Delhi HC observes that assets which are subject matter of the appeals are not “tainted property” as they were acquired prior to the activities of alleged moneylaundering activities, sets aside order of appellate tribunal.
In the present judgment, HC decides to hear together five appeals which give rise, inter alia, to certain common questions of law of import concerning nature of property that may be attached under this special law as indeed the conflict arising from claim of bonafide acquisition of interest by third parties. These appeals are presented under Section 42 of the Prevention of Money-Laundering Act, 2002 (“PMLA”, for short) against more or less similar orders of the appellate tribunal (constituted under Section 25), such orders having been rendered on appeals of the respondents (“banks”) vis-à-vis the orders of provisional attachment issued by the enforcement officers under Section 5, as confirmed by the adjudicating authority under Section 8.
The appeals at hand relate to claims of entities other than the persons in whose name the attached properties are held (“third party”) – such claims of the third party emanating from charge, lien or encumbrances legitimately created. The conflict meriting resolve here concerns the sovereign authority of the State to take away and confiscate the property which has been acquired by a person through criminal activity as against the lawful claim of a third party to reach out to such property to recover, in accordance with law, what is due by attachment and sale of same very property.
The appellate tribunal (as constituted under PMLA), vide its impugned orders, has taken the view that the relevant statutory provisions of PMLA take a back seat, the enactments under which the third parties (the banks) lay a superior claim over the properties in question having primacy. The appellant assails the said view questioning the correctness of the logic and reasoning by which the appellate tribunal has so concluded arguing that if the decision of the tribunal were to prevail it would not only be prone to misuse but also render PMLA toothless.
The facts of each of the five appeals are as follows:
- THE DEPUTY DIRECTOR DIRECTORATE OF ENFORCEMENT DELHI (Appellant) V AXIS BANK & ORS (Respondents)
The dispute stems from the conflict arising out of the attachment of Audi car of seventh respondent Rajeev Singh Kushwaha (the registered owner), by the enforcement officer under PMLA, as confirmed by the adjudicating authority, and the claim of the respondent bank (“Axis Bank”) over the said Audi car on account of hypothecation in relation to the finance that had been provided by it for its acquisition by the said registered owner. By virtue of the Loan cum Hypothecation agreement and Irrevocable Power of Attorney executed by the registered owner, the vehicle is under hypothecation with the bank due to the non-payment of the finances provided for its acquisition. The bank had taken certain steps, through its separate legal entity (Axis Asset Management Company Ltd.), to take over the control/possession of the said asset and recover its dues by its sale. In the wake of the demonetization policy announced by the Government of India in November,2016 which rendered the then existing Indian currency notes of the denomination of Rs.1,000/- and Rs.500/- ceased to be legal tender, a window having been provided for exchange of demonetized notes, with the new currency introduced, by deposit in the bank accounts; three persons were intercepted with four bags containing Rs. 1000/- currency notes to the tune of Rs.3.70 Crores. FIR was registered initially for offences punishable under Sections 420, 120B IPC and other offences including those punishable under Sections 409, 467, 468, 471, IPC and Sections 7 and 13(1)(d) of the Prevention of Corruption Act, 1988 were also added. It was alleged that two bank officials had actively participated in the said transactions leading to the demonetized currency being channelized into the fictitious accounts in return of enrichment form the registered owner. Simultaneously provisional attachment order was passed and properties of Rajeev Singh Kushwaha of the total value of Rs.3.40 Crores (including the Audi car) were attached. Before confirmation of the attachment order, the adjudicating authority had issued a notice (under Section 8) to the bank to show cause as to why the properties, including the Audi Car, be not attached. The request of its asset management company for suspending the provisional attachment was rejected. The appellate tribunal set aside the order of the adjudicating authority confirming the attachment order directing the vehicle to be returned to the bank holding it entitled to dispose it off to recover the balance amount due to it under the loan contract as per law, pointing out, inter alia, that the loan facility pre-dated the allegations of money-laundering, the finance used for its acquisitions not representing “proceeds of crime”, the lender (the bank) having first priority/charge over the hypothecated property, the objective of PMLA not detracting or derogating from the protection of legitimate transaction and financial assets as afforded by legislation such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”, for short). When this appeal came up before the Court, the bank was permitted to sell the Audi car, by open auction, in terms of the relevant guidelines and the proceeds of such sale directed to be deposited with the Registrar General in the form of interest bearing fixed deposit receipt (FDR).
