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The article is written by Anumeha Agrawal pursuing BA.LLB (Hons.) from Symbiosis Law School, Pune. This article deals with the report of the High-level Committee (“the Committee”) under the chairmanship of Justice (Retd.) Anil R. Dave published by SEBI on June 16, 2020. The report provides measures for strengthening the enforcement mechanism of the board and incidental issues. The report is divided into four parts the current article summarises and analyses the fourth part of the report- Interface between securities laws and insolvency law.


Insolvency Bankruptcy Code, 2016 has revolutionised the insolvency regime. However, due to its transformational nature, there has been some lack of clarity in its implementation. The diverging interpretation of the provisions by the government agencies, tribunals, courts and Insolvency Bankruptcy Board of India (“IBBI”) especially, have created a bemusing impact.

Trusts including Quistclose trust: the nature of monies due to investor under securities laws

Investors make a subscription to an issue of securities, the allotment and listing of securities should be done in compliance with securities law in the absence of which, the entire amount becomes refundable. The case Re Nanwa Gold Mines Ltd was related to an unregulated collective investment scheme concerning a property near an airport. The court explained the relationship of the subscribers to the company as follows:

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Section 51 of the Companies Act, 1948 is concerned with the allotment of shares and debentures to be dealt in the stock exchange”, and it refers to a statement in prospectuses about applications for leave to deal with shares proposed to be allotted”, and provides for repayment where permission is refused. Thus, the High Court held that the subscription monies are repayable to the persons who subscribed to shares and do not form a part general assets of the company.’

The Committee also explains the rationale behind it as the money advanced for the subscription of securities is done so on the condition of allotment of securities. Thus, until the purpose is fulfilled, the law impresses them with a trust, and upon non-completion of the subscription, the money shall be refundable and not subject to any claims by creditors.

In India, the nature of trust is quistclose trust, the same approach as adopted in UK Law in the case Barclays Bank Ltd v. Quistclose Investments Ltd. The approach lays down the principle that quistclose is an automatic trust and does not need to be incorporated as such, the trust is not discretionary or remedial nature. From the advancement of money for a subscription, the same was duly marked as trust.

It is immaterial whether the scheme under which the investors have sent the subscription is registered or not. The Calcutta High Court in Ganesh Export and Import Co. v. Mahadeolal Nathmal held:

“A truster of monies can claim a refund from an insolvent company in priority to all creditors not on the ground that the obligation return trust property is to be discharged prior to the obligation to repay debts but on the ground that the money never became a part of the property of the company thus is not divisible to pay its dues. If they are kept separate they must be refunded if they are mixed with companies assets an equal amount must be extracted and refunded to the truster. In order to do this, it is not required that it should be formally held in trust for a third party.”

‘Business trusts’ and ‘monies held in trust’: the nature of trust vehicles registered under securities Law

Among various fundraising vehicles provided under several SEBI Regulations, funds are a unique one, some examples of it are Mutual Funds, REITs, InvITs and, AIFs. The process of incorporation of an artificial entity and individuals lies in the concept of business trusts, the concept was originated in Massachusetts for raising funds by an unincorporated entity. The Judicial Court of Massachusetts in Larson v. Sylvester made observations about the nature of the trusts, “it is not a legal responsibility, it is represented by the trustee and holds a title and has fiduciary obligations to others. The trust can be sued separately from the trustee underwritten instrument with beneficial interests divided into transferable certificates of participation or shares are suable at law. But despite having the capacity to sue and be sued the trusts are not separate legal personality.”

In the case PCS Industries Ltd. v. SEBI, the Securities Appellate Tribunal or SAT implied the units issued by the funds are securities under the SEBI Act, even prior to the 2004 amendment since they were marketable and a high degree of liquidity and these were included. It was not required that it is issued by an incorporated body. The inclusive nature of the definition was existent since 1992 and not from the 1995 amendment which inserted the clause empowering the Central Government to add other forms of securities.

In India, a trust cannot be incorporated but only registered with SEBI and under the Indian Trusts Act, 1882. The trust is understood as an obligation attached with the trust property, thus its formation occurs on entrustment of the property. Therefore, there is a clear distinction between the registration and formation of a trust vehicle. 

