PRESERVING THE IBC’S RATIONALE: THE TUSSLE WITH THE BENAMI ACT
[Rohan Srivastava and Rupam Dubey are currently Second Year B.A., LL.B. (Hons.) students at the National Law School Of India University Bengaluru]
Presently, the Supreme Court is considering an appeal in the C Ramasubramanian vs The Deputy Commissioner of Income Tax, which will potentially establish the extent to which the Insolvency and Bankruptcy Code 2016 (IBC) is given precedence over other civil proceedings. The controversial NCLAT order in question has already been followed in the recent M/s Senthil Papers and Boards vs The Deputy Commissioner of Income Tax case on March 13th and could further weaken the overriding nature of the IBC. At the center of the issue is a conflict between the government's authority to seize property under The Prohibition of Benami Property Transactions Act 1988 (Benami Act) and the need to maintain a company as a "going concern" during the CIRP Moratorium. This article argues that the NCLAT decision has the effect of undoing the IBC’s overriding nature, and that there is a lot at stake if the Supreme Court fails to overturn it.
At the heart of the issue lies the clash between two non-obstante clauses, Section 238 of the IBC and Section 67 of the Benami Act. While clashes with other legislations is not new in the IBC’s nascent yet dynamic history, there have been no authoritative pronouncements by any court on whether the Benami Act will override the IBC or not.
The Appellant in the given case, was undergoing CIRP. The IBC was enacted in 2016 to bring about a major shift in Indian insolvency law by moving from a debtor in control regime to a creditor in control regime for insolvency process in order to maximize value of the debtor’s assets and allow for speedy recoveries. In order to effectuate this change, the IBC contains a moratorium provision in Section 14 of the Code. as per which no legal proceedings etc. can be initiated against the Corporate Debtor’s property during the CIRP. This is to ensure that the Corporate Debtor’s assets are preserved during the entire CIRP, and the creditors’ interest is not harmed. Section 238 of the IBC further cements this by holding that the IBC shall have an overriding effect over anything inconsistent contained in any other law in force. In the case at hand, the Moratorium was initiated from October 15, 2018. The said period was extended for 90 days on October 17, 2019.
It was during the subsistence of this moratorium period that the appellant received a provisional attachment order under the Benami Act on November 01, 2018 which is being challenged in the given appeal. The Benami Act, enacted in 1988, was enacted with the objective to prohibit benami transactions and ensure the right to recover property held benami. To achieve this end, Section 24(3) of the Act provides the power to an Initiating officer to “attach” a property, thereby prohibiting transfer of the said property. To allow for this to operate, the act also includes section 67 which is a non-obstante clause similar to section 238 of the IBC.
It was under Section 24(3) only that the impugned provisional attachment order was issued restraining transfer of the said property. This said attachment, interfered with the resolution process as it would force the company to go for liquidation as had happened in the given case.
The NCLAT Chennai, refused to set aside the provisional attachment order and held that the NCLAT was not competent to adjudicate on the issue, it being one that relates to the Benami Act was thus liable to adjudication only by the Competent authority in that Act. In doing so, the Tribunal acquiesced to the overriding effect of the Benami Act over the IBC. It further cemented its stance by drawing from cases involving the IBC and the Prevention of Money Laundering Act 2002 (PMLA) and noting that, like in PMLA cases, under Benami Act as well, the victim is the ‘state’, reflecting the recent judicial trend of giving leeway to the government at the cost of IBC’s economic efficiency.
Decoding the conflict of IBC with PMLA
Given the reliance placed by the tribunal on judgements dealing with the clash between PMLA and the IBC, it becomes pertinent to evaluate the same. In a recent case, Deputy Director Directorate of Enforcement v Axis Bank, the Delhi High Court dealt with the clash between the PMLA and the IBC. The court observed that section 8(5) of the PMLA allows the Central Government to confiscate properties that stem from the "proceeds of crime," while the IBC deals with civil proceedings and has a non-obstante clause regarding civil proceedings. The court concluded that the proceedings under the PMLA are criminal in nature because the confiscation is related to the proceeds of a crime, and therefore, both proceedings are independent of each other and can occur simultaneously.
Similarly, in the case of Rajiv Chakraborty Resolution v Directorate of Enforcement, the Delhi High Court held that the government's confiscation of assets under the PMLA is not for the purpose of recovering debt as creditors. Rather, it is to impose a restraint on the property holder's right. The court added that the moratorium provision under the IBC aims to maximize the value of the corporate debtor's assets, both being distinct objectives that can operate in their own field.
