Vinit Kumar vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

The appellant has challenged the order dated October 8, 2018 whereby the representation / objection of the appellant was rejected by the Recovery Officer (hereinafter referred to as "RO") of Securities and Exchange Board of India (hereinafter referred to as "SEBI").

The fact leading to the filing of the appeal is, that on October 3, 2006, the appellant was declared as an insolvent by the Hon"ble Bombay High Court under the Presidency-Towns Insolvency Act, 1909 (hereinafter referred to as "Insolvency Act"). Subsequently, the Adjudicating Officer (hereinafter referred to as "AO") initiated proceedings against the appellant for violation of Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as "PFUTP Regulations"). The AO after due consideration passed an order dated January 31, 2013 imposing a penalty of Rs 25 lacs upon the appellant after having found that he was the Managing Director in Temptation Foods Ltd. and had indulged in synchronized and self-trades creating artificial volume in the scrip of Kohinoor Foods Ltd. thereby violated Regulations 3 and 4 of the PFUTP Regulations.

Against the order of the AO, the appellant filed an appeal No. 429 of 2014 which was dismissed as withdrawn by an order of the Tribunal dated July 8, 2016. It may be stated here that the appellant did not seek any liberty to file a fresh appeal. Consequently, the order of the AO dated January 31, 2013 imposing penalty became final. Thereafter, a recovery certificate was issued on December 21, 2017 which led to the filing of the appeal No. 50 of 2018. This Tribunal disposed of the appeal by an order dated June 26, 2018 directing the RO to consider the objection / representation filed by the appellant. Based on the aforesaid direction, the impugned order was passed by the RO.

We have heard Mr. Paras Parekh, the learned counsel alongwith Mr. Robin Shah, Ms. Mitravinda Chunduru, the learned counsel for the appellant and Mr. Gaurav Joshi, the learned senior counsel alongwith Mr. Abhiraj Arora, Ms. Rashi Dalmia, the learned counsel for the respondent through video conference.

The contention of the learned counsel for the appellant is that at the time of passing of the impugned order by the AO the appellant had already become insolvent and, therefore, no order could be passed except with the leave of the court as contemplated under Section 17 of the Insolvency Act. In support of his submission, the learned counsel placed reliance upon a decision of the Hon"ble Bombay High Court in Union of India & Anr. Vs. Shantilal Jewellers and Ors. [2003 SCC OnLine Bom 1032].

On the other hand, the learned senior counsel appearing for the respondent submitted that the order passed by the AO has become final and, therefore, the same cannot be challenged at this stage nor such ground can be taken before the RO. It was further contended that the provisions of Section 17 read with Section 46 of the Insolvency Act are not applicable in the instant case. The learned senior counsel has also placed reliance upon the decision of the Hon"ble Bombay High Court in Shantilal Jewellers (supra) as well as a decision of the Hon"ble Madras High Court in T.T.V. Dhinakaran vs. Dy. Director, Enforcement Directorate, Shastri Bhawan, Chennai -34 [2002 (4) CTC 141].

Having heard the learned counsel for the parties at some length, we are of the opinion that the appellant is not entitled for any relief whatsoever. For facility, Section 17 and Section 46 of the Insolvency Act are quoted here under :-

"17. Effect of order of adjudication. - On the making of an order of adjudication, the property of the insolvent wherever situate shall vest in the official assignee and shall become divisible among his creditors, and thereafter, except as directed by this Act, no creditor to whom the insolvent is indebted in respect of any debt provable in insolvency shall, during the pendency of the insolvency proceedings, have any remedy against the property of the insolvent in respect of the debt or shall commence any suit or other legal proceeding except with the leave of the Court and on such terms as the Court may impose: Provided that this section shall not affect the power of any secured creditor to realize or otherwise deal with his security in the same manner as he would have been entitled to realize or deal with it if this section had not been passed."

"46. Debts provable in insolvency. - (1) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract or breach of trust shall not be provable in insolvency.

