IBC Resolution Plan Shields Corporate Debtor from SEBI Penalty: SAT Mumbai Rules in Bhushan Power & Steel Ltd. Case

Case Overview

The Securities Appellate Tribunal (SAT), Mumbai delivered a significant ruling in the matter of Bhushan Power & Steel Ltd. Vs Securities & Exchange Board of India, setting aside a penalty order passed by SEBI's Adjudicating Officer (AO) against the appellant. The Tribunal determined that once a resolution plan under the Insolvency and Bankruptcy Code, 2016 is duly approved and attains finality, regulatory authorities including SEBI are precluded from initiating or continuing penalty proceedings against the resolved corporate debtor for alleged prior contraventions.

Background and Facts of the Case

The SEBI Penalty Order

The appeal arose from an order dated April 13, 2022 passed by the Adjudicating Officer of SEBI, which imposed a penalty of Rs. 46 lakh to be paid jointly and severally by the appellant along with 22 other noticees. This penalty was imposed under Section 15HA of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act) for alleged violation 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 the PFUTP Regulations).

Nature of the Alleged Violation

The underlying allegation centred on a preferential allotment made by Unisys Softwares and Holding Industries Ltd. (Unisys). It was alleged that Unisys provided financial assistance to preferential allottees to enable them to purchase shares allotted to them on a preferential basis. The specific allegation against Bhushan Power & Steel Ltd. was that the appellant was connected to Unisys through fund transfers and had acted as a conduit, facilitating the transfer of funds to preferential allottees as part of the alleged fraudulent preferential allotment scheme.

Based on this investigation, a show cause notice was issued on August 5, 2019, pursuant to which the impugned order dated April 13, 2022 was eventually passed.

The IBC Timeline: A Critical Sequence of Events

A decisive factor in the Tribunal's reasoning was the sequence of events under the Insolvency and Bankruptcy Code, 2016 (IBC), which predated SEBI's show cause notice:

1. July 2017 — Punjab National Bank filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 against the appellant on account of defaults committed by it.
2. July 26, 2017 — The National Company Law Tribunal (NCLT) admitted the petition and granted a moratorium under Section 14 of the IBC.
3. February 8, 2018 — A resolution plan was filed before the NCLT.
4. August 5, 2019 — SEBI issued its show cause notice (i.e., after the moratorium had already been in operation and after the resolution plan had been filed).
5. September 5, 2019 — NCLT approved the resolution plan by order.
6. February 17, 2020 — The National Company Law Appellate Tribunal (NCLAT) dismissed the appeal against NCLT's approval order, rendering the resolution plan final.

This chronology was central to the Tribunal's conclusion that SEBI's show cause notice, issued on August 5, 2019, was initiated after the moratorium had already taken effect and contemporaneously with the resolution plan approval process — making the subsequent adjudication wholly untenable in law.

Legal Issues Examined by SAT

Issue 1: Whether the AO Could Issue a Show Cause Notice After the Section 14 Moratorium

The first question before SAT was whether SEBI's AO retained jurisdiction to issue a show cause notice and adjudicate the alleged contravention after the moratorium under Section 14 of the IBC had already been granted by NCLT on July 26, 2017.

Issue 2: Whether an Approved Resolution Plan Under Section 31 Bars SEBI Proceedings

The second and more fundamental question was whether the approval of the resolution plan under Section 31 of the IBC extinguished SEBI's authority to adjudicate and impose a penalty against the corporate debtor for liabilities covered under or arising prior to the resolution.