In case of charitable public trusts, the registration is mandatory under state laws like Maharashtra Public Trusts Act, 1950. Non-registration leads to legal consequences but does not result in its derecognition as a trust as the same will enable the trustees to take benefit of their non-compliance and adversely affect the investors.

Even the non-segregation of assets of the trust does not affect the issue of the existence of trusts, rather it creates a constructive trust extended over the entire asset pool, this was stated in SEC v. Better Life Club of Am, Inc.

The principle is based on developing a mechanism to provide a higher level of protection to the investors. The Committee recommends adoption of the same in India as well.

Recovery of monies due to investors in securities in case of insolvency of trusts

Disgorgement of monies

SEBI has wider powers as compared to SEC concerning disgorgement of the dues. The purpose of disgorgement is not that the regulator has a priority right over the illegal proceeds as compared to the investors, rather no one, not even the investors can benefit from the illegal activities of the company. This fund arising out of illegal activities is ‘proceeds of crime’, but the State or the regulatory authority does not act as a creditor. Therefore the moratorium cannot prevent enforcement officers from depriving a corporate debtor of the proceeds of crime.

Forfeiture is of two types- civil and criminal. In India, civil forfeiture is ‘disgorgement’ and criminal forfeiture as ‘forfeiture’. The securities laws were amended to provide specific priority to theSEBI’s disgorgement recovery action over the claim of any other person. This needs to be harmoniously read with the IBC provisions as well.

The NCLT in Weather Makers Pvt. Ltd. v Parabolic Drugs Ltd. held that the moratorium does not apply to the recovery of assets that were contractually required to be held in trust.

The principles of Indian Trusts Act, 1882 are recognised and applied by the courts. With respect to public trusts the omission of Section 94 did not affect public constructive trusts. The distinction between public and private trusts is that in the former, the beneficiaries are people in general, awhile in the later it an ascertained body of persons. SEBI has few private trusts such as Portfolio Management Services.

In case of conflict between SEBI’s right to disgorgement and creditors’ right to recover their dues, the creditors cannot acquire proceeds of crime, as the debtor had no equitable interest in the estate, even on the date of commencement of insolvency proceedings.

On the event of trustee’s insolvency, the trust property does not form part of the trustee’s estate and the beneficiary has sole equitable interest on the property, therefore, it shall be removed from the pool of trustee’s assets. This puts beneficiary in a stronger position as compared to the creditors.

The committee concludes by recommending putting beneficiaries of trust a higher position as compared to the creditors under the creditors.

Differentiating monies and assets held in trust

For monies raised by the public and managed by a debtor company under the insolvency process, it is important to identify and segregate trust property from the company’s assets. The responsibility is on the company and not the investors. In Wolf v. the United States the Court stated that there doesn’t need to be sufficient identification that the fund or property to be traced back to its original form, however, if the same is mixed with the general assets of the insolvent estate the whole will be treated as trust property. The principle was reiterated in Englar v. Offutt.

Berkley Applegate principle

When the previous management of the company admits to insolvency losses, it can no longer deal with the assets of the company and identification of trust assets. Under IBC, the Resolution Professional manages the company during the process of the corporate insolvency resolution process.

The case Re Berkeley Applegate (Investment Consultants) Ltd, stated the Berkeley Applegate principle. It states the insolvency personnel must differentiate the trust assets from other assets of the company and be paid out of such funds. Only the company’s assets are available to the creditors and the liquidator and not the trust or assets beneficially owned by the company.

Protecting bona fide third parties

The manner of enquiry provided by the Delhi High Court should serve as a framework for the insolvency professional when dealing with segregation of assets for recovery of monies held in trust while protecting the interests of the third parties.

Petitioning the Adjudicating Authority and trust property

The PMLA, RDBA, SARFAESI Act and Insolvency Code must coexist in accordance with the following principles of harmonious construction that were developed by the Delhi High Court in Deputy Director, Directorate of Enforcement v. Axis Bank & Ors.

