2023 (3) TMI 1509 - HC - Money Laundering

Provisional attachment order - unsold units mortgaged to SBICAP - effect of attachment order on SBICAP's first charge over certain assets - intent to mitigate the debt servicing burden - HELD THAT - There is no disputing the investment by SBICAP or SWAMIH or the creation of the security documents. There is no finding that the assets over which security has been created are proceeds of crime. What is sought to be equated is the value of the assets for recovery. But the Petition points out that this approach not only jeopardizes but possibly torpedoes the entire purpose of SWAMIH and for no discernible reason. The effect of this attachment under the impugned order is that banks and financial institutions have stopped lending to flat purchasers. This has a direct impact on the cash flow and the sales in the project. That the Petitioner has a first ranking charge cannot be disputed. It is correctly said that this kind of an approach defeats the purpose of the establishment and formation of SWAMIH, the centrally funded project meant to assist desperate home buyers. There is no involvement of any Mantri Group entity in this at all and it cannot transfer any interest in the attached units. No such transfer would be recognized or valid in law. The second charge, that of Piramal, continues and is for Rs. 650 crores. Now there is a hypothecation of the receivables in favour of the Petitioner and the Piramal Group. From where this theory is derived that the Mantri Group might transfer an interest is unclear; and it is only speculation The Mantri Group must have an interest to be able to transfer it. Absent that interest there is nothing for the Mantri Group to transfer. There are no provision of the PMLA that has, combined with the non obstante clause, an overriding charge that would defeat, efface or render subservient the rights of a secured creditor. It is even unclear whether the attachment by the PMLA constitutes a sovereign debt in a case like this. Even if it did, it would not prevail over the rights of a secured creditor claiming security under a contract - It is no argument to say that the PMLA proceedings are in the public interest. Every statute is in the public interest. But is it being suggested that the SWAMIH fund is not in the public interest, despite all that is known? SBICAP is not even made a party to the PMLA proceedings. There is no conceivable answer to the Petition. Apart from anything else, no amount of affidavits can supply reasons if these are not to be found in the impugned order itself.

Summary

Issues Involved:
1. Legality of the provisional attachment order dated 11th August 2022.
2. Impact of the attachment order on SBICAP's first charge over certain assets.
3. Validity of the Directorate of Enforcement's actions under the Prevention of Money Laundering Act (PMLA).

Detailed Analysis:

1. Legality of the provisional attachment order dated 11th August 2022:
The Petitioner, SBICAP Ventures Ltd, challenged the order of 11th August 2022 issued by the Deputy Director, Directorate of Enforcement, Bengaluru Zonal Office, which provisionally attached assets worth Rs. 300 crores. The attachment targeted assets of the Mantri Group, including Castles Vista Pvt Ltd, Mantri Developers, and an individual, Sushil Mantri. The Petitioner argued that the attachment compromised their first charge over certain units in the "Mantri Serenity" project, affecting funding for flat purchasers. The Court noted that the FIR regarding the predicate offence under the PMLA was stayed by the Karnataka High Court, rendering it non-operational at the time of the impugned order.

2. Impact of the attachment order on SBICAP's first charge over certain assets:
SBICAP, through the SWAMIH Investment Fund-I, invested in the Mantri Serenity project to ensure its completion. SBICAP had a first charge over the project's unsold units and receivables, secured by various legal agreements, including a debenture trust deed and an inter-creditor agreement with Piramal Capital. The impugned order disrupted this arrangement, jeopardizing project completion and the interests of home buyers. The Court emphasized that SWAMIH's purpose was to rescue stalled projects and that the attachment order undermined this objective, affecting the cash flow and sales in the project.

3. Validity of the Directorate of Enforcement's actions under the Prevention of Money Laundering Act (PMLA):
The Directorate of Enforcement initiated an investigation under the PMLA, alleging diversion of funds by the Mantri Group. However, the Court found no evidence that the assets secured by SBICAP were proceeds of crime. The impugned order speculated that the Mantri Group might transfer beneficial interest in the attached units, which the Court deemed impossible due to SBICAP's secured position. The Court criticized the Directorate's speculative approach and lack of concrete findings, noting that the attachment order did not secure the interests of home buyers or ensure the recovery of public funds.

The Court concluded that the impugned order lacked justification under the PMLA and failed to consider the larger public purpose served by SBICAP's investment in completing delayed projects. The Karnataka High Court's stay on the FIR further weakened the basis for the attachment. Consequently, the Court made Rule absolute in favor of the Petitioner, setting aside the provisional attachment order and emphasizing the importance of completing the housing project for the benefit of home buyers.