Bank can dispose mortgaged properties under IBC resolution plan despite ED attachment under PMLA Section 32-A(2)

The Appellate Tribunal under SAFEMA ruled that properties mortgaged with the appellant bank, which were attached by ED under PMLA, can be disposed of as per the approved resolution plan under IBC. The Tribunal held that Section 32-A(2) of IBC prohibits action against corporate debtor's property for pre-CIRP offences. Since the resolution plan for the corporate debtor was approved by the Committee of Creditors, the mortgaged properties can be disposed of before NCLT as per the resolution plan terms. If the resolution plan fails, the appellant may approach the Special Judge for auction sale under PMLA provisions. Appeal disposed of.

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The core legal questions considered by the Appellate Tribunal under the Prevention of Money Laundering Act (PMLA), 2002, in the present appeals include:

(i) Whether the properties mortgaged with the appellant bank, which were attached by the Enforcement Directorate (ED) under PMLA, can be released or disposed of by the bank in light of the ongoing proceedings under PMLA and the existence of a resolution plan approved under the Insolvency and Bankruptcy Code (IBC), 2016;

(ii) The interplay between the provisions of PMLA and the IBC, specifically the application and scope of Section 32A(2) of the IBC regarding protection of property of a corporate debtor during the Corporate Insolvency Resolution Process (CIRP) against attachment or other actions for offences committed prior to the CIRP;

(iii) The rights and entitlements of a secured creditor (appellant bank) whose mortgage properties have been attached by ED in a money laundering investigation;

(iv) The procedural and substantive requirements for disposal or auction of mortgaged properties attached under PMLA, including the role of the Special Judge, PMLA Court, and whether the existence of an approved resolution plan before the National Company Law Tribunal (NCLT) affects the attachment and disposal of such properties;

(v) The extent to which the ED can attach mortgaged properties purchased during the period of alleged commission of offences and subsequently mortgaged to banks for availing credit facilities.

Issue-wise Detailed Analysis:

Issue (i) & (ii): Whether properties mortgaged with the appellant bank and attached by ED can be released or disposed of in light of PMLA proceedings and an approved resolution plan under IBC; Interaction between PMLA and IBC provisions

The relevant legal framework includes the Prevention of Money Laundering Act, 2002, the Insolvency and Bankruptcy Code, 2016, and particularly Section 32A(2) of the IBC. Section 32A(2) states that no action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the CIRP, where such property is covered under a resolution plan approved by the Adjudicating Authority under Section 31 of the IBC. However, this protection is subject to two exceptions: the person taking control or acquiring liquidation assets should not be (i) a promoter or related party of the corporate debtor, or (ii) a person against whom the investigating authority has reason to believe had abetted or conspired in the commission of the offence.

The Court interpreted this provision as a clear safeguard to protect the property of the corporate debtor during CIRP, preventing any action against such property in relation to prior offences, provided the above conditions are met. The Tribunal noted that determination of whether these conditions are satisfied is within the jurisdiction of the NCLT or higher appellate forums, not the Appellate Tribunal under PMLA.

Accordingly, the Tribunal held that it cannot stay or interfere with the execution of the resolution plan merely because the properties are attached by ED under PMLA. The resolution plan approved by the Committee of Creditors for M/s D S Kulkarni Developers Ltd. allows for disposal of the properties as per its terms before the NCLT. Thus, the IBC provisions take precedence in protecting the resolution process and the property involved therein.

Issue (iii): Rights of the secured creditor (appellant bank) whose mortgaged properties are attached by ED

The appellant bank contended that it had granted credit facilities secured by mortgage over the properties in question. The bank's loan accounts became Non-Performing Assets (NPA), and the debtors failed to repay the outstanding dues. The bank argued it is a victim of the fraud and should not be deprived of its security by the attachment of properties by ED.

The Tribunal acknowledged the bank's status as a secured creditor and its right to realize dues from mortgaged properties through auction. However, it emphasized that the attachment by ED is lawful under PMLA, particularly since the properties were purchased during the period of the alleged offences and subsequently mortgaged. The Tribunal clarified that if the resolution plan fails or cannot be executed, the bank may apply to the Special Judge, PMLA Court, under Section 8(7) of PMLA for auction of the properties, subject to depositing any excess proceeds with ED for disposal after trial conclusion.

Issue (iv): Procedural and substantive requirements for disposal or auction of mortgaged properties attached under PMLA and effect of resolution plan approval by NCLT

The Respondent ED argued that mortgaged properties cannot be auctioned without prior approval of the Special Judge, PMLA Court, even if a resolution plan is approved by NCLT. The ED contended that PMLA is a special law and its proceedings have precedence over other laws, per Section 71 of PMLA. Therefore, any resolution plan involving disposal of attached properties must be presented before the PMLA Court to protect unsecured creditors' interests.

The Tribunal agreed that the Special Judge, PMLA Court, has jurisdiction to dispose of mortgaged properties after trial conclusion, but clarified that the resolution plan approved by the Committee of Creditors and NCLT can proceed as per IBC terms. The Tribunal granted liberty to the appellant to move the Special Judge for auction if the resolution plan fails, with an undertaking to deposit excess sale proceeds with ED. This balances the interests of secured creditors and the enforcement of PMLA proceedings.

Issue (v): Validity of ED attachment of mortgaged properties purchased during the offence period and mortgaged to banks

The ED's investigation revealed that the accused committed frauds involving approximately Rs. 1100 crores during 2006-2016. The properties in question were purchased during this period and later mortgaged to banks. The Tribunal accepted the ED's contention that such properties are liable to attachment under PMLA as proceeds of crime or involved in money laundering, notwithstanding their mortgage to banks.

The Court reasoned that the attachment is valid and lawful, as the properties were acquired during the offence period and are connected to the proceeds of crime. The mortgage to banks does not confer immunity from attachment under PMLA, but the rights of secured creditors are protected through the mechanisms discussed above.

Conclusions:

The Tribunal concluded that the attachment of mortgaged properties by ED under PMLA is valid and cannot be set aside merely because the properties are mortgaged to a bank or a resolution plan under IBC exists. The execution of the resolution plan approved by the Committee of Creditors and NCLT may proceed, with the proviso that if the plan fails, the secured creditor may seek auction of the properties through the Special Judge, PMLA Court, subject to depositing excess proceeds with ED. The Tribunal held that the PMLA proceedings and the criminal trials remain unaffected by this order.

Significant Holdings:

"No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the corporate insolvency resolution process of the corporate debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under Section 31..." (Section 32A(2) IBC)

"The only two safeguards provided under this sub-section state that the person taking control of the corporate debtor, or participating in the sale of liquidation assets should not be, (i) a promoter or in the management or control of the corporate debtor or a related party of such a person; or, (ii) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession reason to believe that he had abetted or conspired for the commission of the offence..."

"This Appellate Tribunal cannot stop the proceedings for execution of resolution plan, just because the mortgaged properties are attached by ED."

"In case, the said resolution plan fails or could not be executed, then appellant is at liberty to move application before Ld. Special Judge, PMLA Court under Section 8(7) of PMLA, 2002 for auction sale of the properties, as per law, with an undertaking to deposit the excess amount (if any) with ED..."

"It is made clear that nothing expressed herein will affect the right of either party in the criminal trials."

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