  • The burden of proving facts that the third party has a legitimate claim on the property lies on the third party itself.
  • In order for a party to be accepted as a ‘bonafide third-party claimant, it needs to prove by a piece of cogent evidence that it had acquired an interest in such property lawfully, for adequate consideration and without being privy to the crime.
  • The property that a bonafide third party is claiming (by cogent evidence) to acquire at the same time around the commission of a crime, to establish legitimate claim the third party needs to prove additional ‘due diligence’ had been taken. 
  • The property that a bonafide third party is claiming (by cogent evidence) to acquire at the time anterior to the commission of the crime shall not be confiscated to the extent of such claim.
  • The direction of attachment shall be operative only to the part of the value over the claim of the third party.

Application of moratorium to Securities law

Moratorium under IBC

Section 14 of IBC provides for a stay against all suit or legal proceedings upon commencement of the insolvency resolution process. The section is of incomparable importance that is why the bare text requires a read:

‘14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

[Explanation – For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period]

(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during the moratorium period.

(2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.

(3) The provisions of sub-section (1) shall not apply to –

(a) 4[such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;]

(b) a surety in a contract of guarantee to a corporate debtor.]

(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:

Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of the the corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.’

Similar provisions are provided under Section 33, 81, 85, 101 and 124 of the Code.

The section has a potential to turn the bankruptcy proceedings into a shelter from all actions and proceedings against it under various legislations, thus it is imperative to analyse the effect it has on securities law proceedings.

Criminal proceedings

The courts have taken the view that moratorium period does not affect the criminal proceedings against the debtor, but due to the recent insertion of Section 32A (explained in detail later), the criminal proceedings against the corporate debtor shall cease upon approval of resolution plan by adjudicating authority in respect of any offence committed before the commencement of Corporate Insolvency Resolution Process if it leads to change in management of the corporate debtor.

The Committee of Creditors in a position of conflict as they are allowed to approve a resolution plan that may pay off debts, by the introduction of the impugned section a premium will be placed for lack of due diligence conducted by the Committee of Creditors. This can lead to the funding of illegal activities without proper due diligence since they can at the time of resolution pay themselves out of the proceeds acquired illegally by the debtor. The Government may legally allow the creditors to use such assets for resolution of the debtor company as it can validly give up its title on it.

The Committee recommended that the section should be amended so that it clearly states the Board has the right to complete its proceedings and determine the amount to be refunded by the corporate debtor.

Assessment proceedings

Insolvency of one person does not operate as a total restriction on the lawful rights of others. Certain issues that cannot be decided by the Adjudicating Authority because of their exclusive jurisdiction in certain matters, is vested by special legislation to specially incorporated tribunals and courts. Section 20A of the SEBI Act provides SEBI and the Adjudicating Authority exclusive jurisdiction to hear securities law matters.

The Calcutta High Court in Official Liquidator, High Court v. Commissioner of Income Tax (WB), stated the assessment and recovery proceedings stand on different levels when it comes to Section 446(1) of the Companies Act, 1956. By applying the principle of harmonious construction to the two acts, Income Tax Act, 1961 and Companies Act, the Court drew the conclusion that leaves of Court is necessary by the Department in respect of any recovery proceedings and no leave of Court is necessary by the Department in case of assessment proceedings.

In the US the bankruptcy law contains a clear exception saving any action other than recovery proceeding from moratorium by:

  • Any governmental unit
  • Organisation established under the Chemical Weapons Convention

The Committee recommends insertion of exemption clause to the moratorium sections (Section 14, 33, 81, 85, 101 and 124 of IBC) which enable the commencement, continuation of proceedings by government, stock exchanges. Even enforcement of decree ought to be permitted if its nature is not of recovery of any dues.

Interim Order

The IBC does not have a mechanism for identification of ‘assets held in trusts’ thus resolution professionals or the committee of creditors may authorise its use during the period corporate debtors are being managed as a going concern, which will adversely affect the interests of the investors.

This was prevented in the United States by SEC v Wyly; wherein the Court said that the US SEC has the power to issue a temporary freeze for the duration of the bankruptcy proceedings to safeguard the assets for recovery. 

Thus the Committee came to the conclusion that the moratorium clause will not affect the applicability of interim orders as they are not for the purpose of recovery and only temporary, once the appropriate claim is filed before insolvency professional or adjudicating authority, the provisions of Companies Act and IBC will be applicable.

