Investor Or Creditor? – The SEBI V. IBC Battle

BACKGROUND – CONFLICT BETWEEN SEBI AND NCLT'S ORDERS

The conflict is best reflected in the recent case of HBN Dairies. HBN Dairies floated a Collective Investment Scheme ("CIS") without obtaining registration from SEBI. When it came to SEBI's notice, the SEBI passed an order to attach the properties of HBN Dairies to pay off the investors. An appeal was filed before the Securities Appellate Tribunal ("SAT"), which directed SEBI to resolve the plight of the investors expeditiously and preferably within six months. When the same was not complied with, investors filed an application under Section 7 of the IBC for initiating Corporate Insolvency Resolution Process against HBN Dairies.

^[1] The NCLT placed reliance on the non-obstante clause of Section 238 of the IBC and held that the moratorium provision under Section 14 of the IBC would override Section 28A of the SEBI Act, which empowers the recovery process by selling the property belonging to the corporate entity. Aggrieved by the order of the NCLT, a Special Leave Petition has been filed by SEBI before the Supreme Court in the case of

SEBI v. Rohit Sehgal^[2], which is pending as on date.

WHO IS A CREDITOR?

Section 3(10) of the IBC, 2016 states:

"Creditor means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder;"

^[3] the Supreme Court went on to interpret Section 3(10) harmoniously with Sections 5(20) and 5(21) and held that the Central and State governments can be creditors under the IBC. Further, in Pioneer Urban Land Infrastructure v. Union of India,^[4] the Supreme Court put homebuyers in the category of creditors and enabled them to be a part of the Committee of Creditors in a resolution plan intended to secure monies from the corporate debtor or real estate agent. The Court then went on to explain the meaning of debt under the Code:

Section 5(8) of the IBC states that a financial debt must be disbursed against the consideration for time value of money. Therefore, any person who gives money to a debtor in hopes of getting an assured return later would be a creditor. Even if the claim arises out of a breach of contract, it will be considered a financial debt.

WHO IS AN INVESTOR?

In 2018, a Committee was appointed by SEBI under the chairmanship of Justice (Retd.) Anil R. Dave on the Measures for Strengthening the Enforcement Mechanism of the Board and Incidental Issues ("Dave Committee"). When the idea of a collective investment scheme was floated, the three important identifying characteristics suggested by the Dave Committee were pooling of investments; management by a separate entity; and absence of day-to-day control of the customers/investors.

Section 11AA of the SEBI Act defines a Collective Investment Scheme a pool of funds constituting of payments made by the investors, wherein such funds are utilized for the purposes of the scheme or arrangement and the contributions or payments are made with a view to receive profits, income, produce or property. Further, the investors do not have day-to-day control over the funds. SEBI requires such schemes to be registered under the CIS regulations. However, even if such schemes are unregistered, SEBI still has the right to regulate them under the proviso to Section 11AA.

Conclusively, an investor under the CIS would be someone who would contribute to a pool of funds not controlled by himself with the objective of getting promised returns.

JURISPRUDENTIAL ANALYSIS

An Assured Returns Scheme ("ARS") is characteristically similar to a Collective Investment Scheme, the only difference being the control of property. In an ARS, the developer assures a certain rate of monthly return for every unit of property in the project in consideration for the purchaser paying up 90-100% of the unit value at the development phase of the project. Under the ARS, the developer also promises to complete the project within a specific date and hand over the possession of the property to the purchaser.

This arrangement is favourable to the developer as he is able to raise funds at a lower cost and with no collateral. On the other hand, the scheme appears to be lucrative to the purchaser as he is promised an assured rate of return and will also be in possession of the property on the agreed date of completion.

^[6]

When confusion befell over the ARS being under RERA jurisdiction or IBC jurisdiction, the National Company Law Appellate Tribunal held that amounts raised by developers under assured return schemes had the "commercial effect of a borrowing", which became clear from the developer's annual returns in which the amount raised was shown as "commitment charges" under the head "financial costs".

[7]

In addition, the inflows and outflows were distanced by time and there was a compensation for time value of money. As a result, such allottees were held to be "financial creditors" within the meaning of Section 5(7) of the Code.^[8] This decision was further upheld by the Supreme Court in the Pioneer judgement.

While this article does not pertain to the specifics of the HBN case, it would be interesting to look at one of the major reasons put forward by SEBI to favour its position. It stated that the objective of the IBC is to save the business and primacy is not given to the interests of the creditor/investor. The NCLT bench at Mumbai dealt with a similar factual matrix involving attachment of properties of a company which had floated a CIS without registration. When the Tribunal was adjudicating about the existence of a financial debt it held that:

[9]

In Appeal from the NCLT, Mumbai' bench's order, the NCLAT further reconciled the SEBI Act and the IBC and held as follows:

^[10]

While the NCLT Mumbai's approach might be a possible solution for the current case, there is no denying that if the CIS were legally registered under the SEBI Act and its regulations, there is no striking difference between a creditor under IBC and an investor in a CIS. Further, if one tries to form a logical sequence, if an ARS is essentially a CIS, and an ARS comes under IBC domain, would CIS not come under IBC domain too? This is an intersection in law that deserves to be interpreted by the Supreme Court soon.

Authors: Saurabh Mishra is an Advocate on Record of Supreme Court of India. Charu Sharma is a third year student of National Law University, Jodhpur. Views are personal.