(2) A person having notice of the presentation of any insolvency petition by or against the debtor shall not prove for any debt or liability contracted by the debtor subsequently to the date of his so having notice.

(3) Save as provided by sub-sections (1) and (2), all debts and liabilities, present or future, certain or contingent, to which the debtor is subject when he is adjudged an insolvent or to which he may become subject before his discharge by reason of any obligation incurred before the date of such adjudication, shall be deemed to be debts provable in insolvency.

(4) An estimate shall be made by the official assignee of the value of any debt or liability provable as aforesaid which by reason of its being subject to any contingency or contingencies, or for any other reason, does not bear a certain value: Provided that if in his opinion the value of the debt or liability is incapable of being fairly estimated, he shall issue a certificate to that effect, and thereupon the debt or liability shall be deemed to be debt not provable in insolvency.

Explanation.-For the purposes of this section "liability" includes any compensation for work or labour done, any obligation or possibility of an obligation to pay money or money's worth on the breach of any express or implied covenant, contract, agreement or undertaking, whether the breach does or does not occur, or is or is not likely to occur or capable of occurring, before the discharge of the debtor, and generally it includes any express or implied engagement, agreement or undertaking to pay, or capable of resulting in the payment of, money or money's worth, whether the payment is, as respects amount, fixed or unliquidated; as respects time, present or future, certain or dependent on any contingency or contingencies; as to mode of valuation, capable of being ascertained by fixed rules, or as matter of opinion."

A perusal of the aforesaid sections makes it clear that when a person is adjudged as an insolvent, no creditor in respect of any debt provable in insolvency can commence any suit or other legal proceedings except with the leave of the court. It was asserted by the learned counsel for the appellant that no leave of the court was taken before initiating the proceedings under the PFUTP Regulations by the AO and, therefore, the order is void. This submission cannot be accepted in as much as we are of the opinion that SEBI is not a creditor and, therefore, these Sections cannot apply to SEBI, since SEBI is a Regulator. Further, a penalty order issued by the AO is not a debt provable in insolvency under Section 17 read with Section 46(3) of the said Act. Thus, no leave is required to be taken from the court.

We further find that the decision of the Hon"ble Bombay High Court in Shantilal Jewellers (supra) is not helpful to the claimant and in fact proves the stand taken by the respondent. In the said decision, it was held that since the liability to pay the amount had arisen after the order of adjudication such claim does not constitute a debt provable in insolvency under Section 46(3) of the Act.

We further find that in T.T.V. Dhinakaran (supra) case, the Hon"ble Madras High Court held that penalty cannot be equated as a debt under the Insolvency Act and further held :

"penalty is an impost by a statutory authority as a punishment of a crime or for contravention of a penal enactment. Such penal liability is never contemplated under the Insolvency Act."

Thus, in our opinion, the order of the AO imposing a penalty for violation of Regulations 3 and 4 of the PFUTP Regulations is not a "debt" as contemplated under Section 17 read with Section 46(3) of the Insolvency Act and, therefore, leave of the court is not required under Section 17.

12 We further find that in any case, the appellant has ceased to be an insolvent and has been discharged from January 21, 2020. Thus, there is no embargo upon the RO to recover the amount from the appellant.

13 We are of the opinion that the order of the AO had attained finality when the appeal filed against the said order was dismissed as withdrawn and no liberty was taken to challenge the said order afresh. We are of the opinion that such question regarding the proceedings initiated under the Insolvency Act ought to have been taken in the appeal and could not be raised as a ground before the RO. The appellant cannot be allowed to raise such grounds in the recovery proceedings.

In view of the aforesaid, the appeal lacks merit and is dismissed with no order as to costs.

15 The present matter was heard through video conference due to Covid-19 pandemic. At this stage, it is not possible to sign a copy of this order nor a certified copy of this order could be issued by the Registry. In these circumstances, this order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally signed copy sent by fax and/or email.