2019 (2) TMI 962 - AT - Money Laundering

Offence under PMLA - provisional attachment - definition of the expression proceeds of crime - allegations of the ED in the present case is that wrongful gain to the Appellant M/s. VGN Proprty Developers Pvt. Ltd. and wrongful loss to the Government of India of ₹ 115 Crores has been caused by sale of the property admeasuring about 10.46 Acres in Guindy Village, Chennai (hereinafter referred to as the said property ) at a sale price of ₹ 272 Crores whereas the guidelines value for the same was ₹ 387 Crores (and hence the loss) Held that - No reasons to believe are produced before us in order to satisfy us that the property was attached under second proviso if the same is not attached immediately, the purpose would be frustrated any proceedings. It is also not stated either in PAO or in impugned order that the respondent no. 1 has made any efforts to trace out the other property of VGN and respondent no. 1 is unable to find out any other property of the Managing Director/ Director of the Company in view of impugned mortgaged property. The respondent no. 1 has failed to discuss the interest of the buyers who have stake in the attached property. The pre-requisite for ordering attachment is that the property to be attached should constitute the proceeds of crime. In the present case, the said project in question prima facie may not be termed as proceeds of crime since the same was acquired by utilizing the money advanced from the appellant and respondent no. 4. Unless the property comes within the definition of the expression proceeds of crime under Section 2(1)(u) of PMLA, it could not have been attached under Section 5(1)(a) of PMLA. A careful look at the definition of the expression proceeds of crime would show that to come within the definition of the said expression, the following pre-requisites are to be satisfied a. that the same should be any property or the value of any such property; b. that it should have been derived or obtained directly or indirectly; c. that it should have been obtained or delivered by any person as a result of criminal activity relating to a Scheduled Offence. The Respondent no. 1 did not follow the mandate of Section 8(2) and the finding was given. No cogent and cohesive reason was given for rejection of the submissions in writing. The impugned order is mechanical, without application of judicious mind and as such is liable to be set at naught. In fact, the replies and material produced by the appellants have not been considered by the Adjudicating Authority. There were no discussions about the stand taken by them in their replies. The respondent no. 1 despite being aware that thelendersthat they prior in time interest in the subject Property, Respondent No. 1 - ED proceeded to pass a PAO No. 02/2018 dated 13.02.2018, wherebyattachedthe subject Property to the value of ₹ 115 crore as proceeds of crime. In the PAO, in the column Present Status of theproperties‟, the ED identified that the Subject Property wasmortgaged in favour of the lenders and IL&FS i.e.Piramal. In the light of above and in the interest of justice, the order passed by the Adjudicating Authority is set-aside by allowing the present appealsfiled by the lenders. The findings are not sustainable in law and the facts of the appeals of lenders. With regard to the appeal of VGN is concerned, we wish to impose certain terms and we pass the order to secure a sum of ₹ 115 crores as per the version of the ED and direct the VGN to give a surety of the equal amount. As a matter of fact, at the interim stage, VGN has already offered security of the land having value more than ₹ 119 crores situated at Sekkadu Village, Avadi Taluk, Tiruvallur District ad-measuring 10.21 acres, the other property is attached which is owned by the Managing Director/Chairman of VGN. The relevant papers alongwith the affidavit have been filed at the interim stage. If the criminal complaints are finally decided by the Special Court in favour of VGN, the said property shall be released. Till that time, VGN shall not dispose the said property directly or indirectly. Subject to above, the impugned property is released forthwith which was attached under the provisional attachment order i.e.admeasuring about 10.46 acres in Guindy Village, Chennai at VGN Fairmont, Thiru Vi Ka Industrial Estate, Guindy, Chennai-32and the impugned order of confirmation was passed.

Summary

Issues Involved:
1. Wrongful gain and loss allegations.
2. Provisional Attachment Order (PAO) and its confirmation.
3. Rights and interests of financial institutions and home buyers.
4. Compliance with procedural requirements under the Prevention of Money Laundering Act (PMLA), 2002.
5. Evaluation of the guideline value of the property.
6. Validity of the sale by private treaty.
7. Rights of secured creditors versus attachment under PMLA.
8. Impact on home buyers and project completion.

Detailed Analysis:

1. Wrongful Gain and Loss Allegations:
The main allegation by the Enforcement Directorate (ED) was that M/s VGN Property Developers Pvt. Ltd. caused a wrongful gain of ?115 Crores to themselves and a corresponding wrongful loss to the Government of India by purchasing a property for ?272 Crores, which had a guideline value of ?387 Crores. The ED argued that the sale was conducted via private treaty instead of a public auction, allegedly due to collusion between the officials of the State Bank of India (SBI) and M/s Hindustan Teleprinters Ltd. (HTL).

2. Provisional Attachment Order (PAO) and Its Confirmation:
The Directorate of Enforcement issued a Provisional Attachment Order (PAO) No. 02/2018 on 13.02.2018, attaching the property in question to the extent of ?115 Crores. This PAO was confirmed by the Adjudicating Authority on 27.07.2018, which concluded that the attached properties were proceeds of crime involved in money laundering.

3. Rights and Interests of Financial Institutions and Home Buyers:
The appellants, including PHL Finance Pvt. Ltd. (Piramal Group) and Altico Capital India Pvt. Ltd., argued that they had a first-ranking charge on the property as they had jointly lent more than 90% of the funds for its acquisition and development. They contended that the attachment order ignored their statutory rights and that they were innocent victims not involved in any scheduled offense or money laundering activities. The home buyers, having invested their savings and taken loans, were also adversely affected by the attachment, leading to halted construction and financial distress.

4. Compliance with Procedural Requirements under PMLA:
The appellants argued that the ED failed to comply with the second mandatory proviso of Section 5(1) of PMLA, which requires the attachment of property if it is likely to frustrate any proceedings under the Act. The Tribunal noted that no reasons to believe were produced to justify the immediate attachment of the property and that the ED did not make efforts to trace other properties of VGN.

5. Evaluation of the Guideline Value of the Property:
The Tribunal observed that the guideline value of ?387 Crores was based on the property being commercial, whereas it had been converted to residential use, which would have a lower guideline value. The Tribunal also noted that the guideline value is not an absolute measure of market value and that selling below this value does not constitute a crime.

6. Validity of the Sale by Private Treaty:
The Tribunal found that the sale by private treaty was legal and allowed under Section 13(4) of the SARFAESI Act, 2002, read with Rule 8(5) of the Security Interest (Enforcement) Rules, 2002. The sale was conducted after multiple failed public auctions, and the reserve price was fixed by a properly constituted committee of SBI.

7. Rights of Secured Creditors Versus Attachment under PMLA:
The Tribunal held that the rights of secured creditors, such as the financial institutions, have priority over government dues, including those under PMLA, as per the amended SARFAESI Act. The Tribunal cited previous judgments affirming that the secured creditors' rights cannot be hampered by attachment orders under PMLA.

8. Impact on Home Buyers and Project Completion:
The Tribunal acknowledged the severe impact on home buyers due to the attachment, which halted construction and caused financial distress. The Tribunal noted that the home buyers were innocent parties not involved in any scheduled offense or money laundering activities.

Conclusion:
The Tribunal set aside the Provisional Attachment Order and the confirmation order by the Adjudicating Authority. The appeals by the financial institutions were allowed, and the property was released from attachment. However, VGN was directed to provide a surety of ?115 Crores to secure the amount as per the ED's version. The Tribunal clarified that this order would not affect any pending criminal proceedings against VGN, which would be decided on their own merits.