2024 (4) TMI 1228 - AT - Money Laundering

Secured creditor's appeal dismissed for premature Section 32A application before resolution plan approval or liquidation

JM Financial Asset Reconstruction Company Ltd. Versus The Deputy Director, Directorate of Enforcement, Mumbai & Anr.

The Appellate Tribunal under SAFEMA dismissed the appeal filed by a secured creditor seeking release of attached properties under Section 32A of the ... Money Laundering - appellant, as a secured creditor, has the locus to seek the release of attached properties under Section 32A of the Indian Bankruptcy Code, 2016 - applicability of Section 8 of the Prevention of Money Laundering Act, 2002 (PMLA) in protecting the rights of secured creditors when properties are attached under the Act - HELD THAT:- Reference made to the Judgement of the Apex court in the case of Manish Kumar v. Union of India and Anr. [2021 (1) TMI 802 - SUPREME COURT] holding section 32 A to be constitutionally valid. Its application has been subjected to various conditions which includes the approval of the resolution plan resulting in change and control of the corporate debtor to a person who was as not a promoter or in the management of the corporate debtor etc. The condition on sale of liquidated assets is the same. In the instant case, neither resolution plan has been approved nor there exist element of sale of liquidated assets under chapter III of the part II of the Code of 2016 - it is not found that application under section 32 A would be maintainable at this stage, rather that application may be pre-mature. The settlement of the property, if confiscated is provided under section 8 (8) of the Act of 2002. If the prayer of the financial institution for protection of their right and for that to lift the attachment or quash it is accepted that it may be in ignorance of section 8 (8) of the Act of 2002 - When the bank pursued the matter for recovery of the amount and for that even to auction the property by invoking the SARFAESI Act, 2002, it was found that the same property was earlier mortgaged to another bank and therein also the same accused committed default in making the payment. In fact, subsequent loan with mortgage of property was by creation of forged documents. In that case, claim for the property was made by two different financial institutions based on the mortgage of the property with them to secure the loan. If it is interfered at the instance of one financial institution leaving the other, it would be nothing but to affect the rights of other institution. The attachment of the property does not effect or transfer the title unless the property is confiscated and it can be when the accused is convicted. The settlement of the property, if confiscated, is provided under section 8(8) of the Act of 2002. Conclusion - The attachment of the property does not effect or transfer the title unless the property is confiscated and it can be when the accused is convicted. The settlement of the property, if confiscated, is provided under section 8(8) of the Act of 2002. There are no reason to allow the appeal at the instance of the assignee - appeal dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the appellant, as a secured creditor, has the locus to seek the release of attached properties under Section 32A of the Indian Bankruptcy Code, 2016.The applicability of Section 8 of the Prevention of Money Laundering Act, 2002 (PMLA) in protecting the rights of secured creditors when properties are attached under the Act.Whether the attachment of properties affects the rights and interests of secured creditors, and how such interests are to be settled under the relevant legal framework.ISSUE-WISE DETAILED ANALYSIS1. Locus of Secured Creditor under Section 32A of the Indian Bankruptcy Code, 2016- Relevant Legal Framework and Precedents: Section 32A of the Indian Bankruptcy Code, 2016 provides that liabilities of a corporate debtor for offenses committed prior to the commencement of the corporate insolvency resolution process shall cease, and no action shall be taken against the property of the corporate debtor if covered under an approved resolution plan.- Court's Interpretation and Reasoning: The Court emphasized that Section 32A applies when a resolution plan is approved under Section 31, resulting in a change in control of the corporate debtor or sale of liquidation assets. The appellant admitted no such resolution plan or sale had occurred.- Application of Law to Facts: Since no resolution plan was approved and no sale of liquidation assets occurred, the application under Section 32A was deemed premature and not maintainable.- Treatment of Competing Arguments: The appellant argued for the release of properties under Section 32A, but the Court found this inapplicable due to the lack of an approved resolution plan or asset sale.- Conclusions: The Court concluded that Section 32A does not apply in this case, and the appellant's application was premature.2. Protection of Secured Creditor Rights under Section 8 of the Prevention of Money Laundering Act, 2002- Relevant Legal Framework and Precedents: Section 8 of the PMLA provides mechanisms for adjudication, confiscation, and release of properties involved in money laundering offenses.- Court's Interpretation and Reasoning: The Court noted that Section 8(8) protects the rights of claimants with legitimate interests in attached properties, ensuring their claims are settled post-trial if the properties are confiscated.- Key Evidence and Findings: The Court highlighted that attachment does not affect title or ownership unless the property is confiscated after conviction.- Application of Law to Facts: The Court found that the appellant's rights as a secured creditor are protected under Section 8(8), which allows for the settlement of claims post-confiscation.- Treatment of Competing Arguments: The respondent argued that the appellant's rights are not affected by the attachment, as Section 8(8) provides adequate protection.- Conclusions: The Court concluded that the appellant's rights are safeguarded under Section 8(8), and any premature release of properties could disrupt the settlement of legitimate claims.SIGNIFICANT HOLDINGS- Core Principles Established: The judgment reaffirms that Section 32A of the Indian Bankruptcy Code, 2016, applies only when a resolution plan is approved, and no premature application can be entertained without such approval. Additionally, Section 8(8) of the PMLA provides a robust framework for protecting the rights of secured creditors and other legitimate claimants in attached properties.- Final Determinations on Each Issue: The appeal was dismissed on the grounds that the application under Section 32A was premature and that the appellant's rights are adequately protected under Section 8(8) of the PMLA. The Court emphasized that any release of properties should occur only after the proper adjudication process to ensure the rightful claimant's interests are settled.- Verbatim Quotes of Crucial Legal Reasoning: 'The attachment of the property does not effect or transfer the title unless the property is confiscated and it can be when the accused is convicted. The settlement of the property, if confiscated, is provided under section 8(8) of the Act of 2002.'In conclusion, the judgment clarifies the application of Sections 32A and 8(8) in the context of attached properties under the PMLA, emphasizing the protection of secured creditors' rights while ensuring the proper adjudication of claims. The appeal was dismissed, with the Court noting that the appellant's rights remain protected under the existing legal framework.