NCLT, NCLAT Cannot Nullify Benami Act Confiscation In IBC Proceedings: Supreme Court
The Supreme Court on Tuesday held that insolvency tribunals cannot nullify confiscation of property under the Prohibition of Benami Property Transactions Act, ruling that once property is confiscated under Section 27, it vests absolutely in the Central Government and falls outside the liquidation estate under the Insolvency and Bankruptcy Code.
A Bench of Justices Pamidighantam Sri Narasimha and Atul S. Chandurkar dismissed appeals filed by liquidators who had sought to challenge attachment proceedings initiated under the Benami Act, holding that the IBC does not provide an indirect route to question sovereign action validly undertaken under a penal statute.
“The properties in question, having been provisionally attached and confirmed by the Adjudicating Authority under the Benami Act, stand vested in the Central Government under Section 27, subject to statutory appeal. Those determinations remain operative. The NCLT cannot, in exercise of insolvency jurisdiction, disregard or nullify a statutory vesting effected under another enactment. The IBC does not provide an indirect route to challenge sovereign acts validly undertaken under a penal statute,” the Court observed.
The case arose from proceedings against corporate debtors including Padmaadevi Sugars Ltd., where authorities under the Benami Act issued show cause notices in November 2019 alleging benami transactions involving approximately Rs.450 crore.
Provisional attachment orders were passed under Section 24(3), and the proceedings subsequently culminated in confiscation under Section 27.
During liquidation, the liquidators approached the National Company Law Tribunal contending that the attached properties formed part of the liquidation estate and that the moratorium under Section 14 of the IBC barred continuation of such proceedings.
The NCLT and the NCLAT declined to entertain the challenge, holding that the Benami Act constitutes a self-contained code and that the appropriate remedy lay before the statutory authorities under that enactment.
Affirming these findings, the Supreme Court drew a distinction between insolvency proceedings aimed at value maximisation and sovereign confiscatory action under penal statutes. The Court held that proceedings under the Benami Act operate in the public law domain and are not recovery proceedings between private parties.
The bench further emphasised that the IBC contemplates distribution of the debtor's estate and not assets that are not beneficially owned by the corporate debtor. Referring to Section 36 of the Code, the Court noted that only assets beneficially owned by the corporate debtor form part of the liquidation estate.
Property held benami, or property that has vested in the central government upon confiscation, cannot be treated as distributable assets in insolvency proceedings.
"The legality and validity of such determinations are subject matter of appeal under the provisions of Benami Act alone. Insolvency proceedings cannot be utilised to convert 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.”, the court observed
Holding that the appeals amounted to an attempt to bypass the statutory adjudicatory mechanism under the Benami Act, the Court dismissed them with costs of Rs. 5 lakh each.
For Appellants: Senior Advocates Sajan Poovayya, Rajiv Shakdher, and Krishnan Venugopal; Advocates Bharadwajaramasubramaniam R., Diwaagar R.S., Priyadarshi Banerjee, Rishabh Singhle, Leelavathi P., Shrinithi S.R., Gokulnath S., Vibha Shyam, Raksha Agrawal, Harshvardhan Sharma, Sujoy Chatterjee, B. Dhanaraj, G. Ananda Selvam, Habib Muzaffar, Karan Khetani, Jonathan Ivan Rajan, Sangamithra Loganathan, Krishnan Agarwal, Elamathi M.S., Harnoor Singh, Labeeb Faaeq, Nandini Kaushik, and Siddharth Venugopal; Advocates-on-Record Anand Dilip Landge and Shivendra Singh.
For Respondents: Additional Solicitor General S. Dwarakanath; Senior Advocates P. B. Suresh and Jaideep Gupta; Advocates Rajat Vaishnaw, Prabhakar, H. Siddharth Bhandari, Mudit Bansal, S. Vijay Adithya, Abhyudey Kabra, Rajat Nair, Zoheb Hussain, Gargi Khanna, Sachin Sharma, Madhulika Upadhyay, Shashank Bajpai, Balaji Srinivasan, K. Gowtham Kumar, Vishwaditya Sharma, Deeksha Gupta, Harsha Tripathi, Kanishka Singh, Subornadeep Bhattacharjee, K. Shiva, Rohan Dewan, Aakriti Priya, Udayaditya Banerjee, Racheeta Chawla, Sampriti Baksi, Rishi Maheshwari, Anne Mathew, Bharat Sood, Jai Govind M. J., Sahil Raveen, and Raj Bahadur Yadav; Advocates-on-Record P. S. Sudheer and Aanchal Tikmani.