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2023 (2) TMI 1048 - HC - Insolvency and BankruptcyCIRP - applicability of provisions of PMLA - Provisional attachment order - legality of assets acquired by petitioner (whether assets acquired from the proceeds of crime or not?) - seeking declaration that the right, title and interest of the Petitioners to the Specified Assets sold to the Petitioners will not be affected in any manner by any action taken/to be taken by Respondent No. 1 under the provisions of the Prevention of Money Laundering Act against the Corporate Debtor or the Corporate Debtor s promoters. HELD THAT - From the chain of events narrated, what is evident is that ABG Shipyard Limited went into liquidation. Assets of the company corporate debtor were offered for sale pursuant to an auction held under the directions of the Apex Court. The petitioners were successful bidders and had after depositing the entire sale consideration received sale certificates. Certainly can it not be said that the assets which are specified assets which the petitioners have acquired are those assets which are acquired as a result of criminal activity and therefore can be said to be proceeds of crime . If the authorities were given a free hand to pass orders of attachment of properties which were acquired by a successful bidder in a liquidation process, on a presumption that such acquisition was as a result of a criminal activity, could be contrary to the interest of value maximization of the corporate debtor s assets by substantially reducing the chances of finding a willing resolution applicant or a bidder in liquidation. VIJAY MADANLAL CHOUDHARY ORS. VERSUS UNION OF INDIA ORS. 2022 (7) TMI 1316 - SUPREME COURT was a case where the Apex Court was considering a batch of appeals concerning the validity and interpretation of certain provisions of the PMLA, where it was held that sub-section (1) delineates sufficient safeguards to be adhered to by the authorised officer before issuing provisional attachment order in respect of proceeds of crime. It is only upon recording satisfaction regarding the twin requirements referred to in sub-section (1), the authorised officer can proceed to issue order of provisional attachment of such proceeds of crime. Before issuing a formal order, the authorised officer has to form his opinion and delineate the reasons for such belief to be recorded in writing, which indeed is not on the basis of assumption, but on the basis of material in his possession. The order of provisional attachment is, thus, the outcome of such satisfaction already recorded by the authorised officer. Therefore, what is clear is that it is only such property which is derived or obtained directly or indirectly as a result of a criminal activity can be regarded as proceeds of crime. In the facts of the case, obviously apparent it is that the only allegation and the gist that had been discussed is that the corporate debtor used the credit raised from the bank for purposes other than intended purposes to carry out circular transactions with various group companies and making overseas investments. There is no explanation as to how the properties standing in the name of corporate debtor and which form part of the assets sold to the petitioners are proceeds of crime especially since these assets are neither overseas assets or that of the group companies. Sine qua non to arrive at a determination that the assets are proceeds of crime, the foremost requirement is that the author has to have reason to believe on the basis of material in his possession. Reason to believe cannot arise from mere suspicion, gossip or rumour. Merely because the impugned order records alleged fraudulent transactions and diversion of funds, it cannot automatically lead to a conclusion that the properties acquired by the petitioners are proceeds of crime. In order to arrive at a conclusion that reason to believe exists, there must be some material to suggest such formation of opinion. Alternative remedy - HELD THAT - When the assumption of jurisdiction by the authorities itself is non-existent and the respondent proceeds on facts which have no nexus to the objects sought to be achieved, and the opinion is not based on any tangible material, reason to believe is a jurisdictional fact and in absence of such reason to believe arrived at by the authorities, the bar of alternative remedy cannot oust the jurisdiction of this court. Section 8 of the PMLA - HELD THAT - What is evident on reading the provision is that the onus shifts on the petitioners once the adjudicating authority decides to take action and therefore section 8 cannot be a ground on which the petitioner can be ousted from securing a relief in exercise of powers under Article 226 of the Constitution of India. The order dated 21.09.2022 insofar as it attaches the specified assets of the petitioners as shown in the impugned order in the schedule of properties at Sr. Nos. 13, 14, 15, 17, 18, 19 and 20 shall be treated as assets not falling within the purview of and having acquired from proceeds of crime . The order holding so is without jurisdiction and the assets are directed to be released from such attachment - Petition allowed.
Issues Involved:
1. Legality of the Provisional Attachment Order under the Prevention of Money Laundering Act (PMLA). 2. Applicability of Section 32A of the Insolvency and Bankruptcy Code (IBC) concerning the protection of assets acquired through a liquidation process. 3. Validity of the "reason to believe" for the attachment under Section 5 of the PMLA. 4. Jurisdictional issues and the availability of alternative remedies under the PMLA. Detailed Analysis: 1. Legality of the Provisional Attachment Order under the PMLA: The petitioners challenged the Provisional Attachment Order dated 21.09.2022, arguing that the assets acquired were not "proceeds of crime" as defined under the PMLA. The court examined whether the assets acquired by the petitioners through a court-sanctioned auction could be considered proceeds of crime. The court noted that the assets were acquired following a liquidation process under the IBC, and there was no evidence to suggest that these assets were derived from any criminal activity. The court highlighted that the mere diversion of funds by the corporate debtor does not automatically render the assets acquired by the petitioners as proceeds of crime. 2. Applicability of Section 32A of the IBC: The petitioners argued that Section 32A of the IBC provides immunity to the assets acquired through a resolution plan or liquidation process from any action under the PMLA. The court referred to the Supreme Court's decision in Manish Kumar vs. Union of India, which upheld the constitutional validity of Section 32A. The court noted that Section 32A bars any action against the property of the corporate debtor once a resolution plan is approved or liquidation is initiated. The court emphasized that the assets acquired by the petitioners were through a court-approved liquidation process, and thus, Section 32A's protection applies. 3. Validity of the "Reason to Believe" for the Attachment under Section 5 of the PMLA: The court scrutinized whether the "reason to believe" for the attachment was based on tangible material or mere suspicion. The court cited several precedents, including Vijay Madanlal Choudhary vs. Union of India, to establish that "reason to believe" must be founded on credible evidence and not on mere suspicion or gossip. The court found that the attachment order lacked sufficient material to justify the belief that the assets were proceeds of crime. The court concluded that the attachment was based on assumptions and not on concrete evidence, thus failing the "reason to believe" test. 4. Jurisdictional Issues and the Availability of Alternative Remedies under the PMLA: The court addressed the argument concerning the availability of alternative remedies under Section 8 of the PMLA. The court noted that when the assumption of jurisdiction is non-existent and the order is based on irrelevant facts, the alternative remedy cannot oust the court's jurisdiction under Article 226 of the Constitution. The court held that the provisional attachment order was without jurisdiction as it was not based on valid "reason to believe." Conclusion: The court allowed the petition, quashing the Provisional Attachment Order dated 21.09.2022 concerning the specified assets. The court directed that the assets should be released from attachment, as they were not acquired from proceeds of crime. The court rejected the request for maintaining the status quo for a further period of four weeks. Further Order: The court rejected the request by the learned ASG to maintain the status quo for a further period of four weeks post-judgment.
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