Recently the Delhi Appellate Tribunal for Prevention of Money Laundering Act, New Delhi in the case titled Bank of India vs. Deputy Director, ED, Mumbai (FPAPMLA- 2173/MUM/2018), examined the issue pertaining to attachment of properties, by the Directorate of Enforcement (ED) under Prevention of Money Laundering Act (PMLA), which were already secured by the Bank under the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).. The appeal was filed by the Bank (Financial Creditor) against the Order passed by the Adjudicating Authority under the Prevention of Money Laundering Act, New Delhi, whereby the Adjudicating Authority confirmed the attachment of the property which was already secured by the Bank at the time of availing credit facilities/loan.
The Adjudicating Authority, without considering the security interest created in respect of the same property, confirmed the attachment under PMLA on the reason that the property was purchased/acquired by 'proceeds of crime'. The Appellate Tribunal, PMLA, considered section 71 of the PMLA which states that the provisions of PMLA shall have overriding effect, notwithstanding anything inconsistent therewith, contained in any other law for the time being in force.
The Appellate Tribunal also noted that amendments were carried out in the SARFAESI Act, 2002 with effect from September 01, 2016, whereas the PMLA had been enacted prior in time. The Appellate Tribunal relied on its earlier decision rendered in the case titled 'Standard Chartered Bank vs. Dy. Director, Directorate of Enforcement, Mumbai', wherein the Appellate Tribunal had categorically held that the provisions of SARFAESI Act, 2002 and RDB Act, 1993 will prevail over the PMLA, 2002. The Appellate Tribunal examined Section 26E of SARFAESI Act, 2002 and Section 31B of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ("RDB Act"), which provide that after registration of security interest, the debts due to any secured creditors shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.
Relying on the provisions of Section 26E of SARFAESI Act, 2002 and Section 31B of RDB Act, 1993, the Appellate Tribunal held that the secured creditor gets a priority over the rates of Central or State Government or any other local authority. The Appellate Tribunal held that the amendment has been carried out in the provisions of SARFAESI Act, and RDB Act to facilitate the rights of secured creditors/Bank which were being hampered by attachment of properties belonging to the secured creditors. The mortgaged properties are security to the loans, and, therefore, cannot be the subject matter of attachment in cases where such properties were purchased and mortgaged prior to events of funds diversion and frauds committed by such borrowers. The Appellate Tribunal held that once the properties are in possession of the secured creditor/ Bank under SARFAESI Act, it cannot be said that the same is purchased from the 'proceeds of crime'.
The proceedings under PMLA before the Adjudicating Authority, PMLA are civil in nature and not criminal. The Appellate Tribunal also reiterated that the provisions of Insolvency & Bankruptcy Code ("IBC") will have overriding effect over the PMLA. After passing aforesaid judgment, it has become evident that if there is no nexus between the alleged offence and the bank who is mortgagee of the properties, and the properties were purchased prior to sanctioning of the loan, no case of money laundering can be made out against the bank who has sanctioned untainted money in favour of the borrowers.
After the passing of this judgment, the Bank/the secured creditors will definitely invoke the provisions of SARFAESI Act and RDB Act for realizing their dues as proceedings under SARFAESI Act and IBC get stalled owing to the attachment orders passed under PMLA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.