IBC | All Property, Including Alleged Benami Assets, Shielded From Action Over Pre-Resolution Offences: Madras High Court

The Madras High Court has recently held that once a resolution plan is approved under the Insolvency and Bankruptcy Code, authorities cannot proceed against any property standing in the name of a corporate debtor for offences committed before the insolvency process, even if such property is alleged to be held benami. A single bench of Justice G R Swaminathan ruled that Section 32A(2) of the Insolvency and Bankruptcy Code, 2016, offers wide protection to the property of a corporate debtor after a successful resolution. The court observed that the word “property” in the provision is unqualified and must therefore be given its widest meaning. "The expression “property” is not qualified by any adjective. When there is no limiting expression, the word in question must be given its fullest import. “Property of the corporate debtor” would include all the properties standing in the name of the corporate debtor”. The word “property” in Section 3(27) of the Code as including money, goods, actionable claims, land and every description of property and every description of interest including present or future or vested or contingent interest arising out of, or incidental to property.", it said. The case arose from attachment proceedings initiated against Milanem Mall in Madurai, which was purchased by Milan Textile Enterprises Private Limited through a registered sale deed in August 2004. In November 2019, the Deputy Commissioner of Income Tax under the Prohibition of Benami Property Transactions Act provisionally attached the property, alleging that it was held benami. The attachment was continued in January 2020 and later confirmed by the adjudicating authority in September 2021, following which the company's erstwhile management filed an appeal before the Appellate Tribunal under the Benami Act. While the benami proceedings were pending, City Union Bank initiated insolvency proceedings against Milan Textile Enterprises in March 2021. The National Company Law Tribunal, Chennai admitted the case in March 2022, imposed a moratorium and appointed an insolvency resolution professional. In January 2024, the NCLT approved a resolution plan, resulting in a complete change in the management and control of the company. After the new management took over, it approached the Appellate Tribunal seeking release of the attached property on the ground that Section 32A of the Insolvency Code barred any action against the property for past offences. The tribunal declined to grant relief at the interim stage, following which the company moved the Madras High Court. Before the High Court, the petitioner argued that approval of the resolution plan entitled the successful resolution applicant to a clean slate and that no action could be taken against the property of the corporate debtor for offences committed prior to the commencement of the corporate insolvency resolution process. Reliance was placed on Sections 32A and 238 of the Insolvency Code. The Income Tax Department opposed the plea, arguing that Section 32A protects only legitimate properties of the corporate debtor and does not extend to properties alleged to be held benami, where the company is merely a name lender and a third party is the beneficial owner. The department also objected to the maintainability of the writ petition, pointing to the pending appeal before the Appellate Tribunal. Rejecting the maintainability objection, the court held that the appeal was filed by the erstwhile management and that the company had undergone a fundamental change after approval of the resolution plan. It further ruled that the Appellate Tribunal, constituted under the Benami Act, lacked jurisdiction to decide issues arising under the Insolvency Code. On the merits, the court examined Section 32A(2), which states that no action shall be taken against the property of the corporate debtor in relation to offences committed prior to the commencement of insolvency. Referring to the definition of “property” under Section 3(27) of the Insolvency Code, the court noted that it includes land, goods, money and every description of interest, whether present or future, vested or contingent, and that “the description is thus of the widest amplitude”. The court held that the expression “property of the corporate debtor” would therefore include all properties standing in the name of the corporate debtor, whatever their character. Dealing directly with the Income Tax Department's argument that benami properties fall outside the scope of Section 32A, the court warned that such an interpretation would defeat the legislative scheme. Justice Swaminathan observed: “if the contention of the Department is accepted, it would mean that properties held benami would fall outside the scope of Section 32A (2) of the Code. When IBC, 2016 does not exclude such a category of property, it would not be open to the court to restrictively construe the expression 'property' found in Section 32A (2).” The...

IBC | All Property, Including Alleged Benami Assets, Shielded From Action Over Pre-Resolution Offences: Madras High Court

Shivangi Bhardwaj

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