(f). Thus, in practice, the dues that the operational creditor actually receives are meagre to say the least.

Secondly, the court in these cases has not clarified the mechanism for when ‘assets in trust’ are to be claimed. Assets in trust refer to assets that have been placed into a fiduciary relationship between a trustor and trustee for a designated beneficiary. Trust property may include any type of asset, including cash, securities, or real estate. When assets in trust are to be recovered from the debtor, SEBI (or other regulators) may not have knowledge of the particular asset which would match the description. Thirdly, as the IBC does not lay down a process for demarcating ‘assets in trust’, either the Resolution Professional or the Committee of Creditors could essentially authorize the use of such assets. It is imperative to note that doing so could cause great monetary harm to various investors whose right to recover the assets would be violated if such assets are tampered with at the behest of the Resolution Professional / CoC.

Thus, in essence, it is plainly evident that this position merely scratches the surface and does little to solve the conundrum from its core.

Harmonious Construction of the 2 acts : the optimal Remedy

In the alternative, we submit that the mechanism followed by the American Bankruptcy regime is worth applauding and should be imbibed by Indian regulatory and judicial authorities. American jurisprudence shows that in such cases, the U.S Securities and Exchange Commision (American SEBI equivalent) has been permitted to temporarily freeze the assets of the defaulter while insolvency proceedings continue. The rationale behind allowing such a temporary freeze, as propounded by the American judiciary, is that a freeze is meant merely to safeguard the assets of the debtor and not to recover them while the insolvency process is ongoing.  Accordingly, the courts in India should interpret Section 14 of the IBC to halt only recovery proceedings and allow the SEBI to pass interim orders to protect the interests of the investors. As the interim order would only freeze the assets and not amount to a recovery, the order would not amount to a violation of the sanctity of the moratorium. In fact, the Delhi High Court, in  Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd has already observed that the moratorium applies only to “debt recovery actions”. Doing so would ensure that the legislative goals of both the IBC and SEBI act are fulfilled.

Moreover, reliance should also be placed on the  2018 Report of the Insolvency Law Committee, which in unambiguous terms differentiated between proceedings to assess or determine liability and proceedings to recover the recover the said assessed liability. To that effect, it can be argued that Section 14 intends to only prohibit the latter. As under Section 33(5) of the IBC, no legal proceedings can be instituted against the corporate debtor without prior approval from the adjudicating authority. Thus, regulatory authorities (like the SEBI) should be permitted to assess the damages even during the moratorium, while the enforcement should be limited to post the competition of CIRP.


The division bench of the Supreme Court has been presented with a golden opportunity to finally settle a jurisdiction dispute between two salient pieces of legislation and lay down the jurisprudence on the issue for the lower judiciary to imbibe. In this regard, it is hoped that a view preferring the IBC is not adopted by the Apex court and rather a harmonious interpretation, that ensures optimum utilization of both the acts, is embraced. Afterall, a gratuitous encroachment of the SEBI’s powers would not benefit anyone—except probably the corporate debtors seeking to escape from potential liability under the SEBI Act.


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