Summary: The Prohibition of Benami Property Transactions Act, 1988, is a special penal statute and actions under it are sovereign actions. The Supreme Court recently settled that where an action is taken under such a penal statute, it being a sovereign action, is excluded from the jurisdiction of civil fora. This blog analyses how the Supreme Court resolves the conflict between two conflicting special legislations operating in different domain.
The Hon’ble Supreme Court (“SC”) in its recent decision in S Rajendran vs. DCIT (Benami Prohibition)[1] settled that punitive consequences under the Prohibition of Benami Property Transactions Act, 1988 (“Benami Act”), are rooted in illegal benami transactions and enforced through a special adjudicatory mechanism. The SC also went on to hold that they are insulated from ordinary civil forums and recovery proceedings, such as under the Insolvency and Bankruptcy Code, 2016 (“IBC”).
Factual background
The Benami Act is a special legislation constituting a self-contained penal code that allows authorities to confiscate property that are held benami. An attachment of a property held benami is a sovereign function of penal nature, exercised in public interest.
The SC decision stems from connected appeals, having identical questions of law. Promoters of M/s Padmaadevi Sugars Ltd., formerly SV Sugar Mills Ltd (“Company”), had transferred 100% of their shareholding to a VK Sasikala between November and December, 2016, in consideration of INR 450 crore paid in demonetised notes. Evidence of this transaction was found during search and seizure operations conducted at the residence of VK Sasikala. However, the share certificates of SV Sugar Mills Ltd were still in the promoters’ names.
Meanwhile, corporate insolvency resolution process was initiated against the Company under the IBC provisions. It was admitted by the National Company Law Tribunal (“NCLT”) on October 15, 2018, and the moratorium commenced. Pursuant to failure of the resolution process, an order to liquidate the Company was passed on April 20, 2021.
Parallelly, based on incriminating evidence of benami share sale transaction, a show cause notice under the Benami Act was issued to the resolution professional on November 01, 2019, alleging that while the beneficial owner of the Company was VK Sasikala, the legal title of the shares continued to lie with the promoters. Consequently, a provisional attachment order (“Order”), dated November 01, 2019, was also issued, attaching the immovable properties of the Company.
The Order was challenged by the resolution professional as being void ab initio because of the moratorium operating under the IBC. This challenge was rendered infructuous because of commencement of the liquidation process. However, the Order was again challenged by the liquidator (“Appellant”) as the attached properties formed a part of the liquidation estate.
The NCLT, in its order, held that a challenge to the Order should lie before the statutory authorities under the Benami Act, and not before authorities under the IBC. This was reaffirmed in a subsequent clarificatory order by the NCLT and the National Company Law Appellate Tribunal (“NCLAT”).
Decision of the SC
Aggrieved, the Appellant preferred an appeal before the SC. The question of law arising before the SC was whether an order passed under the Benami Act can be challenged in a forum that is not prescribed under the Benami Act, by virtue of parallel proceedings under a separate legislation.
The Appellant contented that the IBC is also a self-contained code for insolvency resolution and liquidation. It has a “non-obstante clause”, providing that the IBC shall prevail over anything inconsistent contained in any other law. Hence, on commencement of insolvency or liquidation under IBC, property of the corporate debtor cannot be confiscated under other statutes and NCLT shall have exclusive jurisdiction over all matters.
The SC noted that while both the Benami Act and IBC are special legislations, the provisions of the Benami Act fall under the public law domain, prescribing sovereign actions to eliminate benami transactions and take necessary penal actions. The provision of confiscation of property is a penal action operating in rem and hence, the confiscated property vests in the government, free of any encumbrances. It further noted that where a property is held benami, it is not beneficially owned by the corporate debtor. Hence, such a property cannot form a part of the liquidation estate.
The SC accepted the findings of the NCLT and NCLAT and held that an order passed under the Benami Act, being a sovereign penal action, shall be excluded from the jurisdiction of other forums.
Significant Takeaways
This case settles that actions under the Benami Act are penal in nature, operating in public domain and enforced through a separate adjudicatory hierarchy prescribed under that statute. Hence, any challenges to such actions must be pursued within such statutory limits. The IBC or any other special law cannot be an indirect route to override sovereign actions. Therefore, the NCLT or any other forum shall not have jurisdiction in deciding the validity of an order passed under the Benami Act.
This case demonstrates how the SC seeks to resolve conflicts between two special statutes. Relying on established principles of statutory interpretation, the SC notes that where two enactments appear to be in conflict, they must be interpreted harmoniously to give effect to both the statutes. However, where harmonious construction is not possible, Courts are required to decide which law shall prevail.
The SC noted that while the IBC is a more recent statute, it cannot be expansively construed to encroach on a public law. The SC noted that where the subject matter involves statutory illegality, laws in personam must yield to laws in rem. The SC does not mechanically apply the statutory rule of interpretation of the “later law prevails”, rather it analyses the schemes and domain of application of both the statutes and holds that the Benami Act shall prevail over the IBC as a civil forum cannot dilute statutory proceedings undertaken in the public law sphere.
[1] S Rajendran vs. DCIT (Benami Prohibition), [TS-234-SC-2026].