Resolving the clash: The IBC and Benami Act
At the time of writing this article, a petition is pending before the Apex Court challenging the NCLAT Chennai judgement in C Ramasubramaniam Liquidator v. Deputy Commissioner of Income tax (Benami Prohibition) (“Ramasubramaniam”). The judgement of the Apex Court herein will decide the range to which the Insolvency and Bankruptcy Code, 2016 (“Code”) will be given an overriding effect over the other civil proceedings.. The issue is with regards to the conflict between the power of the government to confiscate property under the Prohibition of Benami Property Transactions Act, 1988 (“Benami Act”) and the objective of the Code which seeks to ensure a corporate debtor “as a going concern” during the moratorium imposed under the CIRP. Through this article, the authors submit that the judgement in Ramasubramaniam can potentially undo the overriding effect of the Code, and if the Apex Court does not overturn it, the objectives of the Code will be derailed.1
The Issue
The main issue at hand is the conflict between Section 238 of the Code and Section 67 of the Benami Act, both containing non-obstante clauses. While it is true that the conflict of the Code with other statutes is not so uncommon, the position whether the Code will override the Benami Act or not is still unsettled as no binding judgement of the Supreme Court has been pronounced on the matter yet.2
The Code came into effect in 2016 so as to embark a shift in the insolvency proceedings from a debtor in control to creditor in control process with an aim of speedy recoveries and the maximization of the debtor’s asset’s value. For achieving this change, Section 14 of the Code has a moratorium provision, under which no legal proceedings can take place till the completion of the CIRP. This was enacted so as to ensure that the property of a corporate debtor is preserved till the CIRP is completed, and the interest of every creditor is preserved. This is further strengthened by Section 238 of the Code according to which the Code has supremacy over any other statute which contains inconsistent provisions with that of the Code.3
The Benami Act came into force so as to block the benami transactions and to recover benami properties. To fulfill its objective, Section 24(3) of the Benami Act allows attachment of property by an initiating officer, so as to restrict the transfer of the benami property. In Ramasubramaniam, the provisional attachment order was issued so as to prohibit the transfer of the property by the appellant. However, the attachment order disturbed the CIRP since it would compel the corporate debtor to go into liquidation.4
Coming to the facts of the present case, the CIRP was initiated against the appellant and as a result, the moratorium was imposed on 15 August, 2018 which was further extended till 17 October, 2019. During this period, an attachment order was released by the initiating officer under the Benami Act against the corporate debtor on 1 November, 2018. The said order was challenged before the NCLAT Chennai which rejected it. The tribunal opined that it is incompetent to decide the matter since the matter is related to the Benami Act and it does not have the authority to settle the dispute. By rejecting the appeal, the tribunal cleared the way for the Benami Act to override the Code. The tribunal hereby after drawing an analogy between the conflict in the Prevention of Money Laundering Act (“PMLA”) and the Code noted that just like under PMLA, the State is the victim under the Benami Act as well. The order of the tribunal has once again reflected the attitude of the judicial/quasi-judicial bodies of giving preference to the government’s interest over the Code’s aim of economic efficiency.5
Tracing the conflict between the Code and the PMLA
Since the NCLAT relied heavily on judgements resolving the conflict between the Code and the PMLA, it is important to have a look at such judgements. The Delhi High Court in The Deputy Director Directorate of Enforcement v. Axis Bank held that the government under Section 8 of the PMLA can attach property which is acquired from the “proceeds of crime”. The court held that the nature of the procedure under the PMLA is criminal, and the proceedings under the Code and the PMLA can take place at the same time since both are independent of each other.6
On the same lines, in Rajiv Chakraborty Resolution v. Directorate of Enforcement, the Delhi High Court ruled that unlike the creditors, the government by attaching the property does not purport to recover the debts. Instead, the attachment is to prohibit the accused from enjoying the rights over the attached property. The court further ruled that the imposition of the moratorium under the Code is aimed towards the maximization of the value of the debtor’s assets, and hence both the objects are different and can be fulfilled simultaneously.7
