2018 (12) TMI 1245 - AT - Money Laundering

Tribunal rules in favor of secured creditors in property attachment case

The Tribunal concluded that properties mortgaged with the banks, acquired before alleged criminal activities, could not be classified as 'proceeds of ... Provisional attachment under PMLA - proceeds of crime - priority to secured creditors under SARFAESI and RD&B Acts - overriding effect of special statute - status quo order by DRTProvisional attachment under PMLA - proceeds of crime - priority to secured creditors under SARFAESI and RD&B Acts - status quo order by DRT - Validity of confirmation of provisional attachment insofar as properties mortgaged with the appellant banks - HELD THAT: - The Tribunal found that the properties provisionally attached by the Enforcement Directorate were mortgaged to the appellant banks and the securities were created prior to the alleged scheduled offences. The appellant banks had initiated recovery under the SARFAESI Act (including issuing notices and taking symbolic possession) and had obtained proceedings before the DRT which resulted in a status quo order prior to the provisional attachment. The Tribunal relied on the statutory amendments conferring priority to secured creditors under SARFAESI and RD&B Acts and earlier decisions recognising the protective effect of those provisions, holding that the Adjudicating Authority had not properly considered the banks' prior rights. In consequence, and having regard to the admitted chronology (acquisition and mortgage before the alleged criminal conduct) and the banks' recovery steps, the Tribunal concluded that confirmation of the provisional attachment could not be sustained so far as it related to properties mortgaged with the appellant banks. The Tribunal expressly limited its decision to the effect that it would not examine other legal issues left open and recorded that it was not necessary to consider further contentions in view of the ruling on overriding/prior rights. [Paras 50, 53, 55]Provisional attachment confirmed by the Adjudicating Authority is quashed insofar as it relates to properties mortgaged with the appellant banks; the appeals are allowed.Final Conclusion: The appeals are allowed; the impugned order dated 24.10.2017 is set aside to the extent it confirms the provisional attachment of properties mortgaged with the appellant banks; no order as to costs. Issues Involved:1. Legality of the Provisional Attachment Order.2. Rights of Secured Creditors versus the Enforcement Directorate under PMLA.3. Classification of attached properties as 'proceeds of crime.'4. Priority of debts under SARFAESI Act and Recovery of Debts and Bankruptcy Act.Detailed Analysis:1. Legality of the Provisional Attachment Order:The Appellants challenged the Provisional Attachment Order No. MBZO-II/05/2017 dated 08.06.2017 and its addendum dated 13.06.2017, confirmed by the Adjudicating Authority on 24.10.2017. The main contention was that the properties mortgaged with the banks were acquired before the alleged criminal activities and thus could not be considered 'proceeds of crime' under Section 2(1)(u) of the Prevention of Money-Laundering Act, 2002 (PMLA).2. Rights of Secured Creditors versus the Enforcement Directorate under PMLA:The banks argued that they had a prior right over the mortgaged properties under the SARFAESI Act, 2002, and the Recovery of Debts and Bankruptcy Act, 1993, which grant priority to secured creditors over other debts and government dues. The Enforcement Directorate (ED) contended that under Section 71 of PMLA, the provisions of PMLA would have an overriding effect over any other law, including the SARFAESI Act.3. Classification of Attached Properties as 'Proceeds of Crime':The properties in question were mortgaged with the banks before the alleged criminal activities took place. The ED admitted that the properties were acquired prior to the commission of the alleged fraud. The banks argued that the properties could not be classified as 'proceeds of crime' since they were not acquired using the proceeds of the alleged criminal activities.4. Priority of Debts under SARFAESI Act and Recovery of Debts and Bankruptcy Act:The banks emphasized that Section 26(E) of the SARFAESI Act and Section 31(B) of the Recovery of Debts and Bankruptcy Act, as amended, provide that the debts due to secured creditors shall be paid in priority over all other debts and government dues. The Tribunal agreed with this interpretation, stating that the rights of secured creditors have priority over the attachment, confirmation, and confiscation of properties under PMLA.Conclusion:The Tribunal concluded that the properties mortgaged with the banks were acquired before the alleged criminal activities and could not be classified as 'proceeds of crime.' The Tribunal held that the secured creditors have a prior right over the attached properties under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act. Therefore, the Provisional Attachment Order, to the extent of the properties mortgaged with the appellant banks, was set aside. The appeals were allowed, and the impugned order dated 24.10.2017 was quashed, with no cost.