2025 (8) TMI 939 - AT - Money Laundering

Liquidator allowed to auction attached company assets under s.8(7) PMLA; proceeds to ED as FDR pending trial

Biotor Industries Ltd. Versus The Deputy Director, Directorate of Enforcement, Ahmedabad

AT allowed the liquidator of the company in liquidation to apply under s.8(7) PMLA to auction attached properties to satisfy secured creditors and ... Money Laundering - attachment of properties of a company undergoing liquidation - scheduled offences - misappropriation of funds - precedence of IBC over PMLA or not - HELD THAT:- It is pertinent to mention here that Hon’ble Supreme Court of India in SLP No. 4151/2020, in Sterling Biotech Ltd. case [2024 (3) TMI 1471 - SC ORDER], wherein the said company was sold in liquidation proceedings under IBC, 2016 as a running company, vide order dated 01.03.2024 held that 'the special leave petitions are disposed of'. The interest of the consortium of banks and other secured and unsecured creditors can be satisfied only if the liquidator of the company M/s BIL is permitted to auction the properties as mentioned in para no.1 above for proportionate distribution of the outstanding loan liability amongst the secured creditors and excess amount, if any, be kept in the form of FDR till the conclusion of trial to satisfy the claim of the unsecured creditors etc as per their preferential rights. Liquidator is hereby permitted to move application before learned Special Judge, PMLA Court, u/s 8(7) of the PMLA, 2002, for auction sale of the aforesaid properties, with an undertaking to deposit the excess amount (if any) with ED in the form of FDR. The said FDR (if any) will be disposed of by Ld. Special Judge, after conclusion of trial under PMLA as per law - Appeal disposed off. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the properties attached by the Enforcement Directorate (ED) under the Prevention of Money Laundering Act (PMLA), 2002, are proceeds of crime and liable for confiscation. 2. Whether the provisions of the Insolvency and Bankruptcy Code (IBC), 2016, override or prevail over the provisions of the PMLA, 2002, in respect of the attached properties of a company undergoing liquidation. 3. Whether the properties attached are already mortgaged to banks and thus not liable for attachment under PMLA due to absence of risk of concealment or transfer. 4. Whether the liquidator of a company under liquidation can seek release or auction of attached properties to satisfy the claims of secured and unsecured creditors. 5. Whether the Enforcement Directorate has sufficiently demonstrated, with evidence, that the attached assets are derived from proceeds of crime as defined under Section 2(1)(u) of the PMLA. 6. The applicability and effect of Section 71 of PMLA and Section 238 of IBC concerning conflicts between the two statutes. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether the attached properties are proceeds of crime under PMLA and liable for attachment Relevant Legal Framework and Precedents: - Section 2(1)(u) of the 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 PMLA empowers the ED to attach properties believed to be proceeds of crime pending adjudication. Court's Interpretation and Reasoning: - The investigation revealed that the accused persons, including directors and employees of the company, conspired to misappropriate substantial funds (over Rs. 338 crores) from various banks by creating bogus bills, invoices, and opening fictitious accounts (Village Level Aggregators - VLAs). - The loans obtained on the basis of fabricated documents were diverted through circular transactions and misappropriated, constituting scheduled offences under PMLA. - The ED identified 31 properties linked to the accused persons and attached them as value equivalent to the proceeds of crime. Key Evidence and Findings: - FIRs and charge sheets filed by CBI and other agencies established criminal conspiracy, cheating, forgery, and use of false documents to obtain loans fraudulently. - Statements under Section 50 of PMLA and property valuations by registered government valuers corroborated the connection between the properties and the alleged proceeds of crime. Application of Law to Facts: - The properties, though some are in the names of group companies or individuals associated with the accused, are shown to have been acquired or financed through the proceeds of the fraudulent transactions. - The properties' acquisition timelines, loan cycles, and financial transactions indicate their derivation from the criminal activity. Treatment of Competing Arguments: - The appellants contended the properties were acquired prior to the commission of scheduled offences and financed by legitimate bank loans, thus not proceeds of crime. - The Court observed that the loans were obtained fraudulently by misrepresentations and bogus documentation, which taints the properties financed thereby. Conclusions: - The Court upheld the attachment of the properties under PMLA, finding sufficient evidence that the properties are proceeds of crime or value equivalent thereto. Issue 2: Whether IBC provisions override PMLA provisions in respect of attached properties of a company under liquidation Relevant Legal Framework and Precedents: - Section 71 of PMLA states that its provisions shall have effect notwithstanding anything inconsistent in any other law. - Section 238 of IBC similarly provides that its provisions shall have effect notwithstanding anything inconsistent in other laws. - The Supreme Court in a recent decision in a related matter (Sterling Biotech Ltd.) held that a company sold in liquidation under IBC on a clean slate basis extinguishes prior claims. Court's Interpretation and Reasoning: - Both statutes contain non-obstante clauses asserting supremacy over other laws, creating a conflict without explicit saving clauses. - The Court reasoned that in case of such conflict, the provisions of the later enacted statute (IBC, 2016) will prevail over the earlier (PMLA, 2002). - The Court recognized the rights of secured creditors under IBC and the role of the liquidator in satisfying claims through asset realization. Key Evidence and Findings: - The company is under liquidation as per an order dated 31.12.2018. - The properties attached under PMLA are also mortgaged to banks, secured creditors under IBC. Application of Law to Facts: - The Court permitted the liquidator to apply for auction of the attached properties under Section 8(7) of PMLA, with