Secured creditor priority limits PMLA attachment where mortgaged property predates the alleged offence and is not proceeds of crime

A mortgaged asset acquired and charged to banks before the alleged offence, and not shown to be proceeds of crime, could not be sustained in attachment under the Prevention of Money Laundering Act, 2002. The Tribunal held that PMLA attachment targets property derived from or involved in money laundering, and that a bona fide secured creditor's prior mortgage cannot be displaced on the existing record. It further applied the amended SARFAESI Act and Recovery of Debts and Bankruptcy Act provisions giving secured creditors priority and overriding effect, so the mortgaged property had to be released from attachment, while the proceedings against the borrowers otherwise continued.

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Issues: (i) Whether a mortgaged property, acquired and charged to the banks before the alleged criminal activity and not shown to be derived from proceeds of crime, could be confirmed in attachment under the Prevention of Money Laundering Act, 2002. (ii) Whether the secured creditors' rights under the amended Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Recovery of Debts and Bankruptcy Act, 1993 have priority over attachment under the Prevention of Money Laundering Act, 2002.

Issue (i): Whether a mortgaged property, acquired and charged to the banks before the alleged criminal activity and not shown to be derived from proceeds of crime, could be confirmed in attachment under the Prevention of Money Laundering Act, 2002.

Analysis: The subject property had been mortgaged to the appellant bank long before the alleged offence and the record did not show that the bank had any involvement in the alleged fraud or money laundering. Attachment under the Prevention of Money Laundering Act, 2002 is directed at property derived from or involved in money laundering. Where the property is shown to be an existing secured asset of a bona fide mortgagee and is not established to be proceeds of crime, confirmation of attachment would unjustly prejudice the secured creditor.

Conclusion: The property could not be sustained in attachment under the Prevention of Money Laundering Act, 2002.

Issue (ii): Whether the secured creditors' rights under the amended Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Recovery of Debts and Bankruptcy Act, 1993 have priority over attachment under the Prevention of Money Laundering Act, 2002.

Analysis: The Tribunal relied on the amended provisions granting priority to secured creditors and giving overriding effect to those recovery statutes in respect of secured debts. It applied the principle that where later special enactments contain non obstante clauses and expressly protect secured creditors, the secured creditor's right to realise the mortgaged asset cannot be defeated by PMLA attachment in a case where the asset itself is not proceeds of crime.

Conclusion: The secured creditors' rights were held to have priority, and the attachment was liable to be lifted in respect of the mortgaged property.

Final Conclusion: The impugned attachment was set aside insofar as it covered the mortgaged property, and the property was directed to be released from attachment, leaving the proceedings against the borrowers otherwise unaffected.

Ratio Decidendi: A property mortgaged to a secured creditor before the alleged offence, and not shown to be proceeds of crime, cannot be confirmed in attachment under the Prevention of Money Laundering Act, 2002 when the secured creditor's statutory priority under the amended recovery laws applies.

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