PMLA attachment cannot reach pre-existing mortgaged property with no nexus to alleged laundering, secured creditors' priority prevails

Property acquired before the alleged criminal activity and merely mortgaged to secure bank credit cannot be treated as "proceeds of crime" under the PMLA in the absence of any nexus with the laundering activity. The tribunal further noted that secured creditors' enforcement rights under SARFAESI and the Recovery of Debts and Bankruptcy Act, where security interests were created before attachment and no link to the alleged offence was shown, are entitled to statutory priority. On that basis, provisional attachment and its confirmation were set aside, and the banks were left free to continue recovery in accordance with law.

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Issues: (i) Whether mortgaged properties acquired before the alleged offence could be treated as "proceeds of crime" and provisionally attached under the Prevention of Money Laundering Act, 2002. (ii) Whether the secured creditors' rights under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Recovery of Debts and Bankruptcy Act, 1993 would prevail in the facts of the case.

Issue (i): Whether mortgaged properties acquired before the alleged offence could be treated as "proceeds of crime" and provisionally attached under the Prevention of Money Laundering Act, 2002.

Analysis: The definition of "proceeds of crime" requires property to be derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence. The properties in question were acquired much before the alleged criminal activity and were only mortgaged to the banks as security for credit facilities. No material showed that the banks or the mortgaged properties had any nexus with the alleged laundering activity. The Tribunal held that property already owned prior to the alleged offence cannot be treated as proceeds of crime merely because it was later mortgaged for loans.

Conclusion: The mortgaged properties were not proceeds of crime and the attachment could not be sustained against them.

Issue (ii): Whether the secured creditors' rights under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Recovery of Debts and Bankruptcy Act, 1993 would prevail in the facts of the case.

Analysis: The banks had already initiated recovery proceedings and had security interests created over the properties before the attachment. The Tribunal applied the later statutory amendments giving priority to secured creditors, and reconciled the competing non obstante clauses by holding that the secured creditors' statutory priority could not be defeated in respect of properties that were not proceeds of crime and were held bona fide as security for public funds advanced by the banks.

Conclusion: The banks' security interest and recovery rights were entitled to prevail over the provisional attachment in the facts of the case.

Final Conclusion: The provisional attachment and its confirmation were set aside, and the appeals succeeded, leaving the banks free to pursue recovery in accordance with law.

Ratio Decidendi: Property acquired before the alleged criminal activity and held by an innocent secured creditor as mortgage security cannot be attached as proceeds of crime, and the statutory priority of secured creditors must be given effect where no nexus with money laundering is shown.

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