2017 (8) TMI 1747 - AT - Money Laundering

SARFAESI Act overrides PMLA for secured asset recovery when banks aren't accused in criminal proceedings

The Appellate Tribunal ruled that SARFAESI Act, 2002 has overriding effect over PMLA, 2002 regarding attachment and recovery of secured assets. The ... Money Laundering - interplay and overriding effect between the PMLA and the SARFAESI Act, 2002, with respect to attachment and recovery of secured assets - SARFAESI Act, 2002 has overriding effect over the PMLA, 2002 or not - HELD THAT:- Admittedly, neither the banks nor employees of these appellants are accused in any criminal proceedings nor there is any allegations against them that they are involved in the commission of alleged crime or generating “proceeds of crime”. The amounts of loan sanctioned are public money and they are entitled to get back their money by selling the mortgaged property as a first charge. Keeping in view, the facts and circumstances of the present appeals and the judgments cited herein above in the group of matters of State Bank of India and 11 other Banks, the Impugned Orders dated 29.09.2014 and 17.06.2016 passed in O.C. no 334/2014 and M.A. no. 02/2015 (in O.C. no. 160/2012) respectively are not legally correct and liable to be set aside. Conclusion - The Tribunal established that the SARFAESI Act's provisions granting secured creditors priority and overriding effect must be respected in attachment and recovery proceedings, and innocent secured creditors must be protected from unjust attachment under PMLA. Appeal allowed. The core legal questions considered by the Appellate Tribunal under the Prevention of Money Laundering Act (PMLA), 2002, in these appeals primarily revolve around the interplay and overriding effect between the PMLA and the SARFAESI Act, 2002, with respect to attachment and recovery of secured assets. Specifically, the Tribunal examined:Whether the SARFAESI Act, 2002, particularly after its 2016 amendment inserting Section 31B, has overriding effect over the PMLA, 2002, in matters relating to recovery of secured debts and attachment of properties.The legitimacy and propriety of attachment orders passed under PMLA against properties mortgaged to banks, where the banks are innocent parties and not implicated in any scheduled offence or money laundering.The rights and protections available to bona fide secured creditors whose properties have been attached under PMLA proceedings.The scope and application of the concept of 'proceeds of crime' under PMLA and whether properties mortgaged prior to the alleged offence can be treated as proceeds of crime.The procedural and substantive safeguards for innocent third parties or secured creditors under PMLA, including the mechanism for release of attached properties on proof of bona fide acquisition.The effect of settlements between banks and borrowers on criminal complaints and proceedings under PMLA and related laws.Issue-wise Detailed Analysis1. Overriding Effect of SARFAESI Act over PMLAThe Tribunal extensively analyzed the legal framework governing the relationship between the SARFAESI Act, 2002, and the PMLA, 2002. The SARFAESI Act empowers secured creditors to enforce security interests and recover dues without intervention of courts, and the PMLA provides for attachment of properties involved in money laundering.Key statutory amendments were central to this issue: the insertion of Section 31B in the SARFAESI Act and corresponding provisions in the Recovery of Debts and Bankruptcy Act, 1993 (formerly DRT Act), effective from 01.09.2016. These provisions explicitly state that the rights of secured creditors to realize secured debts by sale of secured assets shall have priority over all other debts and government dues, notwithstanding anything contained in any other law, including PMLA.The Tribunal relied on a recent common judgment dated 14.07.2017, where it held that the SARFAESI Act, being the later enactment with a non-obstante clause, overrides the PMLA in matters of recovery by secured creditors. This conclusion was supported by authoritative precedents, including the Supreme Court's ruling in the Solitaire India Ltd. case, which established that between two special statutes with non-obstante clauses, the later statute prevails. The Tribunal also cited a Full Bench judgment of the Madras High Court affirming the priority of secured creditors under the amended provisions.The Tribunal reproduced key paragraphs from these judgments, emphasizing that the legislature's intent was to facilitate secured creditors' recovery rights, preventing government agencies from attaching properties to the detriment of banks and financial institutions. The amendment was described as a legislative response to difficulties faced by banks due to attachments by government authorities under laws like PMLA.Thus, the Tribunal concluded that the SARFAESI Act, post-amendment, has overriding effect over the PMLA, and secured creditors' rights to recover dues through sale of mortgaged properties take precedence.2. Attachment of Properties Mortgaged to Banks and Innocent Parties under PMLAThe Tribunal examined the factual matrix wherein the appellant bank had sanctioned term loans secured by mortgage of immovable properties. The properties in question were acquired by the borrowers prior to the alleged offences and were mortgaged to the banks as security. The Enforcement Directorate (ED) had attached these properties under PMLA proceedings, which the banks challenged.The Tribunal noted that neither the banks nor their employees were accused or implicated in any scheduled offence or money laundering. The banks were innocent parties entitled to recover their dues under SARFAESI. The Tribunal emphasized that the properties mortgaged to the banks were not 'proceeds of crime' and could not be attached under PMLA merely because the borrowers were under investigation for scheduled offences.Reliance was placed on judgments clarifying that attachment under PMLA requires a prima facie nexus between the property and proceeds of crime. The Tribunal cited the principle that innocent bona fide purchasers or secured creditors without knowledge or involvement in money laundering cannot be penalized by attachment of their properties.The Tribunal referred to detailed judicial pronouncements elucidating the ingredients