SC holds Benami Act attachments cannot be challenged before NCLT, upholds IBC moratorium limits

The Supreme Court has delivered a significant ruling clarifying the boundaries between the Insolvency and Bankruptcy Code and the Prohibition of Benami Property Transactions Act, holding that attachments under the Benami Act can only be challenged before authorities constituted under that legislation and not before the NCLT or NCLAT under the IBC framework.

A bench of Justice PS Narasimha and Justice Atul Chandurkar dismissed an appeal against an NCLAT judgment that had upheld the provisional attachment of certain properties of Padmaadevi Sugars Ltd even as corporate insolvency resolution proceedings were pending against the company. The ruling settles an important question regarding the interplay between the moratorium under Section 14 of the IBC and attachment proceedings under the Benami Act.

The case originated from insolvency proceedings against Padmaadevi Sugars Ltd, during which the Deputy Commissioner of Income Tax (Benami Prohibition) passed a provisional attachment order on November 1, 2019 under Section 24(1) of the Benami Act, attaching certain immovable properties of the corporate debtor. This attachment was subsequently affirmed by the Competent Authority on November 10, 2021 under Section 24(3) of the Act.

At the time of attachment, corporate insolvency resolution proceedings were underway and a moratorium under Section 14 of the IBC was in force. Section 14 bars the institution or continuation of suits and proceedings against the corporate debtor and prohibits actions against its assets during the resolution process. The Resolution Professional, and later the Liquidator after the company was ordered into liquidation on April 20, 2021, moved the National Company Law Tribunal seeking lifting of the attachment.

The NCLT refused to interfere with the provisional attachment, prompting the liquidator to challenge the orders before the National Company Law Appellate Tribunal. The central legal question was whether attachment of the corporate debtor’s properties under the Benami Act could continue when a moratorium under Section 14 of the IBC was in force, and whether the IBC, by virtue of Section 238, would override the Benami Act.

The liquidator contended that the attachment was illegal as it violated Sections 14 and 33(5) of the IBC. However, the Deputy Commissioner of Income Tax argued that Section 14 of the IBC did not bar proceedings under the Benami Act, and crucially, that attachment under the Benami Act could be challenged only within the statutory framework of that Act, and not before the NCLT or NCLAT by invoking Section 60(5) or Section 32A of the IBC.

The NCLAT dismissed the appeal, holding that the Benami Act is a self-contained code and that attachment under it can be challenged only before the authorities provided under that Act. It observed that the liquidator could not invoke Sections 32A or 60(5) of the IBC to bypass the statutory hierarchy established under the Benami Act. The tribunal also noted that the provisional attachment had already been affirmed by the Competent Authority and that the aggrieved party was required to follow the procedural framework under the Benami Act. It concluded that the applications filed before the NCLT were not maintainable in law and upheld the orders of the Adjudicating Authority.

The Supreme Court has now affirmed this position, dismissing the appeal and thereby establishing that parallel proceedings under the Benami Act operate independently of the IBC framework, and challenges to attachments must follow the statutory remedy provided under the Benami Act itself rather than through the insolvency adjudication process.

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