2. THE DEPUTY DIRECTOR DIRECTORATE OF ENFORCEMENT (Appellant) V STATE BANK OF INDIA & ORS (Respondents)
The second matter relates to the conflict arising out of attachment under PMLA of certain immovable properties described as agricultural lands and built-up properties on plot of land in Ghaziabad (“the immovable properties”) of private respondents, by the enforcement authority, as confirmed by the adjudicating authority and the claim of the respondent bank (“State Bank of India”) over the said immovable properties under the mortgage contract in relation to the loan facility that had been provided by it. The State Bank of India (“SBI”) had been approached by the second respondent (Dr. Kewal Krishan Sood) for sanction of a term loan in favour of the third respondent M/s Raghubir Hospital Pvt. Ltd. (RHPL) pursuant to the said request term loan aggregating Rs. 5.63 crores was disbursed during the year 2007 for purchase of certain diagnostic machinery. At the time of sanction, and disbursal of the said loan, title deeds of immovable properties were tendered by the borrowers and guarantors and the said properties were accordingly subjected to mortgage/hypothecation. The loan, was not repaid and the account was classified as “non-performing asset” (NPA). The SBI, in exercise of its power under Section 13 (4) of SARFAESI Act, took over the hypothecated property/mortgage property (the immovable properties) and the action was challenged by the second respondent before the Debt Recovery Appellate Tribunal (DRAT), constituted under Recovery of Debts Due to Banks And Financial Institutions Act, 1993(“RDDBFI Act” – since renamed as the Recovery of Debts and Bankruptcy Act, 1993 or “RDBA”), but without success. SBI, thereafter, moved Debt Recovery Tribunal (DRT) for issuance of recovery certificate by sale of the mortgaged properties and hypothecated securities and the request was granted by the DRT.SBI lodged FIR with the SBI upon finding out that the respondents had presented fabricated invoices for purchase of diagnostic machinery and further investigation revealed evidence to show that the second respondent had siphoned off the money received from SBI as loan to RHPL through certain bank accounts maintained with Nainital Bank, Ghaziabad. The enforcement officer found it a case of money-laundering and attached certain assets of the borrowers and guarantors by two separate orders, the property thus attached (under PMLA) including the assets which are subject to mortgage with SBI. The attachment orders having been confirmed by the adjudicating authority, were challenged by SBI before the appellate tribunal by two appeals both of which were allowed, by common order, inter alia, holding that neither the bank nor its employees being alleged to be involved in moneylaundering, the amount of loan sanctioned being “public money”, the bank was entitled to recover it by sale of the mortgage properties “as first charge”, the SARFAESI Act having overriding effect over PMLA. As a result of the order of the tribunal, the subject properties have been released from attachment under PMLA.
