2018 (7) TMI 340 - AT - Money Laundering

Tribunal rules bank has priority in recovering dues from mortgaged properties under SARFAESI Act

The Tribunal dismissed the appeal by the Enforcement Directorate, ruling that properties mortgaged to the bank were not subject to the Prevention of Money ... Offence under PMLA - whether the properties mortgaged with the Respondent no. 5 Bank are ‘proceeds of crime” as defined u/s 2(1)(u) of PMLA - whether the PMLA has priority over SARFEASI and RDDB & FI Act - Held that:- In the present case, the SARFAESI Act, RDDB Act and PMLA are special Acts. The SARFAESI Act and RDDB Act are enacted earlier to PMLA. The RDDB Act and PMLA have non-obstante clause. Recently in 2016 the Parliament has amended the twin legislations viz. (i) the SARFAESI Act, 2002 and (ii) the DRT Act, 1993 (after amendment titled as the Recovery of Debts and Bankruptcy Act, 1993) by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 and its provisions have been given effect from 01.09.2016. The Parliament in its wisdom has not excluded the application of the amended provisions to the proceedings under PMLA. The Respondent no. 5 Bank has the right to property under the Constitution of India. The property of the Respondent no. 5 Bank cannot be attached or confiscated if there is no illegality in the title of the Respondent no. 5 and there is no charge of money laundering against the Respondent no. 5. The mortgaged of property is the transfer under the Transfer of Property Act. Even the appellant is not denying the fact that the Bank is a victim party who is also innocent and is entitled to recover the loan amount. It is also not disputed by the Respondent no. 5 that the properties in dispute are mortgaged with Bank and it has to go to the Bank ultimately. I do not agree with the argument in this regard in view of amendments in the two statutes. Even otherwise the trial would take number of years. The public money cannot be stalled otherwise Banking system would collapse. That the definition of 'proceeds of crime” as per Section 2(u) of the PML Act comprises of the property which is derived or obtained as a result of criminal activity. In the present case, all the properties have been mortgaged with the Respondent no. 5 Bank much prior to the date of alleged offence which shows that no ‘proceeds of crime” are involved in acquiring of these properties and hence the same cannot be attached. The Adjudicating Authority has failed to consider that the ED has attached the properties without examining the case of the bank. The evidence on record suggests that the properties were acquired by the borrower/guarantors much before the alleged date of crime. No money disbursed by the Bank from its loan account, has been invested in acquiring these properties. Furthermore, the Respondent no. 5 Bank had created charge over the property prior to the date of the crime. The Bank has already filed the suit for recovery and has also taken the action under SARFAESI Act. The Adjudicating Authority failed to appreciate that depriving the Respondent no. 5 Bank from its funds/property, without any allegations or involvement of the Bank in the alleged fraud, would be legally unjustified. 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 Banks 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 appellant is wholly vague and without any substance. The provisional attachment order thus apparently bad and against the scheme of the Act. If 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. The Respondent no. 5 is an 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. The appeal filed by the appellant is dismissed accordingly. As far as respondent no.5 is concerned, the properties mentioned at Serial No. 1, 2 and 3, as mentioned in Schedule-A of the provisional attachment order, are the properties outside the purview of Prevention of Money Laundering Act, 2002 (PMLA). The same are governed exclusively under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('SARFESI‟ Act). In view of peculiar facts of this matter, the only remedy left with the respondent no. 5 to approach to Special Court under the amended proviso of Sub-Section 8 of Section8 of the PML Act as prima facie I am of the view that the case of the respondent no. 5 covers the same. Till that time, all partiesto the appeal shall maintain status quo with regard to attachment of properties in relation to mortgaged with the respondent no. 5 by the borrowers. The appellant despite knowledge of the fact that the respondent no.5 had taken possession of the properties in question prior to the order of attachment passed by him, has not dealt with the impact of the action of the respondent No.5 under the SARFAESI Act while passing the impugned order. The said order has been passed without hearing the respondent No. 5 and thereby has violated the principles of natural justice. The prescribed period of 180 days provided under Section 5 has already been expired. The appellant has failed to proceed strictly in accordance with the provisions of the PMLA and has passed the impugned order in an undue haste and by committing patent illegalities, resulting in grave prejudice to the said Respondent , who is a Statutory Corporation constituted under the State Bank of India Act, 1955. The appeal filed by the appellant is dismissed accordingly. Issues Involved:1. Legality of the provisional attachment order (PAO) under PMLA.2. Rights of the secured creditor (Bank) over the mortgaged properties.3. Priority of PMLA over SARFAESI Act and RDDB Act.4. Confirmation of PAO by the Adjudicating Authority.5. Allegations and evidence concerning proceeds of crime.Detailed Analysis:1. Legality of the Provisional Attachment Order (PAO) under PMLA:The Enforcement Directorate (ED) challenged the impugned order confirming the PAO on the grounds that it was incorrect, erroneous, and contrary to law. The appellant contended that the Adjudicating Authority failed to confirm or set aside the PAO for properties at Sr. No. 1 to 3 of Schedule A, thereby refraining from discharging its duty as mandated under Section 8 of PMLA. The Adjudicating Authority postponed its decision pending the verdict of the Division Bench of the Hon’ble High Court of Madras in a related case, which the appellant argued was not applicable to the present case.2. Rights of the Secured Creditor (Bank) over the Mortgaged Properties:The properties in question were mortgaged to the State Bank of India (SBI) by M/s Roopa Paddy Dryers before the alleged criminal activities took place. The bank argued that it had first charge over the disputed properties, and the subsequent sale of these properties without the bank’s knowledge did not affect its rights. The bank had taken possession of the properties under the SARFAESI Act after the borrower defaulted on the loan repayment.3. Priority of PMLA over SARFAESI Act and RDDB Act:The Tribunal examined whether PMLA has priority over SARFAESI and RDDB Acts. It referred to several judgments, including the Full Bench of the Madras High Court, which held that the rights of secured creditors to realize secured debts have priority over all other debts and government dues. The Tribunal concluded that the amendments in SARFAESI and RDDB Acts in 2016, which give overriding effect over any other law, including PMLA, would prevail in cases involving recovery of loans by secured creditors.4. Confirmation of PAO by the Adjudicating Authority:The Adjudicating Authority did not confirm the PAO within the stipulated period of 90/180 days, causing the PAO to cease having any effect in law. The Tribunal noted that the Adjudicating Authority’s decision to wait for the verdict of the Division Bench of the High Court of Madras was incorrect, as it failed to consider the legal position under Section 71 of PMLA, which gives overriding effect over other Acts.5. Allegations and Evidence Concerning Proceeds of Crime:The Tribunal observed that there was no evidence that the disputed properties were purchased from the proceeds of crime. The properties were mortgaged to the bank before the alleged criminal activities took place. The Tribunal emphasized that the bank, as a secured creditor, had a legitimate right to recover its dues and that the properties in question were not acquired from the proceeds of crime.Conclusion:The Tribunal dismissed the appeal filed by the ED, holding that the properties mortgaged to the bank were outside the purview of PMLA and were governed exclusively under the SARFAESI Act. The bank, being an innocent party, had a priority right to recover its dues from the mortgaged properties. The Tribunal directed all parties to maintain the status quo regarding the attachment of properties mortgaged with the bank until the Special Court considers the bank’s claim under the amended provisions of PMLA.