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When SEBI Meets the IBC Moratorium

Table of Contents

I. Introduction

When two statutes with strong and overlapping powers apply to the same situation, a conflict of authority is inevitable. This is exactly what happens when a company enters the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC), while the Securities and Exchange Board of India (SEBI) simultaneously initiates its own enforcement actions.

Under CIRP, the Committee of Creditors (CoC) and the Insolvency Professional (IP) assume control over the corporate debtor’s property, which must be preserved to maximise value for all creditors. To enable this, Section 14 of the IBC imposes a moratorium on any recovery or enforcement proceedings against the company.
SEBI, however, exercises regulatory powers to protect investors and market integrity. In cases involving securities fraud or unlawful fund-raising, SEBI may attach properties of promoters or the corporate entity to secure penalties or restitution for affected investors. These actions often continue even when the company is already undergoing insolvency.

This inevitable clash becomes sharper because both statutes contain overriding clauses: Section 238 of the IBC states that it prevails over any conflicting laws, while Section 28A(3) of the SEBI Act grants SEBI priority in recovering its dues notwithstanding anything inconsistent in other laws. This raises the critical question: when insolvency law demands asset preservation, and securities law demands asset attachment, which legal mandate should take precedence?

When two statutes with strong and overlapping powers apply to the same situation, a conflict of authority is inevitable. This is exactly what happens when a company enters the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC), while the Securities and Exchange Board of India (SEBI) simultaneously initiates its own enforcement actions.

Under CIRP, the Committee of Creditors (CoC) and the Insolvency Professional (IP) assume control over the corporate debtor’s property, which must be preserved to maximise value for all creditors. To enable this, Section 14 of the IBC imposes a moratorium on any recovery or enforcement proceedings against the company.

SEBI, however, exercises regulatory powers to protect investors and market integrity. In cases involving securities fraud or unlawful fund-raising, SEBI may attach properties of promoters or the corporate entity to secure penalties or restitution for affected investors. These actions often continue even when the company is already undergoing insolvency.

This inevitable clash becomes sharper because both statutes contain overriding clauses: Section 238 of the IBC states that it prevails over any conflicting laws, while Section 28A(3) of the SEBI Act grants SEBI priority in recovering its dues notwithstanding anything inconsistent in other laws. This raises the critical question: when insolvency law demands asset preservation, and securities law demands asset attachment, which legal mandate should take precedence?

The first half of the blog will examine the lack of clarity on this issue by tracing landmark judgments as well as discussing the two latest cases in this matter i.e HBN Dairies & Allied Ltd (HBN Dairies case) and National Spot Exchange Ltd. v. Union of India & Ors.(NSEL case). The second half of the blog will consider the economic implications for SEBI if the IBC takes precedence over the SEBI Act during the moratorium period.

Recent Developments​

In HBN Dairies case, the Supreme Court of India permitted SEBI to sell the assets because the company had been found to have conducted illegal collective investment schemes, mobilising funds from investors without complying with regulatory norms. The court’s order allowed it to sell the assets with the involvement of a liquidator. However, the Court did not decide how the proceeds of such sales were to be distributed or divided.
In the NSEL case, the Supreme Court held that properties attached under the Maharashtra Protection of Investors and Depositors Act (MPID Act) can sold even when the corporate debtor is undergoing insolvency proceedings. The Court clarified that such attached assets remain available for the enforcement of investor claims despite the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code (IBC).
These two decisions illustrate the evolving jurisprudence on the balance between regulatory enforcement and insolvency processes in India.

Key Cases Reflecting the Jurisprudential Split

The developments in the HBN Dairies and NSEL cases add to an already mixed set of judicial views on how the SEBI Act and the IBC interact. In Shobha Ltd. v. Pancard Clubs Ltd., (Shobha case) the NCLT held that the two laws operate in different domains: SEBI’s role is to protect investors and regulate the securities market, while the IBC focuses on insolvency resolution. Because their purposes differ, the tribunal concluded that there is no direct conflict between them. The Shobha case is often cited to support the position that the IBC does not automatically override the SEBI Act. However, in Pr. Director General of Income Tax (Admn. & TPS) vs. M/s. Synergies Dooray Automotive Ltd. & Ors. (Pr. Director General of Income Tax), the NCLAT held that statutory dues owed to the Central or State Government fall within the definition of operational debt under the IBC. Similarly, in Shree Bhawani Paper Mills Ltd. v. Bombay Stock Exchange the NCLAT held that Section 14 of the IBC, supported by the non-obstante clause in Section 238, prevails over Section 28A of the SEBI Act during the moratorium period. Relying on Pr. Director General of Income Tax the Tribunal reiterated that even if SEBI imposes penalties or other amounts become payable to it, SEBI can file a claim as an operational creditor and cannot pursue recovery while the resolution process is ongoing. Taken together, these decisions show that the law in this area remains unsettled, with different forums taking different approaches to how SEBI’s enforcement powers should operate once the IBC process and moratorium come into play.

