India: Secured Creditors v. Enforcement Directorate: Right To Attachment Of Property

Recently in the case of Standard Chartered Bank v. Deputy Director, Directorate of Enforcement, the Appellate Tribunal, Prevention of Money Laundering Act, New Delhi has clarified the anomaly regarding the right of the Enforcement Directorate (ED) to attach assets, which have previously been mortgaged to banks, by way of lending. The Appellate Tribunal held that the ED cannot claim right over assets of individuals who are suspected of criminal activity if banks have created prior right over such assets through lending and there exists no direct or indirect relation between the asset and the proceeds of crime. The Appellate Tribunal further noted that such mortgaged assets act as security to the loans and cannot be subject to attachment, particularly when they were purchased and mortgaged prior to the events of funds diversion or fraud committed by the borrowers.

Background

M/s Winsome Diamonds & Jewellery Limited, M/s Kohinoor Diamonds Private Limited, M/s Bombay Diamonds Company Private Limited and Forever Diamond Private Limited (Defaulting Companies) mortgaged various properties, valued at around Rs 155,68,06,162 to a consortium of 14 banks, led by Standard Chartered Bank (SCB). The consortium of banks upon failure of the Defaulting Companies to repay the borrowed amount filed an Original Application before the Debt Recovery Tribunal, Ahmedabad (DRT) under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest, Act 2002 (SARFAESI Act) and subsequently took possession of the mortgaged assets of the Defaulting Companies. A final recovery certificate to the tune of Rs 4687,04,04,315 was issued in favour of the consortium of banks by the DRT along with an attachment warrant. Being aggrieved by the default on part of the Defaulting Companies, SCB and Punjab National Bank (PNB) also filed a complaint against the Defaulting Companies with the ED, Mumbai. Upon such complaint being made, the ED also attached the properties of the Defaulting Companies, despite being aware of the fact that these properties were already mortgaged in favour of the consortium of banks.

Issue

Whether the ED can attach the properties of defaulters, which were mortgaged to banks, prior to the act of funds diversion and fraud committed by the borrowers?

Key observations and findings of the Appellate Tribunal

The Appellate Tribunal noted that there is no dispute that consortium of banks, led by SCB shall have the first right over the attached properties as they were mortgaged to the consortium of banks prior to the order of attachment by the ED. Accordingly, the Appellate Tribunal analysed the scheme of the SARFAESI Act and the Prevention of Money Laundering Act, 2002 (PMLA) and made the following observations:

  • Scheme of attachment under the SARFAESI Act

    • Section 31B was inserted in the SARFAESI Act with the objective of giving the secured creditors (in this case the consortium of banks) a priority over the rights of Central or State Government or any other Local Authority. The intent was to safeguard the interest of the secured creditors, which was frustrated pre-amendment, due to the practise of attachment of properties in favour of the Government Institutions.
    • The applicability of the amendment in the SARFAESI Act was not only limited to pending litigation, but would also to all dues, including governmental dues, qua the SARFAESI Act. Further, it was not possible for secured creditors to check whether the contribution made by the Borrowers towards their share of the sale consideration was lawfully earned or represented the proceeds of crime.
  • Scheme of attachment under the PMLA

    • Section 5 of PMLA requires that the properties sought to be attached must be purchased from the alleged proceeds of crime. The said provision further requires that attachment may only be made in cases where the proceeds of crime are likely to be concealed, transferred or dealt with any other manner.
    • Various judicial precedents have held that illegally acquired properties are earned and acquired in illegal and corrupt ways, at the cost of the people and the state. The state in such cases is deprived of its legitimate revenue and is such cases the properties must go back where they belong i.e. the state.
    • The primary objective of Section 8 and Section 9 of the PMLA is that the adjudicatory authority takes prima facie view on the material available on record. Section 5 and Section 8 of the PMLA cannot be utilized by such authorities to inflict injury to the victim i.e. the banks. The intention of PMLA cannot be to block the loan amount against the mortgaged properties.
  • Supremacy of SARFAESI Act over PMLA

    • The Hon'ble Supreme Court in Solidaire India Ltd. Vs Fairgrowth Financial Services Ltd. &Ors., (2001) 3 SCC 71 has held that the provisions of the amended SARFAESI Act prevail over the provisions of the PMLA as the amended SARFAESI Act is the subsequent legislation to the PMLA.
    • If there is no direct / indirect involvement of any person or property with the proceeds of the crime, then it cannot be said that the said person is connected with any activity or process with the proceeds of the crime. The same principle should be applied while judging the involvement of any property of any person in money laundering.

Based on the above stated analysis, the Appellate Tribunal was of the view that the Properties which are mortgaged with the banks were acquired and possessed by the respective owners much before the Respondents availed the loan from the Appellant Banks and therefore no proceeds of crime are involved in these properties. The Appellate Tribunal noted that the mortgaged properties of the Appellant Bank cannot be attached or confiscated unless link and nexus directly or indirectly established.

The Appellate Tribunal accordingly held that the Appellant Bank shall be entitled to recover huge amounts in the above loan accounts and stood as mortgagee/transferee of the interest in the properties. Further, no case of money-laundering is made out against the consortium of banks. In such circumstances, the bank will have priority on assets of the secured creditors to recover the loan amount/debts by sale of assets over which security interest is created.

Comment

This ruling by the Appellate Tribunal will be widely welcomed by the banking sector, especially in the present circumstances wherein various banks have been unable to recover dues from various loan defaulters. With such defaulters increasingly fleeing the country, the avenues available to secured creditors, such as banks remain limited to the properties mortgaged, at the time of availing the loan. This ruling shall not only ensure that the interest of the banks is secured, but also secures the individuals, who essentially are left to face the brunt of such wrongdoings. The judgment will ensure protection of rights of banks especially when the banks have granted loan facilities bona fide and when they are not involved in any schedule offence.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions