In a significant ruling clarifying the jurisdictional boundaries between the Insolvency and Bankruptcy Code, 2016 (IBC) and the Prohibition of Benami Property Transactions Act, 1988 (Benami Act), the Supreme Court has held that the National Company Law Tribunal (NCLT) lacks the jurisdiction to adjudicate challenges against provisional attachment orders passed by Benami authorities.
A Bench comprising Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar dismissed a batch of appeals filed by liquidators, terming their choice to approach the NCLT instead of the statutory forums under the Benami Act a “complete abuse of the process.” The Court imposed exemplary costs of ₹5 lakhs per appeal on the appellants.
The primary question before the apex court was whether the legality and validity of an attachment order passed under the Benami Act can be challenged before the statutory tribunals (NCLT/NCLAT) constituted under the IBC.
Background of the Case
The controversy originated from an investigation into a benami transaction involving the promoters of M/s Padmaadevi Sugars Ltd. (the “Patel Group”). It was alleged that the group transferred their 100% shareholding to a beneficial owner, V.K. Sasikala, through an intermediary for approximately ₹450 Crores in demonetised currency notes.
In November 2017, search and seizure operations conducted under the Income Tax Act unearthed incriminating documents referencing asset purchases during the demonetization period. Subsequently, authorities under the Benami Act issued a show cause notice and a provisional attachment order on November 1, 2019, attaching the immovable properties of the corporate debtor.
Simultaneously, the corporate debtor underwent Corporate Insolvency Resolution Process (CIRP) and was eventually ordered into liquidation on April 20, 2021. The liquidator challenged the attachment order before the NCLT, claiming the properties formed part of the “liquidation estate.” Both the NCLT and NCLAT dismissed the challenge, holding that the remedy lies exclusively under the Benami Act.
Arguments of the Parties
For the Appellants (Liquidators): The appellants argued that the IBC, being a later and more comprehensive legislation, must prevail over the Benami Act by virtue of the non-obstante clause in Section 238. They contended that parallel attachment proceedings deplete the liquidation estate, undermining the objective of value maximization. It was further argued that under Section 14, the moratorium should interdict Benami proceedings, and Section 32A should insulate the debtor’s property from past liabilities.
For the Respondent (Revenue): The Revenue submitted that the Benami Act is a self-contained code for the identification and confiscation of benami property. They argued that property held in a fiduciary capacity (benami) is expressly excluded from the liquidation estate under Section 36 of the IBC. Furthermore, they contended that confiscation is a sovereign penal act, not a debt recovery proceeding, and thus falls outside the scope of the IBC’s waterfall mechanism.
Court’s Analysis and Observations
The Court conducted a comparative analysis of both statutes, noting that while both are special legislations, they operate in distinct spheres.
1. Public Law Domain and Sovereign Functions: The Court observed that the NCLT cannot act as a forum for judicial review over sovereign actions.
“The jurisdiction of authorities under IBC cannot be expansively construed so as to trench upon fields that are founded in public law domain… The Benami Act represents a sovereign exercise aimed at identifying and extinguishing benami transactions.”
2. Distinction Between “Creditor Actions” and “Tainted Assets”: The Court rejected the argument that the Section 14 moratorium applies to Benami attachments.
“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.”
3. Scope of the Liquidation Estate: Referring to Section 36 of the IBC, the Court noted that the liquidation estate only includes assets beneficially owned by the corporate debtor.
“Where the corporate debtor is merely an ostensible holder, the property never forms part of its estate and cannot be administered in liquidation… beneficial ownership stands negated.”
4. Harmonious Construction: The Court emphasized that the IBC cannot be used to “short-circuit” specialized statutory mechanisms. Citing Embassy Property Developments (P) Ltd. v. State of Karnataka, it held that whenever a corporate debtor exercises a right in the realm of public law, it cannot take a “bypass” to the NCLT.
The Decision
The Supreme Court affirmed the concurrent findings of the NCLT and NCLAT. It concluded that the liquidators’ attempt to challenge the attachment orders before the IBC authorities was not bona fide.
“We have no doubt in our mind that such invocation is not bonafide and is actually intended to circumvent and interdict the procedures contemplated under the Benami Act… the position of law is amply clear and there was no doubt whatsoever about the availability of the statutory remedies under the Benami Act.”
The Court dismissed all appeals with exemplary costs of ₹5 lakhs each, directed to be deposited with the Supreme Court Advocates on Record Association (SCAORA) within four weeks.
Case Title: S. Rajendran v. The Deputy Commissioner of Income Tax (Benami Prohibition) & Ors.
Case Number: Civil Appeal No. 7140 of 2022 (with connected appeals)
