2025 (5) TMI 1691 - AT - Money Laundering

Asset reconstruction company's auction of mortgaged property maintained despite later ED provisional attachment order

Phoenix Asset Reconstruction Company Versus The Deputy Director Directorate of Enforcement & Ors., Chandigarh

The Appellate Tribunal under SAFEMA disposed of an appeal involving provisional attachment of property worth Rs.8 crore obtained through fraudulent loan ... Provisional Attachment Order - printed fictitious letter heads, false and fake bill books, receipts, created false letters, opened false and illegal e-mail accounts of other companies in order to cheat and siphon-off the complainant money taken under the garb of loan - violation of Sections 420, 468 & 471 of Indian Penal Code - HELD THAT:- After hearing the rival submissions, I have given my thoughtful consideration to the same. It is an admitted fact that the alleged period of offence was committed by the accused persons during the period July, 2013 to August, 2013 by obtaining loan to the extent of Rs.8 Crore from Aditya Birla Finance Ltd. by tendering forged and fabricated documents. Now, I will discuss about the properties mortgaged with the present appellants one by one. Land measuring 1 Kanal 8 ½ Marla (833 square yards) located at Plot No. 96, Godown Area, Pabhat, Tehsil-Derabassi, District- SAS Nagar, Zirakpur, Mohali was purchased by Smt. Daljit Kaur Gorwara on 22.01.2010. Thereafter, this property was mortgaged with Appellant Phoenix Asset Reconstruction Company Ltd. on 28.03.2013, for obtaining loan in favor of M/s Arvind Casting Pvt. Ltd. Being the secured creditor and prior mortgagee the SARFAESI proceeding were initiated by this appellant against the defaulter M/s Arvind Casting Pvt. Ltd. in the year 2017 and the possession of mortgaged property was also taken on 18.08.2015 after following the due process, as pointed by Ld. Counsel for the appellant. This property is thereafter auctioned by the appellant on five occasions namely, 25.09.2015, 11.11.2015, 21.12.201, 01.02.2016 and 07.03.2016 with prior intimation in this regard sent to the Investigating Officer on 12.06.2017. The Provisional Attachment Order was passed by ED only on 30.10.2018, without appreciating the fact that the said properties were already auctioned by the appellant on the above- mentioned dates. Being the secured creditor and seeing the fact that properties are already auctioned and purchased by the auction purchaser, the question of setting aside the said auction sale does not arise, seeing the fact that the right of appellant bank will prevail over the right of the Respondent. There is nothing on record that M/s Aditya Birla Finance Ltd. is co-mortgagee or in possession of title deeds. Accordingly, the auction sale already affected in favor of auction purchaser needs to be maintained, if the said auction purchaser has not taken back the tendered amount of auction sale from the appellant Phoenix Asset Reconstruction Company Ltd. Therefore, any excess amount realised by this appellant bank needs to be tendered to ED in the form of FDR, so that the unsecured creditors can claim their right over the same before Ld. Special Judge, PMLA Court. In sequel of my discussion in para no.5, the present appeal is hereby disposed with above direction. Appeal Disposed of with Direction, 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal include:Whether the Provisional Attachment Order (PAO) issued under the Prevention of Money Laundering Act, 2002 (PMLA) against the properties mortgaged with the appellant Phoenix Asset Reconstruction Company Ltd. is sustainable, particularly when the properties have already been auctioned by the appellant as a secured creditor under SARFAESI Act, 2002.Whether the alleged fraudulent activities involving obtaining loans through forged and fabricated documents by the accused companies and their directors constitute proceeds of crime under Section 2(1)(u) of the PMLA, thereby justifying attachment of the properties.The extent of the rights of the secured creditor (appellant) vis-`a-vis the Directorate of Enforcement (ED) in respect of the mortgaged properties and the impact of prior auction sales on the attachment proceedings under PMLA.The applicability and interplay of SARFAESI Act proceedings and PMLA attachment orders in the context of mortgaged properties linked to proceeds of crime.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of Provisional Attachment Order against properties already auctioned by the secured creditorRelevant legal framework and precedents: The PMLA empowers the ED to provisionally attach properties that are proceeds of crime under Section 5 of the Act. However, the SARFAESI Act, 2002 provides secured creditors with the right to take possession and auction mortgaged properties upon default. The question arises as to which right prevails when the same property is subject to both SARFAESI proceedings and PMLA attachment.Court's interpretation and reasoning: The Tribunal noted that the property in question, Plot No. 96, was mortgaged in favor of the appellant on 28.03.2013 and possession was taken under SARFAESI on 18.08.2015, following due process. The property was auctioned on five occasions between September 2015 and March 2016. The Provisional Attachment Order by the ED was passed belatedly on 30.10.2018, well after these auctions.The Tribunal found that the appellant, as a secured creditor and prior mortgagee, had lawful rights over the property and had exercised those rights through SARFAESI proceedings and auction sales. It held that the rights of the secured creditor under SARFAESI Act would prevail over the attachment rights of the ED under PMLA in respect of the mortgaged property.Key evidence and findings: Statements from bank officials and asset reconstruction company representatives confirmed the mortgage, possession, and multiple auctions of the property. The appellant had also intimated the Investigating Officer about the auctions.Application of law to facts: Since the property was auctioned prior to attachment, and there was no evidence that the complainant finance company (Aditya Birla Finance Ltd.) had any co-mortgagee rights or possession of title deeds, the Tribunal held that the attachment could not override the prior auction sale.Treatment of competing