NCLT, NCLAT can't hear challenges to property attachments under Benami Act: Supreme Court

The Supreme Court has held that the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) have no jurisdiction to examine the legality of attachment orders passed under the Prohibition of Benami Property Transactions Act, 1988, even if the attached properties were earlier tied to proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) [S Rajendran v. Deputy Commissioner of Income Tax (Benami Prohibition) and ors]..A Bench of Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar made the observation while dismissing a batch of appeals filed by liquidators who had attempted to challenge Benami Act attachments before the NCLT and NCLAT."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," the Court said. .It added that IBC proceedings cannot be invoked to distribute assets that are suspected to be benami transactions. "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 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 held..The ruling was passed in cases in which authorities under the Benami Act provisionally attached properties of two corporate debtors that were undergoing insolvency and later liquidation. The resolution professional and subsequently the liquidator of these entities approached the NCLT, contending that the attachment was void in view of the moratorium under Section 14 of the IBC.They argued that the assets sought to be attached formed part of the liquidation estate. The NCLT declined to entertain the plea, holding that the proper remedy lay under the Benami Act. The NCLAT affirmed that view, holding that it cannot sit in appeal over decisions of authorities under the Benami Act.This prompted the liquidators to approach the Supreme Court for relief. .The question before the Supreme Court was whether an order of attachment under the Benami Act can be challenged before the statutory tribunals under IBC, namely, the NCLTs and the NCLAT.The Court answered this question in the negative. It acknowledged that the IBC and the Benami Act operate in distinct but potentially intersecting fields. However, it went on to observe that the mechanisms under the Benami Act would prevail over the IBC, in cases concerning the determination of the legality of a property's title, its attachment or its confiscation - namely, subject matters covered by the Benami Act."Where the subject matter of the dispute pertains to the exercise of sovereign statutory power, particularly in relation to 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 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 judgment reads. .The Benami Act represents a sovereign exercise aimed at identifying and extinguishing benami transactions, the top court added. The Bench made it clear that the NCLT cannot assume the role of a supervisory forum over such actions."The IBC, concerned as it is with insolvency resolution and value maximisation of lawfully owned assets, cannot be employed as a mechanism to dilute or override statutory proceedings undertaken in the public law sphere for confiscation of tainted property ... The IBC does not provide an indirect route to challenge sovereign acts validly undertaken under a penal statute," it held. .The Court also rejected the reliance placed on the moratorium under Section 14 of the IBC to justify the liquidators' opposition to the Benami Act 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," the Court said. .Having analysed the statutory scheme, the Court was critical of the course adopted by the appellants. The Court said it had no doubt that the appellants resorted to approaching authorities under the IBC to circumvent and interdict the procedures contemplated under the Benami Act. The Bench termed this a complete abuse of the legal process and imposed exemplary costs of ₹5 lakhs on the appellants. They were ordered to pay these costs to the Supreme Court Advocates on Record Association (SCAORA) within four weeks."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," the Court reasoned. .[Read Judgment].Follow Bar and Bench channel on WhatsAppDownload the Bar and Bench Mobile app for instant access to the latest legal news.