Why SEBI’s Classification Under the IBC Matters

Against this backdrop of inconsistent judicial views, it becomes important to examine what treating SEBI as an operational creditor under IBC would mean in practice. The following section looks at data from resolved insolvency cases to understand how operational creditors typically fare under the IBC.

Where Operational Creditors Stand in the Liquidation Hierarchy

Under Section 53 of the IBC, the “waterfall mechanism” decides the order in which creditors are paid when a company goes into liquidation. Operational creditors (OC) are low in priority in this hierarchy. Because OC ranks lower in the priority order, SEBI would be grouped with other unsecured creditors and may recover only a portion of its dues. This prioritisation has implications for how effectively SEBI’s monetary directions can be enforced in cases where the corporate debtor enters insolvency.

Data on recovery percentage of OC’s under CIRP

For this blog, the analysis uses data from all Corporate Insolvency Resolution Processes (CIRPs) that yielded approved resolution plans as of 31 March 2025. It contains data of 1,194 firms. Basic data cleaning was carried out, including dropping cases:

  • Wherein Admitted Claims and Realisable Amount by OCs was Zero: 10.05%
  • Wherein Admitted Claims and Realisable Amount by FCs was Zero: 4.77%
  • Wherein the Realisable Amount by FC/OC was greater than the Admitted Claims: 4.94%

Finally, the recovery percentage for the final sample of 984 was calculated by dividing the Realisable amount by the Admitted Claims for both OC and FC.

After cleaning, the distribution of CIRP initiation across categories is as follows:

Triggered By

Frequency

Percent (%)

Reserve Bank of India (RBI)

3

0.30

Corporate Debtor (CD)

52

5.28

Operational Creditor (OC)

336

34.15

Financial Creditor (FC)

593

60.26

Total

984

100.00

These figures show that a majority of CIRPs are initiated by financial creditors, while operational creditors initiate roughly one-third of the cases.

Recovery Outcomes Under FC-Initiated CIRPs

A graph of recovery AI-generated content may be incorrect.  A graph of recovery AI-generated content may be incorrect. of FCs and OCs when CIRP is triggered by FC

These graphs show the recovery percentage of FCs and OCs when CIRP is triggered by FC

Recovery Outcomes Under OC-Initiated CIRPs

A graph of recovery AI-generated content may be incorrect. A graph of recovery AI-generated content may be incorrect.These graphs show the recovery percentage of FCs and OCs when CIRP is triggered by OC
These graphs show the recovery percentage of FCs and OCs when CIRP is triggered by OC

Analysis

Across all four graphs, a consistent pattern emerges: OCs experience significantly lower recovery rates than FCs, regardless of who initiates the CIRP. When CIRP is triggered by FCs, FC recoveries span the full range from near-zero to 100%, with a gradual tapering across the distribution. This indicates that although many FCs suffer haircuts, a meaningful proportion achieve moderate or even full recovery. In contrast, OC recoveries in FC-triggered cases are heavily concentrated near the 0–5% band, with very few cases extending beyond 20% and only rare outliers reaching the high-recovery end.
A similar pattern appears when CIRP is triggered by OCs. FC recoveries remain widely distributed, with cases spread across all recovery brackets and a noticeable cluster near full recovery. OCs, however, continue to exhibit extremely low recoveries, with most cases concentrated at or near 0% and only occasional exceptions reaching higher levels. The trigger type does not materially alter this outcome: OCs consistently occupy the lowest end of the recovery spectrum, while FCs retain comparatively better prospects even when they are not the applicants initiating CIRP.
Taken together, the combined evidence shows that the structural position of OCs under the IBC, particularly their lower priority in the waterfall mechanism, results in systematically lower recoveries. This holds true across different types of CIRP initiation and reinforces the broader understanding that OCs, including statutory bodies such as SEBI if treated as operational creditors, face significant limitations in recovering dues under the current framework.

Conclusion

The empirical data reinforces the practical stakes of this debate. Operational Creditors consistently recover far less than financial creditors, regardless of who initiates the CIRP. If SEBI is treated as an operational creditor, the low recovery outcomes observed across insolvency cases suggest that its ability to enforce monetary directions will be significantly limited once resolution begins. This raises broader policy concerns about investor protection, regulatory effectiveness, and the alignment between insolvency objectives and securities-market enforcement.

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