2026 (2) TMI 1225 - SC - Benami Property

Benami property jurisdiction: IBC tribunals lack power to challenge Benami Act attachment; such assets fall outside the liquidation estate.

Orders of provisional attachment and confiscation under the Prohibition of Benami Property Transactions Act are governed by that Act's exclusive ... Challenge to orders under Benami Act before IBC tribunals - Benami Act as a self-contained code and exclusive adjudicatory mechanism - applicability of moratorium u/s 14 of IBC to sovereign attachment proceedings - residuary jurisdiction u/s 60(5) - inclusion of benami property in the liquidation estate - Whether, the legality and validity of an order of attachment under Benami Act can be challenged before the statutory tribunals under IBC. - HELD THAT:- In its post-amendment avatar, Benami Act, by virtue of Section 2(9) defines a benami transaction. While Section 3 prohibits entering into benami transactions and renders such conduct punishable, Section 4 bars any suit, claim or defence to enforce rights in respect of property held benami. The definition clause further defines ‘beneficial owner’ under Section 2(12), ‘property’ under Section 2(26) and ‘transfer’ under Section 2(29). The Benami Act represents a sovereign exercise aimed at identifying and extinguishing benami transactions. The attachment and eventual confiscation of property thereunder operate in rem and culminate in vesting of the property in the Central Government free from encumbrances. Such consequences are penal and deterrent, rooted in statutory illegality, and are enforced through a distinct adjudicatory hierarchy whose jurisdiction is expressly insulated from ordinary civil fora. Section 5 declares that property which is the subject matter of a benami transaction is liable to confiscation by the Central Government. The statutory intent is thus to invalidate both the transaction and any derivative civil claims, while exposing the property itself to State action. Chapter IV embodies the machinery provisions of the enactment and delineates the course to be followed before property is divested. Section 24 empowers the Initiating Officer, upon forming a reasoned belief that a person is a benamidar, to issue notice and, with the requisite approval, provisionally attach the property so as to prevent its alienation pending inquiry. The matter is then placed before the Adjudicating Authority under Section 26, which, after notice and hearing to the concerned parties, records a finding as to whether the property is benami in nature. Benami Act is a complete and self-contained code governing identification, provisional attachment, adjudication and confiscation of benami property, supported by a distinct appellate hierarchy. Exclusive jurisdiction over such determinations is conferred upon authorities constituted under the Benami Act. The IBC neither displaces this statutory mechanism nor empowers the NCLT to reopen findings rendered thereunder. It is, hence, evident that the IBC constitutes a self-contained and exhaustive code governing all facets of insolvency resolution and liquidation of corporate persons. The legislative intent is to ensure that issues relating to the insolvency estate, its preservation, management and distribution are determined within the framework and hierarchy contemplated by the Code. The present controversy arises at the point where property subjected to proceedings under the Benami Act is asserted to form part of the liquidation estate under the IBC. The issue, therefore, is not one of abstract supremacy, but of determining whether the two enactments can be harmoniously construed, and, if not, which statutory regime must prevail in the limited sphere of conflict. It is in this backdrop that the apparent inconsistency between the two statutory regimes requires examination. 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 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. A more fundamental objection is raised with reference to Section 36 of the IBC. The liquidation estate comprises only assets beneficially owned by the corporate debtor. Property held benami is, by definition, held in a fiduciary or representative capacity for the real owner. Section 36(4)(a)(i) excludes assets held in trust for third parties from the liquidation estate. In Controller of Estate Duty, Lucknow v. Aloke Mitra [1980 (10) TMI 59 - SUPREME COURT] this Court reiterated that a benamidar possesses no beneficial interest and that title vests in the person who provided consideration. Where the corporate debtor is merely an ostensible holder, the property never forms part of its estate and cannot be administered in liquidation. Section 36(3)(e) further recognises that property “subject to determination by a court or authority” forms part of the estate only to the extent of such determination. 