3. DEPUTY DIRECTOR DIRECTORATE OF ENFORCEMENT (Appellant) V IDBI BANK LTD (Respondent)
In the third captioned matter, the claim of the respondent bank (IDBI bank Ltd.) over certain properties attached by enforcement authority has been accepted by appellate tribunal. It is stated that Arun Suri (the borrower) had taken cash credit facility from IDBI in January, 2009 executing various security documents thereby creating equitable mortgage in respect of six properties, including two shops, depositing the title deeds with the bank. The borrower (Arun Suri) failed to maintain financial discipline and defaulted in deposit of sale proceeds through the cash credit account, it being declared NPA by IDBI. The bank initiated action under Section 13 (2) of SARFAESI Act , a receiver having been appointed by the Chief Metropolitan Magistrate (CMM to take possession of one of the mortgaged properties. The IDBI also moved DRT for recovery of its dues. Bank of Baroda (BOB) noticed some illicit transactions in the current accounts of various firms/companies of the borrowers, and those connected to him and lodged a complaint with the CBI against 59 current account holders, including the borrower in the present case, and certain bank officials, the case involving offences punishable under Sections 420 read with Section 120 B IPC and Section 13 (2) read with section 13 (1) (d) of Prevention of Corruption Act, 1988. The enforcement directorate registered a case and issued an attachment order in respect of certain properties, including the two shops. The adjudicating authority confirmed the said attachment. On the appeal of IDBI, the appellate tribunal set aside the said attachment of the two properties under PMLA upholding the contention that the said assets had not been acquired by moneylaundering and thus could not be described as “proceeds of crime”, it being noted that the two shops had been purchased by sale deeds of 2003, much prior to the alleged commission of acts constituting money-laundering. As in the previous case, the tribunal has reiterated its view that the claim of the IDBI under SARFAESI Act overrides the authority for attachment under PMLA, there being no illegality or unlawfulness in the title of the bank to recover its dues under the mortgage, the bank itself (or its employees) not being involved in money-laundering.
4. UNION OF INDIA (Appellant) V PUNJAB NATIONAL BANK (Respondent)
The fourth captioned matter pertains to mortgage of six properties by depositing title deeds with Punjab National Bank (PNB) for credit facilities taken in the name of M/s Dynamic Shells (India) Pvt. Ltd. (“DSIPL”) by certain individuals including Mr. Shambhu Prasad Singh . It is stated that, on 10.12.2009, DSIPL had approached the PNB to take over the then existing liabilities from Syndicate Bank. The PNB sanctioned credit facilities which were enhanced from then Rs. 650 lakhs to 1800 lakhs, in the context of certain supply orders to the tune of Rs. 2170.90 lakhs statedly received from armed forces. The enhanced credit facility was availed by DSIPL but with no adjustment, putting PNB to a loss of about Rs. 29.75 crores. The inquiries by PNB revealed that the supply orders from defence authorities which was the basis of drawals were fictitious claims based on forged and fabricated documents, the amounts received against the credit facility having been diverted to the accounts of certain dummy firms and companies set up by Shambhu Prasad Singh in the name of his employees showing them as directors or proprietors. The PNB invoked Section 13 (2) of SARFAESI Act to take the symbolic possession of the mortgaged properties of DSIPL and moved DRT for recovery of debts and also lodged a complaint with CBI which registered FIR involving offences under Sections 120 B/420/468/471 IPC and Section 13 (2) read with Section 13 (1) (d) of Prevention of Corruption Act, 1988. The CBI concluded investigation and filed a charge-sheet in the court of Special Judge (Prevention of Corruption Act) and also informed the enforcement directorate which registered a case under PMLA. The enforcement officer issued attachment order under PMLA attaching the six properties mortgaged with PNB and the said order was confirmed by the Adjudicating Authority. The PNB challenged order of attachment under PMLA before the appellate tribunal. The appeal of the PNB was allowed and the attachment orders have been set aside, it being the conclusion of tribunal that the provisions of the SARFAESI Act and RDDBFI Act (or RDBA) prevail over PMLA. The tribunal has also observed that the properties in question had not been acquired out of any proceeds of crime, their acquisition being prior to the commission of offence of money-laundering. It was also noted that there was no nexus between those indulging in money laundering on one hand and the PNB (or its employees) on the other, its claim under the mortgage being a charge which merited priority. The order of the appellate tribunal was challenged by Union of India in this appeal and, by order dated 25.07.2018, it was directed that the first four above-mentioned properties shall not be alienated by the PNB. Post the decision of the tribunal rendered on the appeal of PNB, PNB proceeded to invoke the jurisdiction of the National Company Law Tribunal (NCLT), it being the adjudicating authority under the Insolvency and Bankruptcy Code, 2016 (“Insolvency Code”), by filing a company petition seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against DSIPL. The NCLT, admitted the said petition and appointed Mr. Nilesh Sharma as the Interim Resolution Professional (“IRP”) of DSIPL for carrying out the “CIRP”. In the wake of developments that took place pursuant to the said appointment the NCLT, by its order dated 06.12.2018, confirmed the appointment of Mr. Nilesh Sharma as the Resolution Professional (“RP”) of DSIPL. The RP approached this court by interlocutory applications inter alia, seeking impleadment and for clarification of the restraint order dated 25.07.2018.The applications were accordingly allowed, to that extent.
