2019 (9) TMI 224 - AT - Money Laundering

Offence under PMLA - Provisional Attachment Order - recovery of amounts outstanding against Respondent no.4 from the sale of the Mortgaged Properties - HELD THAT - It is not denied on behalf of the respondent that the Appellant being the mortgagee and secured Creditor is entitled to recover amounts outstanding against Respondent no.4 from the sale of the Mortgaged Properties as it was never the case of the ED that the attached properties were purchased out of proceeds of crime. It has also come on record that the Appellant acted bonafidly while rendering the facilities and mortgage of the Properties was done for bonafide purposes. The Appellant is not involved in the schedule offence. There is also no criminal complaint under the schedule offence under PMLA is pending against the Appellant or any of its officials. Thus, the mortgaged properties are security to the loans and cannot be subject matter of attachment particularly when the same were purchased much prior to the commission of alleged offences. Respondent has failed to consider that it has attached all the properties without properly examining the case of the Appellant. The mortgaged properties of the Appellant cannot be attached or confiscated unless link and nexus directly or indirectly established and there is no illegality or unlawfulness in the title of the Appellant and there is no charge of money laundering against the Appellant. The mortgaged of properties are under the Transfer of Property Act as there is no dispute as regards the origin of funds or the title of the Property. The Respondent does not have any lien over the said properties as the Appellant is now the Legal transferee of said Properties. The Respondent cannot retain the properties over which they have no legal title and the property is to be returned to the persons lawfully entitled as the Appellant is the victim. As such the properties acquired by Appellant before the initiation of the proceeding under PML Act and properties in respect of which security interest has been created in favour of the bona-fide secured creditor ought not be subjected to attachment in view of the aforesaid observations of the Hon ble Delhi High Court and the State Action would be restricted to such part of the value of the properties as it exceeds the claim of the bona-fide third party. In the present case once it has been showed by the Appellant that proper and due diligence was conducted before the properties were mortgaged to them, the properties thus cannot be attached, neither as a tainted property nor as alternative attachable property since it is nobody s case that the secured creditor had not done the due diligence and/or the transactions were not legitimate. The Appellant undertakes to deposit any amount realized, which is in excess of its outstanding dues, with the ED if such situation would arise. The Appellant is a Public Limited Government Company. The money must come to the public forthwith not after the trial of criminal case against the borrowers which may take many years. The trial may continue against the borrowers. No material has been placed before us to show that the properties attached are part of any prosecution complaint arising out of the present ECIR. Impugned Order of attachment and the PAO are not in accordance with law, so not sustainable. Hence, the appeal is allowed.

Issues Involved:
1. Legality of the Provisional Attachment Order (PAO) under Section 5 of the Prevention of Money Laundering Act (PMLA), 2002.
2. Determination of whether the attached properties are "proceeds of crime."
3. Rights of the Appellant as a secured creditor.
4. Due diligence and legitimacy of the loan provided by the Appellant.
5. Application of precedents and legal principles from previous judgments.

Detailed Analysis:

1. Legality of the Provisional Attachment Order (PAO) under Section 5 of the PMLA, 2002:
The appeal was filed under Section 26 of PMLA, 2002, challenging the PAO dated 31.12.2014, which attached properties of M/s. Naraingarh Sugar Mills Ltd. The Adjudicating Authority confirmed the PAO, holding that the properties were involved in money laundering. The Appellant argued that the properties were secured against a loan provided by them and were not acquired from proceeds of crime.

2. Determination of whether the attached properties are "proceeds of crime":
The Appellant contended that the attached properties were acquired long before the alleged crime occurred. The properties were part of a security against a loan sanctioned in 2012, while the alleged money laundering activities surfaced in 2013. The Appellant further argued that the funds used for the co-generation project were from legitimate sources and not from any proceeds of crime. The Tribunal noted that there was no evidence proving the properties were acquired from proceeds of crime.

3. Rights of the Appellant as a secured creditor:
The Tribunal considered the Appellant's rights as a secured creditor, referencing the judgment in Deputy Director, Directorate of Enforcement, Delhi v. Axis Bank, which held that the rights of secured creditors survive despite attachment orders under PMLA. The Appellant's security interest in the properties was established before the registration of the FIR, and thus, their claim was legitimate and superior.

4. Due diligence and legitimacy of the loan provided by the Appellant:
The Appellant demonstrated that due diligence was conducted before sanctioning the loan, and all necessary KYC requirements were met. The loan was granted for a specific project, and the funds were utilized for their intended purpose. The Tribunal acknowledged that the Appellant acted in good faith and was not involved in any money laundering activities.

5. Application of precedents and legal principles from previous judgments:
The Tribunal relied on the Delhi High Court's judgment in Axis Bank, which emphasized that attachment under PMLA does not invalidate the prior charge of secured creditors. The judgment also highlighted the importance of due diligence and the legitimacy of transactions at the time of acquisition. The Tribunal concluded that the properties in question could not be considered "proceeds of crime" and that the Appellant, as a bona fide secured creditor, had a legitimate claim.

Conclusion:
The Tribunal allowed the appeal, setting aside the Impugned Order of attachment and the PAO. The Tribunal recognized the Appellant's rights as a secured creditor and acknowledged that the properties were not acquired from proceeds of crime. The Appellant's due diligence and legitimate transactions were upheld, and the Tribunal emphasized the need for public money to be recovered promptly. The appeal was allowed with no costs.

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