of money laundering under Section 3 of PMLA, including the necessity of 'knowledge,' 'attempt,' or 'actual involvement' in criminal activity. It was held that mere suspicion or connection to a borrower involved in scheduled offences is insufficient to attach properties of innocent secured creditors.Further, the Tribunal highlighted the statutory mechanism under Section 8 of PMLA, which allows innocent parties to approach the Adjudicating Authority to prove bona fide acquisition and seek release of attached properties. It noted that the Adjudicating Authority must consider such pleas and evidence before confirming attachment.3. Effect of Settlement Between Banks and Borrowers on Criminal ProceedingsThe Tribunal observed that in the present case, the borrowers had settled their outstanding dues with the banks, with undertakings recorded on the record. It was noted that such settlement could form the basis for joint petitions to quash FIRs under Section 482 Cr.P.C., particularly where offences are compoundable or where no grievance remains against the accused.The Tribunal cited authoritative decisions where courts exercised inherent powers to quash criminal proceedings in the interest of justice upon settlement of civil liabilities, especially where prolonged trials served no useful purpose and the accused accepted liability.4. Application of Law to Facts and Treatment of Competing ArgumentsThe appellant bank argued that the properties attached by the ED were mortgaged to the bank prior to the alleged offences and that the bank was a secured creditor entitled to priority under SARFAESI. It contended that attachment under PMLA without regard to the bank's rights and innocence would cause irreparable loss.The respondent (ED) contended that the properties were involved in money laundering and thus liable to attachment. However, the Tribunal found that the ED failed to establish a prima facie nexus between the properties and proceeds of crime with respect to the bank or the mortgaged assets.The Tribunal noted that the Adjudicating Authority had confirmed the attachment orders without adequately considering the bank's submissions or the bona fide nature of the mortgage. The Tribunal also found that the amendments to SARFAESI and DRT Acts postdated the impugned orders, and the legal position had evolved to grant overriding effect to SARFAESI.Given these facts and the settled law, the Tribunal held that the attachment orders were unsustainable and caused unjustified prejudice to the banks.5. ConclusionsThe Tribunal concluded that:The SARFAESI Act, 2002, as amended in 2016, has overriding effect over the PMLA in matters of recovery of secured debts and attachment of mortgaged properties.The banks, being innocent secured creditors, are entitled to priority in realization of their dues and cannot be deprived of their security by attachment under PMLA without a prima facie case against them.The properties mortgaged to the banks, acquired prior to the alleged offences, cannot be treated as proceeds of crime and thus are not liable for attachment under PMLA.The Adjudicating Authority erred in confirming the attachment orders without proper consideration of the banks' rights and the bona fide nature of the mortgage.Settlement between banks and borrowers may warrant quashing of criminal proceedings under Section 482 Cr.P.C. where appropriate.The impugned orders confirming attachment were set aside, and the attached properties were ordered to be released from attachment forthwith.Significant HoldingsThe Tribunal's reasoning includes the following crucial legal principles and verbatim excerpts:'The SARFAESI Act, 2002 has over-riding effect over the PMLA Act, 2002 after discussing the said legal issues in details on the basis of the latest amendment of SARFAESI Act, 2002 in which section 31 (B) has been inserted in the year 2016... The amended provisions give overriding effect over any other law and priority to the secured condition for the time being in force including the provisions of PMLA in so far as recovery of the loan by the secured creditors is concerned.''Where there are two special statutes which contain non-obstante clauses the later statute must prevail. This is because at the time of enactment of the later statute, the Legislature was aware of the earlier legislation and its non-obstante clause. If the Legislature still confers the later enactment with a non-obstante clause it means that the Legislature wanted that enactment to prevail.''The rights of a secured creditor to realize secured debts due and payable to them by sale of assets over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. This section introduced in the Central Act is with 'notwithstanding' clause and has come into force from 01.09.2016.''If a person satisfies the adjudicating authority by relevant material and evidence having a probative value that his acquisition is bona fide, legitimate and for fair market value paid therefor, the adjudicating authority must carefully consider the material and evidence on record... and if satisfied as to the bona fide acquisition of the property, relieve such property from provisional attachment.''The offence of money laundering under Section 3 of PMLA requires that the person 'knowingly' assists or is involved in the process connected with proceeds of crime. Mere suspicion or ownership without knowledge is insufficient.''The Adjudicating Authority can consider the plea of innocence and proceed to release the property if it is demonstrated that the property is not involved in money laundering.''The property of the appellant bank cannot be attached or confiscated if there is no illegality in the title of the appellant and there is no charge of money laundering against the appellant.''The impugned orders confirming attachment are not legally correct and liable to be set aside.'In sum, the Tribunal established that the SARFAESI Act's provisions granting secured creditors priority and overriding effect must be respected in attachment and recovery proceedings, and innocent secured creditors must be protected from unjust attachment under PMLA. The Tribunal's decision underscores the necessity of a prima facie case linking properties to proceeds of crime before attachment under PMLA and recognizes the statutory and judicial safeguards for bona fide parties.