Mumbai, Mar 30 (PTI) The Bombay High Court has ruled that Prevention of Money Laundering Act (PMLA) holds an overriding effect over debt recovery laws like SARFAESI and RDB Acts when it comes to the attachment of "proceeds of crime".

In a ruling delivered on March 23, the Nagpur bench of HC set aside previous orders by the PMLA Appellate Tribunal that had favoured the rights of banks to recover debts from attached properties.

The bench of Justices M S Jawalkar and Nandesh Deshpande emphasised that debt recovery laws such as Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and Recovery of Debts and Bankruptcy Act (RBD) "would not render PMLA subservient to it because of the different objects and reasons of both enactments".

The objective of the legislation in PMLA being distinct from the purposes of two other enactments- RDB Act and SARFAESI Act, the latter cannot prevail over the former, it said.

The case originated from a 2012 Central Bureau of Investigation probe into Grace Industries Ltd regarding irregularities in coal block allocations.

The Enforcement Directorate (ED) identified approximately Rs 24.92 crore as "proceeds of crime" and provisionally attached immovable properties belonging to the accused entities in 2015. The attached properties had been mortgaged to respondent HDFC Bank as security for credit facilities extended prior to attachment.

The bank argued that because the properties were mortgaged to it prior to the ED's action, it held statutory priority under the provisions of RDB and SARFAESI Acts.

The bank then approached the Appellate Tribunal under section 26 of the PMLA challenging the attachment. The PMLA Appellate Tribunal passed an order in favour of the bank, holding that "secured creditors enjoy statutory priority" in debt recovery Acts.

The ED, however, challenged the order claiming the Tribunal incorrectly equated the attachment of "proceeds of crime" with government dues recoverable under civil statute. The Tribunal failed to appreciate that PMLA is a special penal statute aimed at confiscation of tainted property, not recovery of debt, the ED further submitted.

The ED contended that the impugned order undermines the confiscatory object of PMLA by subordinating it to civil recovery proceedings.

Citing the Supreme Court's ruling on the matter, the HC noted that provisions of both the enactments cannot be said to be having an overriding effect on each other.

"We confirm the view taken by the Delhi High Court in The Deputy Director, Directorate of Enforcement Delhi v. Axis Bank & Ors that an order of attachment under PMLA is not rendered illegal only because the secured creditor has a prior secured interest in the subject property," the court said.

The HC, however, clarified that if the order of confiscation has been passed, or trial of a case for the offence under section 4 of PMLA is commenced, the claim of a party asserting to have legitimate interest will have to be adjudicated upon only by the Special Court.

Ruling that the Tribunal order was "illegal, arbitrary and contrary to law", the HC granted liberty to the bank to move an appropriate application for release of attachment of property before the Special Court under PMLA provisions. PTI AVI BNM

PMLA attachment of proceeds of crime overrides prior secured interests under debt recovery laws in property disputes. PMLA has an overriding confiscatory framework for attachment of proceeds of crime, and its operation is not displaced merely because the attached property is subject to a prior mortgage or secured interest under debt recovery laws. The court noted that SARFAESI and the Recovery of Debts and Bankruptcy Act serve different objects and cannot prevail over PMLA in attachment proceedings. Where confiscation has been ordered or trial has commenced, claims of legitimate interest in the attached property must be adjudicated by the Special Court.