2018 (12) TMI 1245 - AT - Money Laundering

Offence under PMLA - attachment of property - properties mortgaged with the appellant banks - Held that - The attached properties were purchased much prior to the period when the facility of loan sanctioned to the borrowers. The Banks while rendering the facilities were bonafide parties. It is not the case of the Respondent that the attached properties were purchased after the loan was obtained. The mortgage of the properties was done for bonafide purposes. The Appellant Banks admittedly are not involved in the scheduled offence. There is no criminal complaint under the schedule offence and PMLA is pending against the Bank. The Respondent no 1 has not fulfilled its duty of carrying out a thorough investigation and attached only such properties which were already mortgaged and held as securities with the Banks against the loans granted by them. Even the car bearing BMW-0005MH43AP was bought by the M/s SVLL out of the loan borrowed by it from the appellant Bank (Bank of Baroda) and was hypothecated to the Bank (Bank of Baroda). Since the M/s SVLL failed to refund the same the said car has become the property of the Bank (Bank of Baroda)and cannot be said be bought out of the proceeds of crime as alleged. In view of the aforesaid submissions the provisional attachment order so far as the properties mortgaged with the appellant banks are concerned confirmed by the Adjudicating Authority is liable to be quashed.

Summary

Issues Involved:
1. Legality of the Provisional Attachment Order.
2. Rights of Secured Creditors versus the Enforcement Directorate under PMLA.
3. Classification of attached properties as "proceeds of crime."
4. Priority of debts under SARFAESI Act and Recovery of Debts and Bankruptcy Act.

Detailed Analysis:

1. Legality of the Provisional Attachment Order:
The Appellants challenged the Provisional Attachment Order No. MBZO-II/05/2017 dated 08.06.2017 and its addendum dated 13.06.2017, confirmed by the Adjudicating Authority on 24.10.2017. The main contention was that the properties mortgaged with the banks were acquired before the alleged criminal activities and thus could not be considered "proceeds of crime" under Section 2(1)(u) of the Prevention of Money-Laundering Act, 2002 (PMLA).

2. Rights of Secured Creditors versus the Enforcement Directorate under PMLA:
The banks argued that they had a prior right over the mortgaged properties under the SARFAESI Act, 2002, and the Recovery of Debts and Bankruptcy Act, 1993, which grant priority to secured creditors over other debts and government dues. The Enforcement Directorate (ED) contended that under Section 71 of PMLA, the provisions of PMLA would have an overriding effect over any other law, including the SARFAESI Act.

3. Classification of Attached Properties as "Proceeds of Crime":
The properties in question were mortgaged with the banks before the alleged criminal activities took place. The ED admitted that the properties were acquired prior to the commission of the alleged fraud. The banks argued that the properties could not be classified as "proceeds of crime" since they were not acquired using the proceeds of the alleged criminal activities.

4. Priority of Debts under SARFAESI Act and Recovery of Debts and Bankruptcy Act:
The banks emphasized that Section 26(E) of the SARFAESI Act and Section 31(B) of the Recovery of Debts and Bankruptcy Act, as amended, provide that the debts due to secured creditors shall be paid in priority over all other debts and government dues. The Tribunal agreed with this interpretation, stating that the rights of secured creditors have priority over the attachment, confirmation, and confiscation of properties under PMLA.

Conclusion:
The Tribunal concluded that the properties mortgaged with the banks were acquired before the alleged criminal activities and could not be classified as "proceeds of crime." The Tribunal held that the secured creditors have a prior right over the attached properties under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act. Therefore, the Provisional Attachment Order, to the extent of the properties mortgaged with the appellant banks, was set aside. The appeals were allowed, and the impugned order dated 24.10.2017 was quashed, with no cost.