Bhanu Ram & Ors v. HBN Dairies: An Ill-Advised Broadening of the IBC’s Purview

[By Suyash Tiwari and Aditya Prasad]

The authors are fourth year students of Hidayatullah National Law University, Raipur and can be reached at

The Insolvency and Bankruptcy Code (“IBC” or “the Code”) recently dealt with a spate of jurisdictional disputes vis-à-vis various other statutes including the Companies Act, 2013; Prevention of Money Laundering Act, 2002; the Arbitration and Conciliation Act, 1996 and the Tea Act, 1953. This article is concerned with such a conflict between the Securities and Exchange Board of India (“SEBI”) and the National Company Law Tribunal (“NCLT”). The present dispute is with regards to the attachment of certain properties by SEBI in an action against illegal mobilization of funds by a company, HBN Dairies.


In 2015, a SEBI order was passed against HBN Dairies wherein it found floating a Collective Investment Scheme (“CIS”) without duly obtaining registration from SEBI under Section 12(1B) of the SEBI Act (“the Act”) read with Regulation 3 of the CIS Regulations, 1999. On appeal, SEBI’s founding was upheld by the Securities Appellate Tribunal. Subsequently, in 2017, SEBI ordered the attachment of 41 properties of the Company and a recovery certificate was issued to the tune of Rs. 1136 Crores to pay off the investors.

However, since the investors under the scheme had not been paid off for several months, a group of 36 investors approached the NCLT preferring an insolvency application under Section 7 of the IBC. On 14th August, 2018, the NCLT admitted the application and declared a moratorium under Section 14 of IBC on the basis that the investors could be considered as financial creditors of the Company. Moreover, it was held that, the provisions of Section 14 of IBC would, by virtue of the non-obstante clause present in Section 238 of IBC, prevail over Section 28A of the SEBI Act which provides for recovery of money from a Company by selling movable or immovable property. The same was upheld by NCLAT on appeal.

SEBI has now preferred an appeal before the Hon’ble Supreme Court of India in the case of SEBI v. Rohit Sehgal. [i]

Feasibility of a Resolution Process

On a prima facie inspection of the facts, we see that there is uncertainty whether the Code is the appropriate machinery under which the investors ought to seek remedy. Should the Supreme Court uphold the NCLAT order, it would be tantamount to defeating the express legislative intent of the Code. The Code seeks to act, not merely on behalf of the creditors, but for the more wholesome endeavour of insolvency resolution, while attempting to maintain or revive the business as a going concern.

Reference can be made to Binani Industries Ltd. v. Bank of Baroda & Anr. [ii] which elucidates the above point. The NCLAT in that case made the following observations:

  • The Code in Section defines Resolution Plan as a plan for insolvency resolution of the Corporate Debtor as a going concern.
  • The Code does not allow liquidation of a Corporate Debtor directly, but only on the failure of the Resolution process.
  • Further, the Code prohibits and discourages mere recovery of debt, which might only end up bleeding the Debtor’s resources to its death, as opposed to a resolution which seeks to keep it alive.

On perusing the above, we find that the primary objective of any resolution proceeding under the Code is to preserve the business as a going concern; to which the recovery of debts is ancillary. An application under Section 7 of the Code does not entail a mere garage sale of the Debtor’s properties to satisfy his debts, but an earnest attempt to keep the business alive. However, keeping the business alive cannot be a suitable course of action with regard to HBN Dairies whose operations were declared illegal as it is in contravention of Section 12(1B) of the SEBI Act. Accordingly, SEBI ordered HBN to cease collection of further funds and initiated attachment and recovery proceedings against it.

What this implies is that the business has effectively been brought to an end and the only remaining course of action left with regard to it is recovery, which as pointed out earlier, is not under IBC’s domain. A Resolution Plan is, thus, an inappropriate remedy for the investors to pursue, more so because the appropriate remedy, that is, the SEBI’s auctioning of HBN’s properties in order to pay back the investors has already been put into motion.

Thus, the Supreme Court, in overturning the NCLAT’s order would be upholding the legislative intent of the Code as well as preventing an encroachment of the SEBI’s jurisdiction in investor protection issues.

Jural Relationship as a requisite for existence of legal debt

The Supreme Court also had the opportunity to shed some light on the question whether these investors may be categorized as financial creditors.

In the instant case the investors were classified as financial creditors after relying on Nikhil Mehta & Sons (HUF) v M/s AMR Infrastructure Ltd. [iii] wherein it was held that those who have been committed assured returns on their investment are financial creditors. However, that order pertained to a legally binding relationship between the investors and the investees, whereas in the present case, the scheme run by HBN Dairies under which the returns were assured was illegal ab initio.

In Shobha Ltd v Pancard Clubs [iv] NCLT Mumbai dealt with a similar factual matrix involving attachment of properties of a Company who had floated a CIS without registration. When the tribunal was adjudicating about the existence of a financial debt it held that:

There is no jural relationship in between this Petitioner and the Corporate Debtor because the contract purported to have been entered between this Petitioner and the Corporate Debtor is not recognised by any law, indeed there is a prohibition under SEBI Act to collect funds as mentioned under Section 11AA of the SEBI Act unless and until license for CIS has been granted by the SEBI.

Thus, the NCLT stated that the returns promised cannot be classified as a debt as the essential requisite for any legal debt, whether financial or operational, is an enforceable agreement between the two parties, unlike the present case.

Overriding effect of the IBC

Another controversial aspect of the present case is the NCLT’s observation that in light of Section 238 of the Code, the SEBI’s recovery proceeding under Section 28A of the Act would be overridden by the Code.

In Shobha Ltd. [v], it was held that the non-obstante clause does not override all existing laws, but only those provisions which are repugnant to the effective functioning of the Code. Reliance was placed upon Kishorebhai Khamanchand Goyal v. State of Gujarat [vi] wherein the Supreme Court necessitated the existence of a subject matter conflict in order for the provisions of a later Statute to prevail over those of an earlier one.

The NCLT stated that the overriding provision takes effect:

 “… only when the other laws are inconsistent with the IBC, since SEBI Act has been dealing with investor protection issues, not with creditor and debtor issues, though Section 238 has exhaustive mode in respect of the subject matter of creditor and debtor issues, it has no overlapping or overriding effect over investor protection issues dealt with under SEBI Act.”

In the words of Krishna Iyer, J. in LIC v DJ Bahadur [vii],In law, we have a cosmos of relativity not absolutes – so too in life“. Keeping this in mind, the Supreme Court may clarify whether Section 14 of the Code can bring even those proceedings to a halt, which are carried out under statutes which have a different objective than that of the Code.


The Supreme Court has been presented with an opportunity to clear up a rather puzzling jurisdictional tussle between two vital authorities in the bigger picture of the Indian economy. It has had its hands full in clarifying and correcting the working of the Code to ensure optimum utilization. However, optimum utilization does not necessarily entail maximum utilization; this is one case where giving primacy to the Code would lead to an unnecessary encroachment of the SEBI’s jurisdiction. However, since the letter of the law dictates that the Moratorium under Section 14 of the Code shall preclude all other proceedings including the one envisaged by Section 28A of the SEBI Act, the matter is not in black and white and thus the Apex Court’s take is interesting.


[i] Civil Diary No(s). 19613/2019.

[ii] Company Appeal (AT) (Insolvency) No. 82 of 2018.

[iii] Company Appeal (AT) (Insolvency) No. 07 of 2017.

[iv] 2017 SCC Online NCLT 7486

[v]   Ibid.

[vi] (2003) 12 SCC 274

[vii] (1981) 1 SCC 315


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