Settlement proceedings

The moratorium bars initiation and continuation of proceedings against the debtor company, whereas settlement proceedings are initiated by the company itself for its benefit. Hence settlement proceedings are ordinarily continued by the Insolvency Resolution Professional.

The Delhi High Court in Power Grid Corporation of India v. Jyoti Structures Ltd. stated that:

Proceedings under Section 14 do not mean all proceedings the moratorium clause only intends to prohibit recovery from the corporate debtor, thus the following observations were made.

  • Continuation of arbitration proceedings under Section 34 is not prohibited under the section.
  • The narrower term ‘against the corporate debtor’ as compared to the broader term ‘by or against the corporate debtor’ under section 33 is intentional.
  • Proceedings under section 34 of Arbitration and objections to the award are not covered under the moratorium clause. The proceedings under Section 36 the enforceability and execution of awards are covered under the moratorium as the same is for the purpose of recovering dues from the corporate debtor.

In the light of this precedence, the committee takes the view that settlement proceedings can be continued even during moratorium if represented by the Insolvency Resolution Professional.

Recovery Proceedings for monies due to assets of debtor and assets in a trust

During the moratorium period, any recovery proceedings are not allowed; hence the creditors are required to file their claim to the Resolution Professional. However, where the assets held in trust have been mixed with the assets of the corporate debtor the application has to be made to the adjudicating authority under Section 60 and 179 of IBC or Section 280 of the Companies act to the NCLT.

Alternatively an application for examining pro interesse suo and Berkley Applegate for identification of the monies and handing it over to the Recovery Officer under securities laws by the Insolvency Resolution Professional on the direction of the Adjudicating Authority.

Other proceedings

Other proceedings against the corporate debtor, which do not affect its financial position should not be subject to the moratorium. An example of such proceedings is delisting due to non-compliance with the listing requirements. 

The NCLT in Roofit Industries Ltd. v. BSE Ltd. and Ors. held a combined reading of prohibition under Section 14 of the IBC is in respect to the dues payable by the company and not in respect to other violations committed by the company, this can be inferred by application ejusdem generis. Since the Code basically deals with debts payable by the company, therefore, the prohibitions imposed under section 238 shall also be in terms of debts and not all aspects of the law. 

Since the Securities Contract Regulation Act and Regulations are not in any manner connected to debts payable by the company, the Court stated it is not hit by Section 14 or 238 of the Code. 

Discharge from certain debt under individual insolvency

Although Part III of IBC has not been brought into operation yet, recently the Ministry of Corporate affairs re-constituted an Insolvency Law Committee (Standing Committee) for ‘Review of Implementation of IBC’ which may propose to do so soon. Therefore the current issue gains relevance.

In cases of individual insolvency when the resolution fails the debtor is declared bankrupt, and he is discharged from his debts with the continuance of its legal existence, this creates a possibility of moulding the bankruptcy law to use it as a shield for evading liabilities including under securities law. 

This is not possible for the debts which are declared as non-dischargeable or excluded debts u/s 79 (15 ) of IBC. Excluded debt is defined as:

(a) liability to pay fine imposed by a court or tribunal;

(b) liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other legal obligation;

(c) liability to pay maintenance to any person under any law for the time being in force;

(d) liability concerning a student loan; and

(e) any other debt as may be prescribed.

Since the SEBI does not impose either fines or damages, the protection under this Section is not extended to liabilities under securities law.

The position differs in the United States where Section 523 (a)(3)(7) and (19) of sub Chapter II, Chapter 5 includes debts with respect to securities laws in non-dischargeable debts.

This anomaly should be recognised and addressed by the constituted by the Ministry of Corporate Affairs. The following is recommended to be included in Section 79(15) of IBC:

  • Debt due, other fees due, under any law administered by the Securities and Exchange Board of India;
  • Any debt which results from any court or quasi-judicial order for any damages, fine, penalty, restitution payment, including disgorgement or forfeiture, or other payment owed by the debtor;
  • Debt is due under any other law relating to fraud, deceit or manipulation in connection with the purchase or sale of any security and the creation or redemption of any deposit.

There is a need for implementation of the recommendation by the IBBI and Ministry of Corporate Affairs, by bringing appropriate amendments in both IBC and SEBI Regulations.