5. DIRECTORATE OF ENFORCEMENT (Appellant) V PUNJAB NATIONAL BANK & ANR (Respondents)
This case involves credit facilities having been taken, in the name of Surya Vinayak Industries Ltd. (SVIL), from various banks, by its directors Sanjay Jain and Rajiv Jain, mortgaging several of their immovable properties. The loans were taken and the mortgage contracts created during 2005 and 2007, the properties which were placed under mortgage having been acquired during 1994 to 2005. All the loans became NPA after 2011. A forensic audit of the borrowers was carried out by the consortium (led by PNB) in the wake of resolution of December, 2013. The audit report brought out serious financial irregularities including mis-representation of value of stock in book debts. It is stated evidence was gathered in due course that the statement of stock as well as debtors and receivables on the basis of which credit facilities were obtained were false and fabricated. The matter was reported to CBI which registered FIR involving offence under Section 120 B read with Section 420 IPC. CBI brought the facts to the notice of enforcement directorate which, for reasons reduced to writing, found it to be a case of money-laundering and, thus, registered its own case under PMLA. While the consortium of banks led by PNB has proceeded to take steps for recovery of outstanding dues under SARFAESI Act and RDBA, the enforcement directorate, for reasons to believe reduced to writing, proceeded to attach the above-mentioned properties and which order was confirmed by the adjudicating authority. PNB and DBS Bank Ltd. approached the appellate tribunal. The appellate tribunal, by its common judgment allowed the said appeals and set aside the attachment order under PMLA.
The third party argues that if the contentions of the respondent banks were to be upheld and the view taken by the appellate tribunal endorsed, the law under PMLA would stand defeated, not only because the sovereign authority to take away the property of the money-launderer “free from all encumbrances” would stand frustrated, but also because the wrong-doer (the borrower who has indulged in money-laundering) would derive illegitimate pecuniary advantage by getting a discharge for the debt by using an asset the right to hold which had been forfeited. It is further argued that the legislative intent and command is that the RDDBFI Act (or “RDBA”) and SARFAESI Act (as also the Insolvency Code) must prevail over PMLA, the authority of enforcement agency taking a back-seat. At the same time, it was urged that a harmonious construction of PMLA and the legislations (RDBA and SARFAESI Act) under which the respondent banks (“secured creditors”) seek remedy has to be achieved such that the objective of each is sub-served, none defeated.
HC observes that the expression “proceeds of crime” constitutes the core of the offence of money-laundering, “the concealment, possession, acquisition or use” of “proceeds of crime” in a manner where the same are projected or are claimed to be “untainted property” being what forms the essential part of actus reus, the intent to so conceal, possess, acquire or use, or guilty knowledge, being the requisite mens rea. HC finds it inherent in this that prior to coming in possession, acquisition, concealment or use of “tainted property” (the claim being to the contrary that it is untainted property) there must have been some other offence committed, the property perceived or alleged to be tainted being the product of such criminal activity.
