TaxTMI 
TaxTMI 
2020 (1) TMI 522
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....hat Sterling Biotech in connivance with some unknown public servants had engaged in some illegal transactions as gratifications in lieu for settling proceedings before authorities, obtaining tenders for supply of goods and granting loans by Banks and financial institutions; and FIR No. RCBD1/2017/E/0007 dated 25th October 2017 against Sterling Biotech and Others ("Second FIR"). It was also alleged that the Directors of Sterling Biotech and others hatched a criminal conspiracy amongst themselves with dishonest intention to cheat Andhra Bank and other public sector banks. 4. The allegations made in the Complaint revolve around companies, entities, persons belonging to the Sandesara Group of companies ("Sandesara Group"). Insofar as this appellant is concerned, who has acquired outstanding loans payable by below mentioned entities of Sandesara Group, alongwith all rights, titles and interests, securities, guarantees, etc. under the provisions of SARFAESI Act from the various banks/financial institutions, most of them being public sector banks/financial institutions regulated by Reserve Bank of India): Sterling Biotech Limited ("Sterling Biotech"); Sterling SEZ & Infrastructure Limi....
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.... is cleared that in view of which appellant has rights as a secured creditor in the said properties. The Complainant alleges that the said JMFARC Mortgaged Properties fall within the scope of "proceeds of crime". The said JMFARC Mortgaged Properties were given as collateral to the respective Banks in lieu of the loans advanced to Sterling Biotech Limited, Sterling SEZ and Infrastructure Ltd., Unique Proteins Pvt. Ltd., PMT Machines Ltd. and subsequently assigned to this appellant. 9. SICOM Limited sanctioned a loan of INR 50,00,00,000/- (Rupees Fifty Crore only) to Unique Proteins vide a duly executed Loan Agreement on 19th May 2010. The said loan was secured by way charge over assets of certain entities of Sandesara Group. Thereafter, the loan account of Unique Proteins was declared as NPA by SICOM Limited on 30th November 2012, due to default in repayment of the said loan amount. Appellant in its ordinary course of business, acquired this outstanding loan from SICOM Limited with all rights, title and interest, along with the underlying security interests, pledges and/or guarantees in respect of the said loan vide an Assignment Agreement dated 22nd March 2014 under the provisions....
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....plaint are properties on which this Defendant acquired a security interest pursuant to the Assignment Agreement dated 25th March 2014 executed between Federal Bank and appellant. Facts pertaining to the acquisition of loan of PMT Machines 12. Oriental Bank of Commerce, under consortium lending, sanctioned various credit facilities to PMT Machines, which were enhanced/reviewed from time to time. The said facilities were secured by way of charge over the assets of PMT Machines vide Agreement of Hypothecation of Assets dated 15th March 2005, Deed of Hypothecation dated 20th March 2007, and Joint Deed of Hypothecation dated 26th September 2008. Thereafter, the loan account of PMT Machines was declared as NPA by Oriental Bank of Commerce in December 2012, due to default in repayment of the said loan amount. Appellant in pursuance of its aforementioned business activities, acquired this outstanding loan from Oriental Bank of Commerce with all rights, title and interest, along with the underlying security interests, pledges and/or guarantees in respect of the said loan vide an Assignment Agreement dated 27th June 2014 under the provisions of SARFAESI Act. Property attached under the PAO....
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.... Delhi on 30th August 2017 under Sections 13(2) r/w 13(1)(d) of the Prevention of Corruption Act, 1988 ("PC Act") and Section 120B of the Indian Penal Code, 1860 ("IPC") against, inter alia, Sterling Biotech. The Second FIR dated 25th October 2017 was registered for offences allegedly committed under Section 13(2) r/w 13(1)(d) of the PC Act and 120B r/w Sections 420, 467, 468 and 471 of the IPC against Sterling Biotech. Pursuant to the registration of the Second FIR, the Complainant registered ECIR/HQ/17/2017 dated 25th October 2017 and took up the matter for investigation on 27th October 2017. 15. In none of the FIRs referred above, name of assignor of loan JMFARC or any of its personnel has been mentioned. Further, the said Second FIR itself shows that there was a criminal conspiracy to cheat the public sector banks, some of whom have assigned the loans to appellant and hence having stepped into the shoes of the victim banks, the appellant is also a victim. Further, without prejudice to above, Complainant in Para 5 of its reply to the reply filed by appellant, has itself candidly admitted that there is no impropriety and illegalities alleged against JM Financial Asset Reconstru....
