The Supreme Court of India ruled that National Company Law Tribunal and National Company Law Appellate Tribunal cannot review attachment orders under the Prohibition of Benami Property Transactions Act, 1988, even if linked to Insolvency and Bankruptcy Code, 2016 proceedings, dismissing liquidators’ appeals.
NEW DELHI: The Supreme Court has ruled that the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) do not have the authority to review attachment orders issued under the Prohibition of Benami Property Transactions Act, 1988, even if the properties involved were previously connected to cases under the Insolvency and Bankruptcy Code, 2016 (IBC).
A Bench of Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar made this determination while dismissing multiple appeals from liquidators attempting to challenge attachments under the Benami Act before the NCLT and NCLAT.
The Court noted,
“Permitting the NCLT to examine the correctness of attachment or adjudication under the Benami Act by invoking Section 60(5) of the IBC would amount to elevating it to the status of a judicial review forum over sovereign action, a course expressly disapproved in the line of authority commencing from Embassy Property (supra) and consistently reiterated thereafter,”
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The Court added that IBC proceedings cannot be invoked for the purpose of distributing assets suspected to involve benami transactions.
The ruling stated,
“Once the Adjudicating Authority under the Benami Act has concluded that the corporate debtor is a benamidar, beneficial ownership stands negated. The legality and validity of such determinations are subject matter of appeal under the provisions of the Benami Act alone. Insolvency proceedings cannot be utilized to transform property held for another into distributable assets for creditors. The IBC contemplates distribution of the debtor’s estate, not assets impressed with a trust or held on behalf of a third party,”
This decision arose from cases where authorities under the Benami Act provisionally attached properties belonging to two corporate debtors undergoing insolvency and subsequent liquidation.
The resolution professional, and later the liquidator of these entities, approached the NCLT, arguing that the attachment was void due to the moratorium under Section 14 of the IBC. They asserted that the assets being targeted for attachment formed part of the liquidation estate.
The NCLT dismissed this plea, stating that the proper remedy lay with the Benami Act. The NCLAT upheld this perspective, explaining that it could not appeal the decisions made by authorities under the Benami Act.
This led the liquidators to seek relief from the Supreme Court.
The key question for the Supreme Court was whether attachment orders issued under the Benami Act could be challenged in the statutory tribunals established under the IBC, namely the NCLTs and NCLAT.
The Court answered this question in the negative.
While acknowledging that the IBC and the Benami Act operate in distinct yet potentially overlapping domains, it clarified that the mechanisms under the Benami Act take precedence in matters concerning the legality of property titles, their attachment, or confiscation, which are specifically addressed by the Benami Act.
The judgment highlighted,
“Where the subject matter of the dispute pertains to the exercise of sovereign statutory power, particularly concerning the determination of legality of title, attachment, or confiscation and vesting thereof, the adjudicatory fora under the IBC must necessarily yield to the specialised mechanism created by such statute. Proceedings under the Benami Act squarely fall within the public law domain. They are not in the nature of inter se disputes between private parties concerning proprietary rights, nor are they recovery proceedings capable of being subsumed within insolvency resolution,”
The Benami Act serves as a sovereign measure aimed at identifying and eradicating benami transactions, the Court added. The Bench emphasized that the NCLT cannot act as a supervisory forum over such sovereign actions.
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It stated,
“The IBC, focused on insolvency resolution and maximizing the value of lawfully owned assets, cannot be employed as a means to undermine or override statutory proceedings undertaken in the public law sphere for the confiscation of tainted property … The IBC does not offer an indirect route to challenge sovereign acts validly enacted under a penal statute,”
The Court also rejected the argument that the moratorium under Section 14 of the IBC justified the liquidators’ opposition to the Benami Act attachments.
The Court explained,
“The moratorium is intended to protect the corporate debtor from ‘creditor actions’ aimed at debt recovery, not to shield ‘tainted assets’ from sovereign actions against crime,”
After reviewing the statutory framework, the Court criticized the approach taken by the appellants.
It remarked that there was no doubt the appellants were attempting to navigate around the procedures outlined in the Benami Act by approaching authorities under the IBC.
The Bench described this conduct as a complete abuse of the legal process and imposed exemplary costs of Rs 5 lakhs on the appellants, instructing them to pay this amount to the Supreme Court Advocates on Record Association (SCAORA) within four weeks.
The Court concluded,
“The appellants have taken the precious time of the NCLT, NCLAT, and also of this Court when the position of law is amply clear and there was no doubt whatsoever about the availability of the statutory remedies under the Benami Act,”
Case Title: S Rajendran v. Deputy Commissioner of Income Tax (Benami Prohibition) and ors
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