HC examines the provisions of the PMLA to answer the questions of law posed in the appeals and outlines the pre-requisites for a valid provisional attachment order as under:-
(i) existence of material (“in possession of” the enforcement officer i.e. the specified authorities under PMLA) which is the basis of the “reason for belief”;
(ii) existence of identifiable “property” which qualifies to be treated as “proceeds of crime”;
(iii) there being likelihood that such proceeds of crime are to be concealed or transferred or dealt with in any such manner as may result in “frustrating” the proceedings relating to its confiscation;
(iv) the “reasons for belief” relating to such foundational material (as above) having been “recorded in writing”;
(v) prior submission of charge-sheet (report under Section 173 Cr.P.C.) or a “complaint” in the court of cognizance respecting the “scheduled offence” to which the proceeds of crime relate unless there is “recorded in writing” the “reasons to believe” that if attachment be not ordered “immediately” the omission to do so is similarly “likely to frustrate”;
(vi) the order of provisional attachment, to be issued in writing, to be valid maximum for one hundred eighty days from the date of such order (this excluding the period for which the order may have been stayed by the court); and
(vii) submission of a copy of provisional order of attachment by the empowered officer to the adjudicating authority, in a sealed envelope in the manner prescribed, such submission to include “material” in possession of the officer directing such provisional attachment.
HC observes that in terms of the provisos to sub Section (1) of Section 8, the right to be heard in opposition to the prayer for confirmation of attachment by the adjudicating authority is also given to such third parties as may be holding the property in question “on behalf of any other person” (whether jointly or otherwise), the adjudicating authority also being obliged by the proviso to sub-Section (2) of Section 8 to give opportunity of being heard and prove that the property is “not involved in moneylaundering” even to such third parties as to whom notice may not have been issued but may have “claimed” the same. HC further observes it necessary to take note of the provision contained in Section 9 PMLA inasmuch as it prescribes the consequences that flow from the eventual order of confiscation. HC observes that the provisional attachment under the directions of enforcement authorities is subject to confirmation by the adjudicating authority. Mere confirmation of attachment by the adjudicating authority does not lead to the person claiming interest in the property being divested of such interest as he legitimately holds, inasmuch as the expression “attachment” is defined by section 2 (1) (d) to mean prohibition of transfer, conversion, disposition or movement of property by an order issued under third Chapter of PMLA. HC finds that upon perusal of Section 5 (4), mere order of provisional attachment does not prevent a person “entitled to claim” any interest in the property (“person interested”) or to enjoyment of an immovable property (for example a lessee) from such enjoyment, the possibility of taking over the possession of such property or for it to be treated as “frozen” [Section 17 (1A)] arising only upon confirmation by the adjudicating authority under section 8 (4). In terms of such scheme, the attachment is an interim measure, eventual intendment being that in the event of it being “found” that the offence of money-laundering has been committed and that “such property” is involved or has been used for such offence to be committed, the same shall be ordered to be “confiscated to the Central Government” [Section 8 (5)].
HC observes that it is clear from the provisos to Section 9, the liability under the encumbrance subsists in favour of such third party as had acted in good faith but if the creation of such encumbrance was with the objective of managing escape of such property from such attachment or confiscation, the law empowers the special court, or the adjudicating authority, to declare such encumbrance to be “void”, this also leading to confiscation of the property in favour of the State. HC finds that the eventual touchstone, even for the special court, dealing with the offence of money-laundering (and connected offences) remains that the property attached, or to be confiscated, must be such as was “involved in” or “used for” the commission of the offence of money-laundering. HC notes that the law recognizes that there may be third parties having “legitimate interest” in such property and hence are afforded opportunity to approach the adjudicating authority under section 8(1) or (2) and also the appellate tribunal under Section 26, as indeed the special court under section 8 (6), (7) & (8). HC states that the basic tests prescribed by the law while dealing with the claim of a third party for “release” of the property are to find as to whether such claimant has “a legitimate interest” in the property, whether he had “acted in good faith” having taken “all reasonable precautions” and himself was “not involved in the offence of moneylaundering” or “may have suffered a quantifiable loss as a result of the offence of money-laundering”.
