2018 (7) TMI 33 - AT - Money Laundering

Banks' Priority Rights Upheld Over PMLA in Debt Recovery Cases

Indian Overseas Bank & Others, Andhra Bank, State Bank of Hyderabad, Canara Bank, Vijaya Bank, Bank of Baroda, State Bank of India, Oriental Bank of Commerce, Punjab National Bank, Union Bank of India, Century Comm Ltd. Versus The Joint Director Directorate of Enforcement, Delhi

The Tribunal held that the properties mortgaged with the banks were not considered 'proceeds of crime' under the Prevention of Money Laundering Act ... Offence under PMLA - provisional attachment orders - whether mortgaged properties purchase from the proceed of crime? - loan granted by banks - Held that:- It is admitted position that the loan was given by the banks in good faith who has suffered a less because of non-return of money by the borrowers i.e. serial no. 11 (as a appellant). The borrower is also arrayed as one of the respondent in the appeal filed by the banks. It is evident from the said proviso that in case the claimant would be able to satisfy the Special Court that it has acted in good faith and suffered the loss despite of having taken all the reasonable precautions and is also not involved in the offence of money laundering then the Special Court is empowered to restored such property during the trial of the case. In the facts of the present case, the mortgaged properties are not purchased from the proceed of crime. Those were purchased prior to FIR against borrower/accused and even prior to execution of mortgaged deed agreement. The question of proceed of crime qua those properties does not arise. Even the stand of the respondent in almost in all the cases where it was found that the attached properties are mortgaged properties which were not purchased from proceeds of crime, the Bank are victim parties and are innocent parties who are entitled to recover the loan amount from the said mortgaged properties, but the banks be allowed to dispose the properties after the trial and final out-come of criminal complaints filed against the borrowers under schedule offence and prosecution complaint. The said argument cannot be accepted in view of settled law and new amendment in sub-section 8 of section 8 of the Act. Thus, the stand earlier taken by the respondent no. 1 is wholly vague and without any substance. The provisional attachment order thus apparently bad and against the scheme of the Act. In case the Special Court passes the order to release the property of the victim and innocent party is mortgaged property could be disposed of for the purpose of adjustment of the amount due from the borrowers. Once it was found that the appellant is a innocent party who is not involved in the money laundering directly or indirectly or assist any party and the mortgaged property is also not purchased from the proceeds of crime then the question of provisional attachment order and confirmation thereof does not arise and the victims/innocent party i.e. innocent party would be entitled to disposed of the said property. In view of the reasons amendment in the PMLA and once the provisional attachment order is set aside, the property is released the borrower/accused and the banks can only dispose of the said property after passing the order by the special court in favour of the complaint. In case the provisional attachment order and impugned orders are set- aside, the complainant may not be able to dispose of the property in order recover the loan amount even if the special court restore such properties during the trial. In view of the amendment of sub section 8 of Section 8 proviso (1) and (2) the bank is at liberty to move its claim in relation to mortgaged property before the Special Court for disposing in accordance with the law. The property attached at serial no. (i) was bought by the Borrower/Accused Company much before the enactment of the PMLA and also much before the Borrower/Accused Company approached the Appellants for financial assistance - It is accordingly release in favour of the appellant as mentioned above as the said property was purchased in the year 1994. There is no valid discussion and finding as to how this property was purchased from the proceeds of crime. Admittedly, the complaint was filed by the appellant no. 1 on 22nd February, 2012. The ECIR was registered and recorded on 20th June, 2013. The said property was purchased in the year 1994, therefore the impugned order in relation to the above said property at serial no. (i) is set aside. Consequently the provisional attachment order with regard to the said property is also quashed. Issues Involved:1. Whether the properties mortgaged with the appellant banks are 'proceeds of crime' as defined under Section 2(1)(u) of PMLA.2. Whether the PMLA has priority over the SARFAESI Act and RDDB & FI Act.Issue-Wise Detailed Analysis:1. Whether the properties mortgaged with the appellant banks are 'proceeds of crime' as defined under Section 2(1)(u) of PMLA:The main allegations against the borrowers, specifically M/s. Century Communication Ltd. (CCL), involve the availing of credit facilities from a consortium of banks and the subsequent default on these loans. The Enforcement Directorate (ED) recorded an ECIR based on an FIR filed by the CBI against CCL for various offenses under IPC and PC Act. The properties in question were attached by the ED under a Provisional Attachment Order (PAO), which was later confirmed by the Adjudicating Authority.The banks argued that five out of the six attached properties were mortgaged to them against the monies lent for the working of the borrower/accused company. They contended that the properties were purchased before the enactment of PMLA and the loans were sanctioned for legitimate business purposes, not for money laundering activities. The ED did not dispute that the properties were mortgaged and the loans were sanctioned for business expansion.The Tribunal noted that the properties were acquired before the alleged criminal activities and the mortgages were created before the enactment of PMLA. The money lent by the banks was used for the intended business purposes, and there was no diversion of funds for purchasing the attached properties. Therefore, the properties mortgaged with the banks could not be considered 'proceeds of crime' as defined under Section 2(1)(u) of PMLA.2. Whether the PMLA has priority over the SARFAESI Act and RDDB & FI Act:The Tribunal examined whether the provisions of PMLA would override the SARFAESI Act and RDDB & FI Act. The banks argued that under the amended provisions of the SARFAESI Act and RDDB & FI Act, secured creditors have a priority right to recover debts over other claims, including those under PMLA. The amendments introduced Section 26(E) to the SARFAESI Act and Section 31(B) to the RDDB & FI Act, which explicitly state that the debts due to secured creditors shall be paid in priority over all other debts and government dues.The Tribunal referred to several judgments, including the Supreme Court's decision in KSL & Industries vs. Arihant Threads Ltd., which clarified that when two special statutes contain non-obstante clauses, the later statute prevails. Since the amendments to the SARFAESI Act and RDDB & FI Act were enacted after PMLA, the provisions of these Acts would prevail over PMLA in case of a conflict.The Tribunal concluded that the amendments to the SARFAESI Act and RDDB & FI Act give secured creditors a priority right to recover debts, and this right would prevail over the provisions of PMLA. Therefore, the banks, as secured creditors, have the right to recover their dues from the mortgaged properties, and the attachment under PMLA was not legally proper.Conclusion:The Tribunal set aside the impugned order of the Adjudicating Authority and the Provisional Attachment Order, allowing the banks to proceed with the recovery of their dues under the SARFAESI Act and RDDB & FI Act. The properties mortgaged with the banks were not considered 'proceeds of crime,' and the banks' right to recover their debts was upheld.