Benami Attachment Orders Cannot Be Challenged Before NCLT Under IBC: Supreme Court [Read Judgement]
The Supreme Court held that attachment orders under the Benami Act cannot be challenged before NCLT under the IBC and must be contested only before authorities under the Benami law.
In a recent judgment, the Supreme Court held that attachment orders passed under the Prohibition of Benami Property Transactions Act, 1988 cannot be challenged before the NCLT or NCLAT under the Insolvency and Bankruptcy Code, 2016 (IBC).
The case involved the promoters of the corporate debtor Padmaadevi Sugars Ltd. Authorities who were subject to proceedings under the Benami Act after an investigation showed that the promoters had allegedly transferred 100% shareholding of the company to a beneficial owner for about Rs. 450 crores. The amount was said to be paid in demonetised currency during November-December 2016.
A show cause notice was issued and a provisional attachment order was passed attaching the company’s factory land and plant and machinery. At the same time, insolvency proceedings were going on against the company under the IBC, and later the company was sent into liquidation.
The liquidator approached the NCLT and sought to stay the attachment order, arguing that the attached properties should form part of the liquidation estate. The NCLT held that it had no jurisdiction to decide the validity of attachment under the Benami Act. The NCLAT also agreed with this view.
A Bench of Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar observed that the Benami Act is a complete code which provides its own mechanism for attachment, adjudication and appeal. The court explained that confiscation under the Benami Act is a sovereign action and not a recovery action by creditors. It pointed out that the moratorium under Section 14 of the IBC protects the corporate debtor from creditor actions but it does not stop proceedings under a penal statute like the Benami Act.
The appellants’ counsel argued that the IBC is a later and special law and has overriding effect under Section 238. They argued that allowing attachment would defeat the objective of value maximisation under the IBC. The court did not accept this contention and explained that the IBC cannot be used to bypass the statutory mechanism under the Benami Act.
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The court also explained that under Section 36 of the IBC only assets beneficially owned by the corporate debtor can form part of the liquidation estate. If the company is only a benamidar, it has no real ownership.
The appeals were dismissed with costs of Rs. 5 lakhs each.
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