HC observes that in the impugned decision of the appellate tribunal, reference is made to the conclusions on question of law arrived at by the said forum in its earlier decision in the matter of State Bank of India vs. Director, Directorate of Enforcement, Kolkata (in appeal no.FPA-PMLA-1026/KOL/2015), the tribunal having chosen to quote verbatim the articulated views. The said observations reflect reliance, inter alia, on decisions of the Supreme Court in Solidaire India Ltd. Vs. Fairgrowth Financial Services Ltd. and Ors., (2001) 3 SCC 71 and United Bank of India vs. Satyavati Tandon, (2010) 8 SCC 110; decision of a learned single Judge of this court in Sanjay Bhandari Vs. CBI, 2015 SCC Online Del 10079; (2015) 222 DLT (CN) 5; three decisions of the Madras High Court, they being V.M. Ganesan vs. Joint Director, Directorate of Enforcement, 2014 SCC Online Mad 10702; C. Chellamuthu vs. Deputy Director, Prevention of Money Laundering Act, Manu/TN/4087/2015, decided on 14.10.2015; and Assistant Commissioner vs. Indian Overseas Bank, AIR 2017 Mad 67 (FB); 2016 SCC Online Mad 10030; besides one decision each of Bombay High Court and Andhra Pradesh High Court, they being Bhoruka Steel Ltd. vs. Fairgrowth Financial Services Ltd., 1996 SCC Online Bom 717 and B. Rama Raju vs. Union of India, 2011 SCCOnline AP 152. HC observes that the decision of the appellate tribunal shows that it has treated the other enactments like SARFAESI Act and RDDBFI Act (since rechristened as RDBA) to be prevailing over the PMLA on account of amendments brought into the former two legislations by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (Act no.44 of 2016). By the said amendment of 2016, Section 26-E was inserted in SARFAESI Act with similar provision contained in Section 31-B being added to RDBA, both declaring the claim of “secured creditors” to have priority over certain other claims as specified by the law. However, HC observes that the case of Sanjay Bhandari (supra), Satyawati Tandon (supra), B Rama Raju (supra), C. Chellamuthu (supra) have no relevance in the present matters.
HC clarifies the distinction between the expressions “Confiscation” and “forfeiture” by referencing to the Supreme Court decision in Gunwant Lal Godawat vs. Union of India and Anr., (2018) 12 SCC 309 wherein it was observe that – “39. The expression “confiscation” is not defined in the Rules. It had roots in the Latin word Confiscare – to consign to fiscus i.e. transfer to treasury, as a punishment or in enforcement of law. Though, the expression is generally understood as having implications associated with a crime…. The words “forfeiture” and “confiscation” have come to be used interchangeably. The General Clauses Act, 1897 does not employ the word “confiscation”. On the other hand, it employs the word “forfeiture” in Section 6(d). Having regard to the long history of the usage of those two expressions, we are of the opinion that “forfeiture” is an expression which takes within its sweep “confiscation” also for the purpose of law [Salig Ram vs. Secy of State of India in Council, 1872 SCC Online PC 43].”
HC finds it essential to dispel the impression that the process of attachment (for confiscation) under PMLA is in the nature of punishment for an offence and so cannot precede determination of guilt or adjudication of value of proceeds of crime by the court. HC observes that The Indian Penal Code, 1860 (IPC), by Section 53 (Fifthly), provides for “forfeiture of property” as one of the permissible “punishments”. Though in IPC, as initially enforced, a number of offences attracted such punishment, prescription of this nature in some of them (e.g. Sections 121 & 122 IPC) having since been omitted, a few (e.g. Section 126 & 127 IPC) still retain forfeiture of property as one of the possible punishments, this giving it a flavour of criminal sanction. Interestingly, the act of unlawful purchase of, or bidding for, property by a public servant, under certain circumstances, is not only punishable offence under Section 169 IPC but also entails such property, if purchased, to be “confiscated”. The Code of Criminal Procedure, 1973 (Cr. PC) replaced the then existing procedural law governing criminal investigations and trials, it being the Code of Criminal Procedure, 1898 (old Cr. PC). Both the said laws have carried provisions for attachment of property of an accused, the objective whereof, however, has been to compel appearance. In case the criminal court has reasons to believe that a person against whom warrant (of arrest) issued by it has “absconded” or is concealing himself, subject to certain other conditions being fulfilled, it may while issuing, or following the issuance of, proclamation (under Section 82 Cr. PC) requiring his appearance, proceed to order “attachment” of property (movable or immovable) of such person by issuance of a warrant under Section 83 Cr. PC (corresponding to Section 88 of the old Cr. PC). Pertinent to note the objective of such