Implications of IBC (Amendment) Ordinance 2019

Section 32A

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 inserted Section 32A which has a substantial impact on various other legislations including securities law. It provides the corporate debtor and its property an immunity against prosecution on certain conditions.

Section 32(A) (1) is a non-obstante clause providing the corporate debtor immunity from prosecution for an offence committed prior to commencement of Corporate Insolvency Resolution Process subject to meeting the following conditions:

i) Resolution plan has been approved by the adjudicating authority.

ii) Resolution plan results in a change in management/control of the corporate debtor to a person who was not: 

  • A promoter/ management/ control of the corporate debtor or related party of such person
  • A person against whom a relevant investigating authority has material in possession on the basis of which it believes he has abetted/ conspired for the commission of the offence and submitted a report or filed a complaint to the relevant authority.

iii) Prosecution initiated during the corporate insolvency resolution process against the corporate debtor stands discharged from the date of approval of the resolution plan.

iv) This immunity cannot be availed by any person:

  • Who was in charge of the corporate debtor for the conduct of its business or associated in any other manner.
  • Who was directly or indirectly involved in the commission of an offence as per the report submitted by the investigating authority.

Section 32 (A) (2) bars any action against the property of the corporate debtor with respect to an offence committed before the commencement of corporate insolvency resolution process subject to it meeting the following criteria:

(i) The property must be covered under the resolution plan approved by the Adjudicating Authority.

(ii) The Resolution plan must:

  • Change the control of the corporate debtor to a person; or
  • Sale of liquidation assets under Chapter III of Part II of IBC.

(iii) The person must not be

  • A promoter/ management/ control of the corporate debtor or related party of such person.
  • A person against whom a relevant investigating authority has material in possession based on which it believes he has abetted/ conspired for the commission of the offence and submitted a report or filed a complaint to the relevant authority.

(iv) the immunity does not extend to any person:

  • other than the corporate debtor.
  • who has acquired the property through a corporate insolvency resolution process/ liquidation process.

Lastly, Section 32 (A) (3) states any person shall extend all assistance and co-operation to the investigating authority for an offence committed prior to the corporate insolvency resolution process’s commencement.

Impact on SEBI proceedings

The Section does not clearly state whether it applies to only criminal proceedings or civil proceedings or both. 

The offence has been dealt under Section 24 of SEBI Act, 1992, which states that any contravention or an attempt of contravention of the Act or rules or regulations is an offence and is punishable with imprisonment which may extend to ten years and fine which may extend to 25 crores.

If the same is made applicable to civil proceedings, SEBI will not be able to recover penalties for violation of securities law which was earlier recoverable after the moratorium was revoked.

The Committee recommends exception of applicability of this immunity to the proceedings of securities law.

The impugned report has four parts, this was the final part to read the first part follow the link –


The Committee finally gave the following recommendations in the Report: 

  1. Development of an extensive procedure for dealing with an application for examination pro interesse suo in respect of claims relating to ‘assets held in trust’.
  2. Development of an end to end procedure both in specie and in co-mingled form, for identification of assets held in trust by the Insolvency Professional at the time of his appointment.
  3. Development of a procedure for dealing with claims of the third parties and determining their bona fides and priorities related to the trust assets.
  4. Introducing express power for application of Berkeley Applegate principle by the Adjudicating Authority.
  5. The exemptions to the moratorium should be expressly stated in the provision, including ‘assessment proceedings’ and ‘interim orders’.
  6. Providing a well-defined procedure for distribution of assets by the insolvency professional and also for identification of the cost of the same.
  7. The list of non-dischargeable debts under IBC must be expanded to include the debts due to violation of securities law by the IBBI.
  8. The exemption clause with regards to the applicability of section 32A of IBC to SEBI disgorgement or refund proceedings should be inserted.


The recommendations made by the Committee ensure that the assets utilised in corporate insolvency resolution process, are the ones on which the corporate had both a legal title and equitable interest, otherwise the creditors do not have a claim over the same. These recommendations if implemented will prevent absorption and utilisation of proceeds of crime and trust assets by the corporate debtors or the creditors to settle the dues of the corporate debtor which would otherwise amount to allowing enrichment from their wrongful act.



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