an undertaking to deposit excess proceeds in Fixed Deposit Receipts (FDR) pending conclusion of the PMLA trial. - This approach balances the interests of secured creditors under IBC and the enforcement of PMLA proceedings. Treatment of Competing Arguments: - The appellants argued that IBC has overriding effect and PMLA attachment should yield to liquidation process. - The ED contended PMLA is a special statute and its provisions prevail under Section 71. - The Court reconciled the conflict by allowing auction under supervision, preserving rights of both parties. Conclusions: - The Court held that the liquidator may realize the value of attached properties to satisfy creditors under IBC, with safeguards for PMLA proceedings. - The provisions of IBC and PMLA must be harmoniously construed, with the latter's attachment not impeding the liquidation process unduly. Issue 3: Whether properties already mortgaged to banks can be attached under PMLA Relevant Legal Framework and Precedents: - Under PMLA, properties can be attached if they are proceeds of crime or value equivalent. - SARFAESI Act provisions allow banks to take possession of mortgaged properties upon default. Court's Interpretation and Reasoning: - The appellants contended that since properties were mortgaged and taken possession of by banks prior to attachment, there was no risk of concealment or alienation. - The Court noted the properties were mortgaged but acquired through proceeds of crime, thus liable for attachment under PMLA notwithstanding existing mortgages. - The Court acknowledged the banks' status as victims of fraud and secured creditors but emphasized that attachment under PMLA is independent of mortgage status. Key Evidence and Findings: - Possession under SARFAESI Act was taken on 15.11.2011, prior to PMLA attachment in 2017. - The loans on the properties were obtained fraudulently. Application of Law to Facts: - The Court held that mortgage does not preclude attachment under PMLA if the properties are proceeds of crime. Treatment of Competing Arguments: - The appellants argued for release of properties to satisfy secured creditors. - The Court balanced this by allowing auction under supervision with proceeds deposited pending trial. Conclusions: - Mortgaged properties can be attached under PMLA if they are proceeds of crime, but realization of value for creditors is permissible under controlled conditions. Issue 4: Whether the liquidator can seek release or auction of attached properties to satisfy creditor claims Relevant Legal Framework and Precedents: - IBC provides for liquidation and realization of assets to satisfy creditor claims. - PMLA allows attachment pending adjudication but does not preclude disposal under supervision. Court's Interpretation and Reasoning: - The Court recognized the liquidator's role to realize assets for distribution among secured and unsecured creditors. - To balance interests, the Court permitted the liquidator to apply under Section 8(7) of PMLA for auction of attached properties. - Excess proceeds from auction are to be deposited in FDR with the ED, to be released after trial conclusion. Key Evidence and Findings: - The company is under liquidation and owes substantial amounts to banks and other creditors. Application of Law to Facts: - The Court's order facilitates creditor recovery while safeguarding the ED's interest in the PMLA proceedings. Treatment of Competing Arguments: - The appellants sought release of properties for liquidation. - The ED sought to maintain attachment pending trial. - The Court's solution accommodates both concerns. Conclusions: - The liquidator is authorized to seek auction of attached properties with conditions ensuring protection of PMLA claims. Issue 5: Whether ED demonstrated with evidence that attached assets are proceeds of crime Relevant Legal Framework and Precedents: - PMLA requires identification of proceeds of crime based on investigation and evidence. Court's Interpretation and Reasoning: - The ED produced FIRs, charge sheets, statements, and property valuations linking the properties to the fraudulent loan transactions. - The chain of transactions, bogus bills, and misuse of authority by company officials established the criminal origin of funds used to acquire properties. Key Evidence and Findings: - Multiple FIRs and charge sheets by CBI and other agencies. - Statements under Section 50 of PMLA. - Valuation reports of properties in question. Application of Law to Facts: - The Court found the evidence sufficient to establish that the properties are proceeds of crime or value equivalent. Treatment of Competing Arguments: - The appellants challenged the sufficiency of evidence and contended properties were acquired legitimately. - The Court found the ED's evidence credible and persuasive. Conclusions: - The attachment of properties under PMLA was justified based on the evidence presented. Issue 6: Interpretation of Section 71 of PMLA and Section 238 of IBC concerning conflicts between statutes Relevant Legal Framework and Precedents: - Section 71 of PMLA states its provisions prevail notwithstanding inconsistencies with other laws. - Section 238 of IBC similarly provides its provisions prevail notwithstanding inconsistencies with other laws. - Absence of saving clauses creates a legal conflict. Court's Interpretation and Reasoning: - The Court noted that both statutes contain non-obstante clauses asserting supremacy, but neither contains an express saving clause for the other. - The Court applied the principle that in case of conflict between two statutes with identical non-obstante clauses and no saving provisions, the later enacted statute prevails. - IBC, being enacted in 2016, is later than PMLA, enacted in 2002. Key Evidence and Findings: - Supreme Court's recent decision in Sterling Biotech Ltd. case supports the primacy of IBC in liquidation matters. Application of Law to Facts: - The Court reconciled the conflict by allowing liquidation processes under IBC to proceed with safeguards to protect PMLA interests. Treatment of Competing Arguments: - The ED relied on Section 71 of PMLA to assert its primacy. - The appellants relied on Section 238 of IBC for overriding effect. - The Court balanced both by recognizing the later enactment and practical necessity to satisfy creditors. Conclusions: - The provisions of IBC prevail over PMLA in respect of liquidation and realization of assets, subject to protection of PMLA claims through judicial supervision.