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. We are of the opinion that the appellants could not have challenged the attachment order passed under the Benami Act before the statutory authorities under the IBC. We have no doubt in our mind that such invocation is not bona fide and is actually intended to circumvent and interdict the procedures contemplated under the Benami Act. Further, filing of appeal before NCLAT, despite the finding that the appropriate forum is not NCLT, but the statutory authorities under the Benami Act, leaves no doubt that it is a complete abuse of the process. 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. Thus, the appeals have to be dismissed with exemplary costs. Issues: (i) Whether orders of provisional attachment and confiscation under the Prohibition of Benami Property Transactions Act, 1988 can be challenged before tribunals constituted under the Insolvency and Bankruptcy Code, 2016; (ii) Whether the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 operates to stay or invalidate proceedings under the Benami Act; (iii) Whether property provisionally attached or confiscated under the Benami Act forms part of the liquidation estate under the Insolvency and Bankruptcy Code, 2016.Issue (i): Whether orders of provisional attachment and confiscation under the Prohibition of Benami Property Transactions Act, 1988 can be challenged before tribunals constituted under the Insolvency and Bankruptcy Code, 2016.Analysis: The Benami Act establishes a structured adjudicatory scheme for identification, provisional attachment, adjudication and confiscation, with an exclusive hierarchy of authorities and appellate remedy; it contains provisions insulating those matters from ordinary civil fora. The IBC is a separate, self-contained code directed to insolvency resolution and liquidation of assets beneficially owned by the corporate debtor. Where a specialised statute confers jurisdiction over determinations of title, attachment or confiscation in the public law domain, the adjudicatory fora under IBC do not supplant that exclusive mechanism. Harmonisation of the two statutes was sought, but where the Benami Act governs the determination of whether property is benami and effects vesting in the Central Government, those determinations fall outside the ordinary insolvency adjudicatory function.Conclusion: Orders of provisional attachment and confiscation under the Prohibition of Benami Property Transactions Act, 1988 cannot be challenged before tribunals constituted under the Insolvency and Bankruptcy Code, 2016. This issue is decided against the appellant.Issue (ii): Whether the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 operates to stay or invalidate proceedings under the Benami Act.Analysis: The moratorium under the IBC is directed to creditor actions and proceedings seeking recovery or enforcement against the corporate debtor and is intended to preserve the debtor's estate for orderly insolvency resolution. Proceedings under the Benami Act are sovereign in rem proceedings aimed at identification and confiscation of benami property and operate in the public interest; they are not creditor enforcement proceedings. Section 32A's protections are event-based and trigger only upon approval of a resolution plan or completion of liquidation sale to an unconnected third party, and do not retroactively validate defective title.Conclusion: The moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 does not stay or invalidate proceedings under the Prohibition of Benami Property Transactions Act, 1988. This issue is decided against the appellant.Issue (iii): Whether property provisionally attached or confiscated under the Benami Act forms part of the liquidation estate under the Insolvency and Bankruptcy Code, 2016.Analysis: The liquidation estate comprises assets beneficially owned by the corporate debtor. Property held benami is held for the benefit of a real owner and, once determined to be benami and provisionally attached or confiscated under the Benami Act, beneficial ownership is negated and vesting in the Central Government follows. Section 36 and related provisions exclude assets held in trust or subject to determination by other authorities from the liquidation estate to the extent determined by those authorities.Conclusion: Property provisionally attached or confiscated under the Prohibition of Benami Property Transactions Act, 1988 does not form part of the liquidation estate under the Insolvency and Bankruptcy Code, 2016. This issue is decided against the appellant.Final Conclusion: The adjudicatory jurisdiction of tribunals constituted under the Insolvency and Bankruptcy Code, 2016 does not extend to reviewing or nullifying orders of attachment or confiscation passed under the Prohibition of Benami Property Transactions Act, 1988; proceedings under the Benami Act must be pursued before the authorities and appellate fora established under that Act.Ratio Decidendi: Where a special enactment establishes an exclusive adjudicatory mechanism for determination of title, attachment and confiscation in the public law domain, tribunals under the Insolvency and Bankruptcy Code, 2016 lack jurisdiction to entertain challenges to orders under that special enactment, and assets determined to be benami do not form part of the insolvency liquidation estate.