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....tions and appellant contain an affirmative covenant that the accounts assigned have not been classified as "fraud accounts" and that fraudulent accounts do not form part of the assignment agreements. After being informed of the proceedings being initiated by the Complainant against Sterling Entities, appellant provided a detailed written response before the Complainant on 18th April 2018, 27th April 2018 and 11th June 2018, setting out the true and factual position leading to the Assignment and the secured charge created in favour of appellant on the JMFARC Mortgaged Properties. Further, it is also noteworthy to mention that JMFARC Mortgaged Properties were duly charged in favour of respective banks/financial institutions for a fair consideration, and the same was under was bonafide loan transaction in the ordinary course of business of banking/lending. There was an authentic disbursement of loans which, amongst other securities, was secured by way of a charge over JMFARC Mortgaged Properties. 18. The details of the JMFARC Mortgaged Properties, along with the present status of the said properties attached under the POA are more particularly set out in a Schedule of JMFARC Propert....
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....ns. 12. 30th September 2012 Loan account of Sterling Biotech was declared as NPA by Federal Bank. 13. 30th November 2012 Loan account of Unique Proteins was declared as NPA by SICOM Limited. 14. December 2012 Loan account of PMT Machines was declared as NPA by Oriental Bank of Commerce. 15. 22nd March 2014 Defendant No. 85 acquired the outstanding loan of Unique Proteins from SICOM Limited including all its rights, title and interest vide a registered Assignment Agreement dated 22nd March 2014 and hence obtained a valid and subsisting secured charge over the JMFARC Mortgaged Properties at Serial Nos. 4, 18 and 39 in the PAO and in the Complaint. 16. 25th March 2014 Defendant No. 85 acquired the outstanding loan of Sterling Biotech from Federal Bank including all its rights, title and interest vide a registered Assignment Agreement dated 25th March 2014 and hence obtained a valid and subsisting secured charge over JMFARC Mortgaged Properties at Serial Nos. 6, 7 and 9 in the PAO and in the Complaint. 17. 27th June 2014 Defendant No. 85 acquired the outstanding loan of PMT Machines from Oriental Bank of Commerce including all its rights, title and interest vide a reg....
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....18 by Hon'ble NCLT Mumbai against PMT Machines. 19. It is now a settled position of law that "reasons to believe" cannot be a mere rubber stamping and the officer who is supposed to write down his reasons to believe has to apply his mind and provide specific reasons why a property is being attached under Section 5 of PMLA. More importantly, "reasons to believe" cannot be a mechanical reproduction of words in the statute. It is submitted that when an authority is judicially reviewing such "reasons to believe", it must be apparent that the officer penning the reasons has applied his mind to the materials available on record and has, on that basis, arrived at his "reasons to believe". The process of thinking of the officer must be discernible and the reasons have to be made explicit. It is only the reasons that can enable the reviewing authority to discern how the officer formed his reasons to believe. 20. The Hon'ble Delhi High Court in Himachal Emta Power Ltd. v UOI [W.P.(C) 5537 of 2018, dated 23-8-2018] has held that in order to pass an order of provisional attachment, it was necessary for the ED to have reasons to believe that the property sought to be attached was "der....
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....r loans. 23. The appellant submits that majority of the properties over which this Defendant acquired a security interest had been purchased by the Sandesara Group prior to the year 2008, which is when the ED alleges the offences started (as per the Second FIR). It is submitted that at the very least, the properties which were acquired by the Sandesara Group prior to the year 2008 cannot be said to have been acquired by the proceeds of crime and as such, cannot fall within the purview of PMLA. Further, in any event, this Defendant acquired security interest over the majority of JMFARC Mortgaged Properties, by virtue of assignment under the provisions of SARFAESI Act, much before the registration of any FIR or ECIR. Therefore, the said JMFARC Mortgaged Properties cannot fall within the purview of the PMLA. In view of the aforesaid, it is submitted that the PAO should be set aside summarily so that the interests of this Defendant are not further prejudiced. 24. It is admitted position that appellant is a secured creditor of the Sterling Entities and has to recover huge outstanding dues from the said Sterling Entities. The appellant, being a secured creditor is entitled to recover t....
