Can insolvency proceedings protect firms & directors from SEBI heat?

The noticees had challenged an earlier interim order, issued by SEBI on March 20, 2023, citing various sections of the the Insolvency and Bankruptcy Code (IBC)

A company and its  directors, who had siphoned funds and cooked the books, tried to fend off punitive action by claiming that since the firm was facing insolvency proceedings, there was a moratorium on regulatory proceedings.

In an order issued on May 2, the Securities and Exchange Board of India (SEBI) slapped one of the stiffest penalties till date  — Rs 56 crore — on two promoters of Seya Industries.

Ashok Ghanshyamdas Rajani and Amrit Ashok Rajani, who are also the company's CMD (Chairman and Managing Director) and CFO (Chief Financial Officer), respectively, have been asked to pay Rs 28 crore each. The regulator has also asked the promoter-CFO to return more than Rs 80 crore that was siphoned off.

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Regulatory action against the company will be notified through a separate order, given that the company is going through the Corporate Insolvency Resolution Process (CIRP).

One of the points discussed in the insolvency proceedings was whether SEBI can initiate regulatory action against a company and its directors when the company was under CIRP.

The noticees had challenged an interim order issued by SEBI on March 20, 2023, citing various sections of the Insolvency and Bankruptcy Code (IBC), including section 14, under which there is a moratorium on regulatory action pending insolvency proceedings.

Company's liability

SEBI pointed out that the  2023 order had been passed when the two parties — the creditor and the corporate debtor Seya Industries — had reached a settlement when the company's management was still under the control of the noticees.

In the latest order, SEBI's Whole-time Member Ananth Narayan pointed out the uniqueness of the case, "It was a peculiar instance wherein though the petition was admitted by the adjudicating authority (National Company Law Tribunal, or NCLT), the parties were already discussing a settlement before the said admission  and eventually settled their disputes and proceeded to take steps for the withdrawal / dismissal of the petition."

Seya Industries entered  the CIRP process following action by another debtor in 2023, and this matter is still ongoing.

Directors' liability

In the order, the regulator clarified that an existing matter under CIRP against a company does not bar SEBI from proceeding against the firm's directors and promoters.

The regulator said, "the protection of moratorium is granted only to Noticee No. 1 (Seya Industries)."

The CFO, through an authorised representative, also cited section 96 of the IBC, which grants interim moratorium on legal action with respect to any debt; under the section, the interim moratorium commences from the date of filing a petition under the IBC by a debtor / creditor, and ceases as soon as the petition is admitted by the tribunal. The CFO submitted that a petition had been filed by IFCI Ltd before the NCLT and that it was pending, and therefore the interim moratorium is applicable.

On this, the market regulator said that the interim moratorium is applicable for dues that were applicable when the moratorium was declared, and not for future dues such as the current SEBI penalty.

SEBI's order said, "Any penalty imposed in the extant proceedings would be in the nature of a future liability as far as the interim moratorium under section 96 of IBC is concerned."

"Perpetrating fraud"
In the order, Narayan noted, "Noticee No. 2 (Ashok  Rajani) was a promoter and MD of the company, and Noticee No. 5 (Amrit  Rajani) is the son of the promoter (and yet not disclosed as a member of the promoter group) and the CFO of the company.

"The funds / assets which were diverted / siphoned were moved to privately held companies in which Noticee No. 5 held a significant number of shares and was on their board of directors. These companies were also co-owned / co-managed by other immediate relatives of Noticee Nos. 2 and 5. The fictitious proprietorships, evidently, were orchestrated at the behest of the promoters, through Narendra Pandya (an associate). Therefore, Noticee Nos. 2 and 5 are clearly liable for the highest possible penalties under securities law for their active role in perpetrating the fraud."