2021 (7) TMI 463 - HC - Money Laundering

Court quashes attachment order for properties, stresses on evidence & legal principles in money laundering cases

The court quashed the provisional attachment order and related show-cause notice concerning immovable properties, emphasizing the importance of material ... Money Laundering - proceeds of crime - scheduled offences - attachment of tainted property - respondents were of the view that since no tainted property of respondent No.5 was available for attachment the property which was acquired by untainted money could also be attached - HELD THAT:- A conjoint reading of the aforesaid provisions of SARFAESI Act and Bankruptcy Law makes it clear that the secured creditors have preferential right of realization of their dues against all other debts and government dues. Provisional attachment of the “proceeds of crime” under Section 5 of the PML Act is not an exercise for recovery of government dues of any nature; rather it is an exercise to seize /confiscate the property acquired by unlawful means of money laundering. Therefore, both the laws SARFAESI and Bankruptcy Act on the one hand; and PML Act on the other; operates in two different fields - the two statutes neither covers the same field nor overlaps against each other. Since SARFAESI Act only protects the interest of secured creditors against other debts and government dues. Whether in the facts and circumstances of the case, the petitioner should be relegated to the cumbersome litigation before the referred statutory body? - HELD THAT:- It is well settled by a catena of judicial pronouncements that the jurisdiction of the High Court under Article 226 of the Constitution of India is broad, plenary, equitable and discretionary one. It is equally settled that the writ jurisdiction of the High Court cannot be completely excluded by statute. However, certain self-imposed limitations are there. To illustrate the High Court should not act as Court of Appeal or entertain disputed question of fact while exercising writ jurisdiction under Article 226. Ordinarily, the High Courts should refrain to exercise jurisdiction under Article 226 if alternative remedy is there to the petitioner. In the case on hand what is noticeable that the statutory authority under Section 5 of the P.M.L.A., 2002 has not acted in accordance with the provisions of the enactment in question rather acted in defiance of the fundamental principles of judicial procedure and in total violation of the principles of natural justice. What can be provisionally attached under Section 5(1) of the P.M.L. Act is a ‘proceeds of crime’ and to establish that the property attached is ‘proceeds of crime’, there must be material in possession of the authority to ventilate that the authority had “reason to believe”. In the case on hand, the authority appears to have passed the order contained in Annexure-3 in flagrant violation of the mandate of Section 5(1) of the P.M.L.A, 2002, as there was no material before the authority to come to the conclusion that the property-in-question was ‘proceeds of crime’ or such ‘proceeds of crime’ was likely to be concealed, transferred etc. - the property in question was not proceeds of crime as defined under the Prevention of Money-Laundering Act nor the impugned order reveals that there was a direct nexus between the property in question and the proceeds of crime. Therefore, evidently, there was no material before the authority concerned to have “reason to believe” that the property in question was proceeds of crime. Only perfunctory recording of the fact that the authority has “reason to believe” and has material before him for such belief would not suffice unless there is evident material for such belief. This is a fit case wherein this Court should exercise its jurisdiction under Article 226 of the Constitution of India - Application allowed without any costs. Issues involved:1. Legitimacy of provisional attachment under Section 5 of the Prevention of Money Laundering Act (PMLA), 2002.2. Definition and scope of 'proceeds of crime' under Section 2(1)(u) of PMLA.3. Preferential claim of secured creditors under Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, and Section 26-E of the SARFAESI Act, 2002.4. Availability and adequacy of alternative statutory remedies.Issue-wise Detailed Analysis:1. Legitimacy of Provisional Attachment under Section 5 of PMLA:The petitioner challenged the provisional attachment of properties by the Enforcement Directorate under Section 5 of PMLA, arguing that the properties were acquired before the alleged money laundering activities. The court found that the properties in question were not 'proceeds of crime' as defined under PMLA, since they were acquired legitimately before the alleged criminal activities. The court emphasized that the authority must have material evidence to justify the 'reason to believe' that the property is 'proceeds of crime,' which was lacking in this case. Therefore, the provisional attachment order was deemed arbitrary and in violation of Section 5 of PMLA.2. Definition and Scope of 'Proceeds of Crime' under Section 2(1)(u) of PMLA:Section 2(1)(u) of PMLA defines 'proceeds of crime' in three limbs: property derived from criminal activity, value of such property, and equivalent value property held in India or abroad. The court clarified that properties acquired before the commission of the scheduled offense do not fall under the first limb. The court also rejected the argument that legitimate properties could be attached if tainted properties were unavailable, as this would contradict the legislative intent. The court adopted the view of the Punjab and Haryana High Court in Seema Garg v. Deputy Director, Directorate of Enforcement, emphasizing that 'value of such property' must have a direct or indirect link with the property derived from the criminal activity.3. Preferential Claim of Secured Creditors under Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, and Section 26-E of the SARFAESI Act, 2002:The petitioner argued for a preferential claim over the mortgaged properties under Section 31B of the Recovery of Debts and Bankruptcy Act and Section 26-E of the SARFAESI Act. The court noted that these provisions give secured creditors priority over other debts and government dues but do not supersede the PMLA's provisions regarding the attachment of 'proceeds of crime.' The court concluded that the SARFAESI Act and Bankruptcy Act protect secured creditors against other debts and government claims, whereas the PMLA focuses on confiscating properties acquired through money laundering. Therefore, the petitioner's argument was not upheld.4. Availability and Adequacy of Alternative Statutory Remedies:The respondent argued that the petitioner had alternative statutory remedies under PMLA, such as appearing before the Adjudicating Authority and appealing to the Appellate Tribunal. However, the court recognized exceptions to the rule of alternative remedies, particularly when statutory authorities act in defiance of fundamental judicial principles or natural justice. The court found that the provisional attachment order was issued without material evidence and in violation of natural justice principles. Consequently, the court exercised its jurisdiction under Article 226 of the Constitution, bypassing the alternative statutory remedies.Conclusion:The court quashed the provisional attachment order and the related show-cause notice to the extent of the immovable properties mentioned. The writ application was allowed, emphasizing the necessity of material evidence and adherence to legal principles in provisional attachment cases under PMLA.