Supreme Court upholds supremacy of IBC by asking SEBI to join process - Ponzi companies

If the current proceedings at the Supreme court are an indication, all collective investment schemes being investigated by SEBI ‘may’ very well end up being proceeded against under the Insolvency and Bankruptcy Code, 2016 (IBC).

The case before the Supreme Court pertains to two (Ponzi) schemes launched by the same promoters using the companies Royal Twinkle Star Club Limited and Citrus Check In Limited. While these cases were under SEBI investigation after having traveled to the Supreme Court earlier, some of the investors in this scheme triggered the IBC in 2017. The Mumbai Bench of the NCLT declared moratorium against both companies.

This case, however, has elements which have been tested and applied for the first time under IBC.

Firstly, in the absence of any financial creditors, the huge base of 18 lakh investors was tagged as operational creditors. Regulation 16 of the IBBI (CIRP) Regulations which specified that in case of no financial creditors the Committee of Creditors (CoC) shall be of top 18 operational creditors. Resolution Professional (RP), Devendra Jain says, it was difficult to constitute CoC of only 18 operational creditors and proceed. Hence, he constituted the CoC by taking representatives from different groups of investors for better representations. Also, he made an advisory committee of retired bankers and legal professionals to guide the process.

During the resolution process, the CoC decided on liquidation given that the assets of the two companies amounted to not more than Rs. 25-30 crores. The RP then applied for liquidation in November 2017. However, the RP conducted a forensic audit into the two companies and found that all the monies collected from the investors were being diverted to several sister concerns. And the assets of these sister concerns collectively added to nearly Rs. 3,500 crores. For this reason, the RP applied for attaching the assets of these sister concerns and the NCLT agreed, with cooperation from the alleged promoters.

The liquidation application was however opposed by a certain set of investors who filed an intervention application alleging collusion between the (insolvency) triggering investors and the promoters. The NCLT did not entertain this application, neither the NCLAT. But the Supreme Court in January 2018 passed an ex-parte order staying any further insolvency proceedings. However, by an order passed in April, 2017, operational expenses are allowed to be defrayed.

Before the matter reached the Supreme Court but after the liquidation application had been filed, the RP had moved to the NCLT by the means of an interlocutory application praying the NCLT to pass orders which prohibit the promoters from alienating such properties and asking the promoters to deposit their passports. The NCLT was pleased to allow this application exercising its inherent powers which are outside the IBC mandate, in view of the repayment that needed to made to investors. This is perhaps the first time the NCLT has done so for any IBC proceedings.

This set of investors investors at the Supreme Court are arguing before a bench Justices AK Goel and Rohinton Nariman that the SEBI is the appropriate authority for handling this matter. The Supreme Court, however, has for now made its stance clear that the matter will continue to be governed by the IBC. The Supreme Court has further asked the SEBI to have a joint meeting with the RP  and investors to allay the concerns of these investors. The objective of this meeting is to arrive at an amicable solution.

Senior Counsel Shyam Divan appeared for the disgruntled investors before the Supreme Court whereas ASG  Tushar Mehta appeared for SEBI.  Senior Counsel K V Vishwanathan along with Mahesh Agrawal and Nipun Singhvi appeared for the RP.

[Corrigendum: A previous version of this article wrongly mentioned that the SEBI will now be a part of the CoC. The author would also like to clarify that this is an interim order and the final verdict of the Supreme Court is yet be delivered on the subject.]

Courtesy Bar and Bench