arguments: The appellant argued that the fraudulent loan obtained from Aditya Birla Finance Ltd. had no bearing on the mortgaged property already auctioned by it, and hence the attachment order should be set aside qua this property. The ED contended that the property represented proceeds of crime and was rightly attached. The Tribunal sided with the appellant's position on this point.Conclusion: The Tribunal disposed of the appeal with the direction that the auction sale in favor of the auction purchaser be maintained, and any excess amount realized by the appellant be deposited with the ED for distribution to unsecured creditors.Issue 2: Whether the alleged fraudulent loans constitute proceeds of crime under PMLA justifying attachment of propertiesRelevant legal framework and precedents: Section 2(1)(u) of PMLA defines 'proceeds of crime' as any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to scheduled offences. The offences under IPC Sections 420, 468, 471, and 120-B are scheduled offences under PMLA.Court's interpretation and reasoning: The Tribunal analyzed the FIR, investigation reports, and charge sheets which revealed that the accused companies and their directors obtained loans fraudulently from Aditya Birla Finance Ltd. by creating false, fake, and fabricated documents, impersonating employees of other companies, opening fictitious bank accounts, and generating fake invoices.Investigations by both police and ED confirmed the fraudulent nature of invoices and the diversion of loan proceeds through group companies. The ED recorded statements under Section 50 of PMLA and traced the proceeds of crime amounting to Rs. 8.60 crores.Key evidence and findings: The FIR, charge sheets, bank account details, KYC documents, and statements of bank officials and asset reconstruction company representatives corroborated the fraudulent scheme. The property details and mortgage records were scrutinized.Application of law to facts: Given the established fraudulent conduct and the tracing of proceeds, the Tribunal held that the properties attached fall within the definition of proceeds of crime under PMLA, justifying attachment.Treatment of competing arguments: While the appellant challenged the attachment of mortgaged property already auctioned, the ED maintained that the properties were rightly attached as proceeds of crime. The Tribunal accepted the ED's contention on the fraudulent origin of the crime proceeds but limited the attachment impact on the auctioned property.Conclusion: The Tribunal upheld the attachment of properties as proceeds of crime derived from the scheduled offences committed by the accused.Issue 3: Rights of secured creditor versus enforcement agency in attachment and auction of mortgaged propertiesRelevant legal framework and precedents: The SARFAESI Act empowers secured creditors to take possession and auction secured assets without intervention of courts, while PMLA empowers ED to attach proceeds of crime. The conflict between these rights requires balancing.Court's interpretation and reasoning: The Tribunal emphasized that the secured creditor's rights under SARFAESI Act, especially when possession and auction have been completed following due process, cannot be lightly disturbed by subsequent attachment orders under PMLA. The secured creditor's rights are prior in time and law.Key evidence and findings: The appellant's possession and auction of the property predated the ED's attachment order. No evidence suggested that the secured creditor acted in collusion or that the auction was a sham.Application of law to facts: The Tribunal held that the attachment order could not nullify the auction sale effected by the secured creditor. However, it directed that any excess amount realized by the secured creditor from the auction be deposited with ED for distribution to unsecured creditors.Treatment of competing arguments: The ED argued that the properties were proceeds of crime and should be attached regardless of SARFAESI proceedings. The appellant argued for protection of its rights as a secured creditor. The Tribunal balanced these competing rights in favor of the secured creditor's prior rights.Conclusion: The Tribunal preserved the secured creditor's rights and auction sales while ensuring that proceeds beyond the secured debt be made available for distribution to unsecured creditors via the ED.3. SIGNIFICANT HOLDINGS'Being the secured creditor and seeing the fact that properties are already auctioned and purchased by the auction purchaser, the question of setting aside the said auction sale does not arise, seeing the fact that the right of appellant bank will prevail over the right of the Respondent.''There is nothing on record that M/s Aditya Birla Finance Ltd. is co-mortgagee or in possession of title deeds. Accordingly, the auction sale already affected in favor of auction purchaser needs to be maintained, if the said auction purchaser has not taken back the tendered amount of auction sale from the appellant Phoenix Asset Reconstruction Company Ltd.''Any excess amount realised by this appellant bank needs to be tendered to ED in the form of FDR, so that the unsecured creditors can claim their right over the same before Ld. Special Judge, PMLA Court.'Core principles established include:The rights of a secured creditor under SARFAESI Act in respect of mortgaged properties, including possession and auction, prevail over subsequent attachment orders by ED under PMLA, provided the secured creditor acted lawfully and prior to attachment.Properties mortgaged and auctioned prior to attachment cannot be subjected to attachment or confiscation under PMLA to the detriment of the secured creditor's rights.Proceeds of crime traced from fraudulent loans obtained through forged documents constitute valid grounds for attachment under PMLA.Any surplus amount realized by the secured creditor beyond the secured debt must be deposited with the ED to facilitate distribution among unsecured creditors.Final determinations:The appeal was disposed of with directions preserving the auction sale in favor of the auction purchaser.The attachment order was not set aside in entirety but was limited in effect regarding the mortgaged property already auctioned.The secured creditor was directed to deposit any excess auction proceeds with the ED.