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....37,39,40,42,43,45,48 and 52 in the PAO and the Complaint, to the extent and charged in favour of the Appellant (together hereinafter referred to as "JMFARC Mortgaged Properties") and in view of which this, Appellant has rights as a secured creditor in the said properties. 30. Out of the 17 JMFARC Mortgaged Properties, the ED has admittedly not even attempted to provide reasons to believe for 16 properties. 31. Out of 17 JMFARC Mortgaged Properties, the ED has attached 14 properties which have been acquired prior to the date on which the alleged scheduled offences were committed. The said 14 properties out of the 17 JMFARC Mortgaged Properties have been acquired prior to the date on which the alleged scheduled offences were committed is an admitted position of fact between the parties. The Appellant, in Paragraphs 8.4 to 8.7, has set out the dates on which the JMFARC Mortgaged Properties were originally acquired by the respective members of the Sandesara Group. In its Rejoinder dated 12 October 2018, in the paragraph-wise response, in response to the above mentioned paragraphs, the ED has stated on affidavit that the contents of the same are "matter of record. No comments". Theref....
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.... "163. Having regard to the above scheme of the law in PMLA, it is clear that if a bonafide third party claimant had acquired interest in the property which is being subjected to attachment at a time anterior to the commission of the criminal activity, the product whereof is suspected as proceeds of crime, the acquisition of such interest in such property (otherwise assumably untainted) by such third party cannot conceivably be on account of intent to defeat or frustrate this law. In this view, it can be concluded that the date or period of the commission of criminal activity which is the basis of such action under PMLA can be safely treated as the cut-off. From this, it naturally follows that an interest in the property of an accused, vesting in a third party acting bona fide, for lawful and adequate consideration, acquired prior to the commission of the proscribed offence evincing illicit pecuniary benefit to the former, cannot be defeated or frustrated by attachment of such property to such extent by enforcement authority in exercise of its power under Section 8 PMLA. 165. Situation may also arise, as seems to be the factual matrix of some of the cases at hand, wherein a secur....
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....as of the Appellant and determine the bonafides and legitimacy of its claims as well as the legality of the Provisional Attachment Order. Upon an argument being raised by the Enforcement Directorate that claims of third parties are to be solely adjudicated by the Special Court before whom trial is pending. 39. The Hon'ble High Court of Delhi in the Axis Bank Decision has held that the claim of a party asserting a bonafide and legitimate claim would be inquired into by the Special Court only if the order confirming the attachment "has attained finality". An order cannot be said to have attained finality until and unless all the remedies under the Act have been exhausted. No doubt, the bank and financial institutions are always at liberty to approach the Special Court (if so desired) in order to invoke the amended provision of sub section 8 of Section 8, however, it is wrong to suggest that the bank and financial institutions are not entitled to challenged the order of attachment because this tribunal is only exclusively having jurisdiction to examine the validity of attachment and to decide the same under section 26 of the Act as to whether attachment was valid or not. The bank....
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....the Respondents Accused and created a mortgage over the Secured Property prior to the commission of the Scheduled Offence in respect of the Secured Property; and (c) The Appellant commenced the proceedings under SARFAESI Act against the Secured Property prior to its provisional attachment. (d) The said property was not acquired from the proceed of crime. 43. The appellant is always at liberty to approach the Special Court to initiate the proceeding for disposal of mortgaged property, if so desired, who is agreeable to deposit the excess amount if such situation will arise. Counsel for appellant after taking the instructions from his clients stated that his clients are duty bound to deposit the excess amount with the respondent. 44. It is submitted on behalf of appellant that in view of propositions of law has been laid down in support of Appellant's case in light of the judgment of the Hon'ble Delhi High Court in the case of Axis Bank (supra). (a) Pre-requisites of Attachment: (i) Existence of material which is the basis of the "reasons to believe"; (ii) existence of identifiable "property" which qualifies to be treated as "proceeds of crime"; (iii) there being....
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....perty by such third party cannot conceivably be on account of intent to defeat or frustrate this law. In this view, it can be concluded that the date or period of the commission of criminal activity which his the basis of such action under PMLA can be safely treated as the cut-off. An interest in the property of an accused, vesting in a third party acting bona fide, for lawful and adequate consideration, acquired prior to the commission of the prescribed offence evincing illicit pecuniary benefit to the former, cannot be defeated or frustrated by attachment of such property. [Paragraph 163 at Page No. 94 of the Judgment.] 45. It is admitted position between the parties that 14 of the JMFARC Mortgaged Properties have been acquired prior to 2008 (date on which the offences were allegedly commissioned) therefore, the attachment order is not sustainable as per settled law. The Appellant is a secured creditor under the provisions of the DRT Act, the SARFAESI Act and the IBC, the provisions under PMLA must take a backseat to the enforcement of the Appellant's right as a secured creditor. 46. The Appellant is a bona fide third party and was not even involved in the initial loan bein....