2019 (1) TMI 1182 - AT - Money Laundering

Offence under PMLA - provisional order of attachment of the properties made under sub-section (1) of Section 5 - Attachment of the Moveable/immoveable property which has been Hypothecated/Mortgaged with the Appellant Bank is that proceeds of crime received by the Respondent No.2 Company through circular rotation (As alleged by the Respondent No.1) was either used for repayment of loans or for repayment of its term loans as Advanced by the Appellant Bank, therefore, the entire Plant and Machinery of M/s NakodaLts and its factory building are Proceeds of Crime Held that - There is no denial on behalf of respondent that appellant is a Secured Creditor and is entitled to priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or Local Authority. The Adjudicating Authority did not appreciate that a bare perusal of the afore mentioned section 2(1)(u) of PMLA very clearly stipulates that the property can be attached under the provisions ONLY WHEN, Such property has EITHER been derived or obtained, directly or indirectly as a result of a criminal activity relating to a scheduled offence. The complainant has failed to prove/establish that the immoveable property that has been lawfully Mortgaged with the Appellant Bank has EITHER been derived or obtained, directly or indirectly as a result of a criminal activity relating to a scheduled offence. The only reason given by the Respondent No.1 in the present OC 974/2018 is that proceeds of crime amounting to ₹ 827.98 Cr. received by the Respondent No.2 Company through circular rotation (As alleged by the Respondent No.1) was either used for repayment of loans or for repayment of its term loans as Advanced by the Appellant Bank, therefore, the entire Plant and Machinery of M/s Nakoda Ltd and its factory building are Proceeds of Crime‖ and the Factory land of M/s Nakoda is also liable for attachment under PMLA as Value of Such property. It is admitted position that the said movebale/immoveable property is not a property that has been derived or acquired, directly or indirectly through the Proceeds of crime . Thus, the said mortgaged property in which the bank is the secured creditor is not liable to be attached in lieu of even value therefore. Therefore, the OC 974/2018 is not maintainable as the Respondent No.1 had no jurisdiction to attach the aforementioned immoveable property under the provisions of the PMLA and that the PAO bearing No. 01/2018 is quashed against the appellant. The Adjudicating Authority did not consider that the provisions of The Prevention of Money-Laundering Act, 2002 cannot be construed and implemented to the detriment of third parties having no connection with and involvement in the scheduled offences which fall within the domain of the Act. The provisions of the Act can only entail penal consequences on those who are guilty of committing of scheduled offences. The rights of a third party having no involvement in the scheduled offences cannot be jeopardized and decimated by the operation of Act as the same would be violative of their legal right under bond fide contracts. Appeal allowed.

Summary

Issues Involved:
1. Provisional Attachment Order (PAO) confirmation.
2. Secured Creditor's priority over debts.
3. Validity of property attachment under PMLA.
4. Jurisdiction and power of Adjudicating Authority.

Issue-Wise Detailed Analysis:

1. Provisional Attachment Order (PAO) Confirmation:
The appellant challenged the order dated 01.10.2018, which confirmed the provisional attachment of properties made under Section 5(1) of the Prevention of Money Laundering Act, 2002. The properties were initially attached by the Respondent No.1 on 13.04.2018 and later confirmed by the Adjudicating Authority on 01.10.2018. The appellant contended that the properties were already mortgaged to the bank prior to the attachment and thus should not have been attached under PMLA.

2. Secured Creditor's Priority Over Debts:
The appellant bank argued that as a secured creditor, it has priority over all other debts, including government dues, under Section 26E of the SARFAESI Act, 2002, and Section 31B of the Recovery of Debts due to Banks and Financial Institutions Act, 1993. The Tribunal supported this by citing the Supreme Court's decision in Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd., which held that the non-obstante clause in the later enactment prevails over the earlier one. The Tribunal also referred to several judgments, including those of the Madras High Court and the Andhra Pradesh High Court, which upheld the priority of secured creditors.

3. Validity of Property Attachment Under PMLA:
The Tribunal noted that the properties in question were mortgaged to the appellant bank before the alleged proceeds of crime were used for loan repayment. The Tribunal emphasized that under Section 2(1)(u) of PMLA, only properties derived or obtained directly or indirectly as a result of criminal activity related to a scheduled offense can be attached. The Tribunal found no evidence that the properties were acquired through proceeds of crime and thus ruled that the attachment under PMLA was not justified.

4. Jurisdiction and Power of Adjudicating Authority:
The Tribunal criticized the Adjudicating Authority for confirming the PAO without considering the appellant's status as a secured creditor. The Tribunal highlighted that the Adjudicating Authority should have carefully examined the material and evidence to establish the bona fides of the appellant's acquisition of the property. The Tribunal also pointed out that the Adjudicating Authority has no power to confirm the attachment under Section 8(2) of PMLA if the property is lawfully acquired and mortgaged.

Conclusion:
The Tribunal set aside the impugned order dated 01.10.2018 and quashed the PAO, allowing the appeal in favor of the appellant. The Tribunal emphasized that the appellant bank, being a secured creditor, has priority over the mortgaged properties and that the properties were not acquired through proceeds of crime. The Tribunal also disposed of the Miscellaneous Petition and ruled that the Adjudicating Authority had overstepped its jurisdiction by confirming the attachment. No costs were awarded.