However, it is submitted, that it would be an error to claim that the same considerations will also apply in cases dealing with the clash between the Benami Act and the IBC.
Firstly, to resolve the inconsistency between the Benami Act and the IBC, it is necessary to consider the nature of the proceedings each one entails, as was done in Axis Bank. The attachment of property under section 5 of the Benami Transactions (Prohibition) Act is done to deprive a person of their beneficial interest in the property. This can be seen in section 19 of the Act, which lays down that the power of the authorities is similar to those with courts under the Code of Civil Procedure, 1908. Hence, the confiscation under Benami and the proceedings thereafter are civil and not criminal in nature. Despite the fact that entering into a benami transaction is made an offense under the Act, the clash is not with the offense at hand but with the ‘attachment’ power and the latter is clearly a civil proceeding that will be overridden by the IBC section 63. The Supreme Court has ruled in the case of Yogendra Kumar Jaiswal v State of Bihar that confiscation of property is a civil, rather than punitive, measure. Section 40(5) of the Benami Act states that proceedings before the Appellate Tribunal shall be deemed to be civil court proceedings, further supporting this interpretation.
Secondly, there have also been cases dealing with the clash between PMLA and the IBC where the importance of the moratorium and objectives of the IBC have been upheld over the PMLA. In SREI Infrastructure Finance Ltd. v. Sterling SEZ and Infrastructure Ltd.,the tribunal has held that the attachment initiated after the moratorium cannot be held as valid. Hence, instead of treating the jurisprudence on PMLA clashes as settled, the court has to evaluate the case at hand on its own merits to see if the IBC would prevail or not.
Resolving the Conundrum
In the case of Solitaire India Pvt Ltd v Fairgrowth Services, the Supreme Court ruled that when two special statutes have non-obstante clauses and the proceedings under them are of the same nature, the latter act should override the former. The Court reasoned that since the legislature was aware of the existence of the non-obstante clause in the former act and still passed the latter act with a non-obstante clause, the latter act should take precedence. In the given case, applying this reasoning to the current situation, it can be concluded that the Benami Act should give way to the IBC, the latter being a later enactment. Having established that Section 238 would have precedence over Section 67, it is clear that the attachment is non est in law.
Firstly, as already noted, since both the moratorium and attachment are civil in nature, section 63 of the IBC which debars the jurisdiction of ‘any other civil court’ or authority will thus oust the Benami Act and the adjudicating authority provided therein. As stated in Section 40(5) of the Benami Act, all proceedings before the appellate authority will be civil proceedings. Hence, the NCLAT was wrong in holding that the said attachment can only be reverted by the authority under the Benami Act, as the same directly affects the operation of the moratorium and is overcome by Section 63 of the IBC.
Secondly, an attachment order as in the given case, makes it impossible for a resolution applicant to revive the corporate debtor. The rule of harmonious construction as elucidated in Busching Schmitz Private Ltd vs P.T. Menghani that “legislative futility is to be ruled out as long as interpretative possibility permits” will have to be considered by the courts in resolving the inconsistency. Applying this principle, The twin goals of value maximization and timely resolution both are at stake if an attachment order is allowed to derail the CIRP. As held in the case of SREI infrastructure, delayed proceedings can frustrate the objective of the time-bound process of the IBC and may also lead to erosion in the value of the assets. This will affect both the corporate debtors and the creditors who are two crucial stakeholders in the insolvency process. To add on to the woes, the Benami act allows for an attachment order to be served on the personal satisfaction of the Initiating officer, the same being a very low threshold with potential of exploitation as well. This can allow for derailing of the CIRP on a mere suspicion of a benami transaction. On the other hand, practically. the government will still be able to obtain its dues if the CIRP is allowed to continue. After the case of State Tax Officer vs Rainbow Papers, it has been settled that statutory dues have to be discharged before the debt of any creditor is discharged. Hence, the anxiety that was present in most PMLA cases, that ‘proceeds of crime’ will be allowed to discharge the corporate debtor’s civil liabilities, no longer exists post the Rainbow papers verdict.
The Supreme Court’s decision in C Ramasubramaniam can potentially set a troublesome precedent if the NCLAT verdict is not overturned. Allowing the Benami Act proceedings to prevail over the IBC will practically undo sections 238 and section 63 by preventing the IBC to override civil proceedings despite the express wordings of the two sections. This will open the doors to frustration of the IBC’s economic rationale which has so far been praised for inculcating investor confidence and promoting asset maximization.