2020 (1) TMI 522 - AT - Money Laundering

Tribunal quashes Provisional Attachment Order on properties, recognizing appellant's legitimate claims as secured creditor.

JM Financial Asset Reconstruction Co. Versus Deputy Director, Directorate of Enforcement

JM Financial Asset Reconstruction Co. Versus Deputy Director, Directorate of Enforcement - TMI Issues Involved:1. Legitimacy of the Provisional Attachment Order (PAO) under the Prevention of Money Laundering Act (PMLA).2. Bona fide acquisition of loans and security interests by the appellant.3. The appellant's rights as a secured creditor.4. The applicability of the PMLA to properties acquired before the alleged criminal activities.5. Jurisdiction of the Appellate Tribunal and the Special Court under PMLA.6. The interplay between PMLA and other financial recovery laws like SARFAESI Act, DRT Act, and Insolvency and Bankruptcy Code (IBC).Detailed Analysis:Legitimacy of the Provisional Attachment Order (PAO):The tribunal examined the validity of the PAO issued under Section 5 of the PMLA. It was emphasized that 'reasons to believe' cannot be a mere formality and must reflect the officer's application of mind. The tribunal noted that the Enforcement Directorate (ED) failed to provide specific reasons linking the appellant to the alleged crimes committed by the Sandesara Group. The tribunal cited the Delhi High Court's ruling in Himachal Emta Power Ltd. v UOI, which mandates that an order of provisional attachment requires a clear belief that the property is 'derived or obtained' from any scheduled crime.Bona fide Acquisition of Loans and Security Interests:The appellant, an asset reconstruction company, acquired the loans of the Sterling Entities in the ordinary course of business under the SARFAESI Act. The tribunal found that the appellant was not named in any FIRs or charge sheets and had no reason to suspect any illegality at the time of acquiring the loans. The tribunal acknowledged that the appellant had acted in good faith, believing the loans to be non-performing assets (NPAs) without knowledge of any fraudulent activities by the Sterling Entities.Appellant's Rights as a Secured Creditor:The tribunal recognized the appellant as a secured creditor with valid and subsisting security interests over the properties attached under the PAO. It was noted that the appellant had acquired these interests through legitimate commercial transactions and had paid significant consideration to the assignor banks. The tribunal highlighted that the appellant's rights as a secured creditor are protected under the SARFAESI Act, DRT Act, and IBC, which override the provisions of the PMLA.Applicability of PMLA to Properties Acquired Before Alleged Criminal Activities:The tribunal noted that many of the properties in question were acquired by the Sandesara Group before 2008, the year when the alleged offences began. It was argued that these properties could not be considered 'proceeds of crime' under the PMLA. The tribunal agreed, stating that properties acquired before the commission of the alleged offences cannot fall within the purview of PMLA.Jurisdiction of the Appellate Tribunal and Special Court:The tribunal asserted its jurisdiction under Section 26 of the PMLA to adjudicate upon the validity of the PAO and the claims of the appellant. It referenced the Delhi High Court's decision in the Axis Bank case, which clarified that claims of bona fide third parties should be inquired into by the Special Court only if the attachment order has attained finality. The tribunal emphasized that the appellant's case had not reached such finality and thus fell within its jurisdiction.Interplay Between PMLA and Other Financial Recovery Laws:The tribunal highlighted the precedence of financial recovery laws like the SARFAESI Act, DRT Act, and IBC over the PMLA. It was noted that the appellant had initiated recovery proceedings under these laws before the PAO was issued. The tribunal cited the Delhi High Court's ruling in the Axis Bank case, which established that the rights of secured creditors must be respected, and the PMLA attachment should take a backseat to allow the enforcement of these rights.Conclusion:The tribunal set aside the impugned order confirming the PAO with regard to the properties mortgaged with the appellant. It was concluded that the appellant, as a bona fide third party and secured creditor, had legitimate claims over the properties, which were acquired before the alleged criminal activities and were not derived from proceeds of crime. The appeal was allowed, and the provisional attachment order dated 14.06.2018 was quashed concerning the appellant.