However the same consideration cannot be applied in cases covering the conflicts between the Code and the Benami Act. In order to solve the clash between these statutes, it becomes pertinent to note the nature of the proceeding under each statute. As discussed above, under Section 5 of the Benami Act, the property is attached in order to prohibit the accused from enjoying the rights over the attached property. This is cemented by Section 19 of the Benami Act, which confers the authorities the same power which is vested to the courts under the C.P.C., 1908. Therefore, the nature of the attachment and the proceedings under the Benami Act are civil instead of criminal. Notwithstanding the fact that benami transactions are an offence under the Act, the conflict is not related to the offence, it is related to the ‘confiscation’ power which is a civil proceeding. The Apex Court also noted in Yogendra Kumar Jaiswal v. State of Bihar that whenever property is confiscated, the procedure and the measure would be civil instead of punitive. Additionally, under Section 40(5) of the Benami Act, all the proceedings of the Appellate Tribunal will be considered as civil. Therefore, rather than seeing and comparing the conflicts between the PMLA and the Code, the apex court should decide the present issue on its own merits to decide whether the Code would prevail over the Benami Act or not.8
Clearing the confusion: The probable solution
The apex court in Solidaire India Ltd v. Fairgrowth Financial Services pronounced that if two legislations contain non-obstante clauses and then a conflict arises between them, the clause that was enacted earlier would be overridden by the latter one. The court held that because the Parliament knew that the former legislation contained a non-obstante clause and it knowingly inserted a non-obstante clause in the latter legislation, the latter legislation should override. Therefore, it should be the Code which should override the Benami Act since among the two, the Code was enacted later.9
Firstly, as said above, because moratorium as well as attachment under the Benami Act are civil procedures, Section 63 of the Code that seeks to prohibit the interference of any other civil court should expel the interference of the Benami Act. Under Section 40(5) of the Benami Act, the Appellate Tribunal’s proceedings are civil in nature. Therefore, the NCLAT committed a fallacy by ruling that only an authority formed under the Benami Act can annul the attachment order, because this will disturb the proper functioning of the moratorium.10
Secondly, an order to attach the property under the Benami Act would make it next to impossible for the successful resolution applicant to resuscitate a corporate debtor. The Supreme Court in Busching Schmitz Private Ltd v. P.T. Menghani explaining the rule of harmonious construction said that “legislative futility is to be ruled out as long as interpretative possibility permits.” By following this principle, both the objectives of the Code i.e., maximisation of the value of the assets and ensuring the completion of the resolution process in a timely manner would be defeated if the apex court decides to uphold the Ramasubramaniam judgement. This is because assets attached under the Benami Act would not be considered in the pool of the corporate debtor’s assets and therefore potential resolution applicants would hesitate to come up with resolution plans. Moreover, such resolutions applicants would also hesitate to revive a corporate debtor against whom proceedings have commenced under the Benami Act due to possible litigation over such properties of the corporate debtor. In SERI Infrastructure Finance Limited v. Sterling International Enterprises Limited, the NCLT Mumbai noted that longer proceedings have the potential to defeat the completion of the time-bound process of the Code which can diminish the value of the assets. Additionally, under the Benami Act, a discretion is vested in the initiating officer for releasing an order for the attachment of property. This discretion that comes with a low threshold has the potential of abuse of power which can disrupt the CIRP simply because of a meagre speculation.11
Conclusion12
In the opinion of the authors, the Apex Court’s decision on the challenge against the judgement in Ramasubramaniam has the potential to set an alarming precedent if it fails to overturn the NCLAT’s judgement. Enabling the IBC to take a backseat will undo sections 238 and 63 of the Code by precluding the Code from overriding other civil proceedings despite the express wordings of these sections. It will frustrate the economic rationale of the IBC which has so far been applauded for imbibing confidence of the investors and fostering asset maximisation.13