Secured creditor priority protects bona fide mortgaged assets from PMLA attachment where no proceeds of crime are shown.

Bona fide mortgaged property acquired before the alleged laundering and unconnected with the scheduled offence cannot be treated as proceeds of crime, so provisional attachment and confirmation against the bank's secured assets were unsustainable. The Tribunal also held that the statutory priority given to secured creditors under SARFAESI and the RDB Act prevails over competing claims where the security interest was created before attachment and the assets were not shown to be tainted. On this reasoning, the attachment was set aside as to the bank's mortgaged properties, and the bank was left free to recover its dues according to law.

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Issues: (i) Whether the mortgaged properties attached under the Prevention of Money Laundering Act, 2002 were "proceeds of crime" so as to justify provisional attachment and confirmation thereof. (ii) Whether the Prevention of Money Laundering Act, 2002 could prevail over the rights of a secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Recovery of Debts and Bankruptcy Act, 1993.

Issue (i): Whether the mortgaged properties attached under the Prevention of Money Laundering Act, 2002 were "proceeds of crime" so as to justify provisional attachment and confirmation thereof.

Analysis: The properties in question had been acquired and mortgaged before the alleged criminal activity, and the bank was not shown to have any nexus with the scheduled offence or with the generation or laundering of tainted funds. The material before the Tribunal indicated that the bank had advanced the loan in good faith, created a security interest before the attachment, and was not a participant in the alleged crime. In such circumstances, the properties could not be treated as proceeds of crime merely because the borrowers were facing prosecution.

Conclusion: The properties were not proved to be proceeds of crime, and attachment/confirmation of attachment against the bank's mortgaged assets was not sustainable; this issue was decided in favour of the appellant.

Issue (ii): Whether the Prevention of Money Laundering Act, 2002 could prevail over the rights of a secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Recovery of Debts and Bankruptcy Act, 1993.

Analysis: The Tribunal held that the later statutory amendments introducing priority to secured creditors, particularly Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, gave overriding priority to secured creditors in respect of secured assets. The bank's security interest had been created before the attachment and the properties were not shown to be tainted assets. On a harmonious construction, the secured creditor's statutory priority could not be defeated in the facts of the case.

Conclusion: The secured creditor's rights had priority and the attachment could not stand against the bank's mortgaged properties; this issue was decided in favour of the appellant.

Final Conclusion: The provisional attachment and its confirmation were set aside insofar as they concerned the bank's mortgaged properties, and the bank was left free to proceed according to law for recovery of its dues.

Ratio Decidendi: Bona fide mortgaged property acquired before the alleged laundering and unconnected with the proceeds of crime cannot be attached under the Prevention of Money Laundering Act, 2002, and a secured creditor's statutorily created priority prevails over competing claims to such secured assets.

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