attachment (under Section 83 Cr. PC) being to compel appearance, the attachment is lifted and the property released in the event of appearance within the period specified in law. Conversely, in the event of continued default beyond the specified period, the property is placed by the criminal court “at the disposal of the State Government”, though the right for its disposal (except in case the property is subject to speedy and natural decay) is deferred for a period of six months. Meanwhile, a third party claiming interest may approach the criminal court by objections that his “interest” in the property is “not liable to attachment”, such objection requiring inquiry and adjudication (Section 84 Cr.PC). The absconder, in any case, must come up “within two years from the date of the attachment” to claim restoration of the property or net proceeds of its sale, or residue thereof, by showing and proving to the satisfaction of the criminal court that he had not absconded to evade the process. After two years, the criminal court virtually becomes functus officio in the matter. In these provisions under the general law, however, the core issue that the court is to inquire into is the connection, if any, between the absconder and the property. The property of a third person cannot be attached under Section 83 to compel the appearance of an accused. The Criminal Law Amendment Ordinance, 1944 (“the 1944 Ordinance”) continues to operate till date, the jurisdiction to enforce it having been conferred on the Special Judge appointed under the Prevention of Corruption Act, 1988, inter alia, by Section 5(6), as reinforced by a new provision (Section 18A in Chapter IVA) on the subject of “attachment and forfeiture of property”, added by the Prevention of Corruption (Amendment) Act, 2018. The Ordinance focuses on “money or other property” believed to have been “procured by means of ” an offence under the said law, the persons “claiming an interest” in the subject property or any portion thereof having been given (by Section 4) the right to object and be heard against such sanction. As in the case of certain other enactments (e.g. SAFEMA), the property to be attached or forfeited must have “nexus” with the corrupt practice constituting the offence. HC observes that In State of West Bengal vs. S.K. Ghosh (supra), as referred to in Gunwant Lal (supra), in the context of Section 13(3) of the 1944 Ordinance, it has been observed that : “15……… The mere use of the word “forfeited” would not necessarily make it a penalty. The word “forfeiture” has been used in other laws without importing the idea of penalty or punishment within the meaning of Article 20(1).”
HC observes that the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 (“SAFEMA”, for short) focused on forfeiture of “illegally acquired property”. It defines, by Section 2(2), the “person” to whom the law is to apply to include not only every person who has been held guilty and convicted for offences (involving specified amounts of money) under specified laws (i.e. Customs Act, 1962, Foreign Exchange Regulation Act, 1947, Foreign Exchange Regulation Act, 1973, Sea Customs Act, 1878) and those against whom order of detention is made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA), also taking in its sweep others including “every person who is a relative (as specified by second explanation, of such convict)”, “every associate (as specified by third explanation, of such convict or detenue)” and, what turned out to be the cause of conflict, “any holder (hereinafter in this clause referred to as the present holder) of any property which was at any time previously held by a person referred to in clause (a) or clause (b) unless the present holder or, as the case may be, any one who held such property after such person and before the present holder, is or was a transferee in good faith for adequate consideration”. The definition of the expression “illegally acquired property” under SAFEMA required a clear “nexus” between the prohibited activities and acquisition of such asset as indeed the means (including the consideration paid) employed in that regard and, in the event of the third party being the holder, carved out an exception if he had acquired it “in good faith” and “for adequate consideration”, the onus to prove such elements obviously being on him.
HC further observes that the case of Biswanath Bhattacharya (supra) arose out of SAFEMA. The Supreme Court dealing with similar issue referred to the regime of forfeiture of property prevalent in this country at least from 1944 and accepted the argument that the forfeiture contemplated under the said law was not a “penalty” within the meaning of Article 20 of the Constitution of India but “only a deprivation of property of a legislatively identified class of persons – in the event of their inability to explain (to the satisfaction of the State) that they had legitimate sources of funds for the acquisition of such property”, holding inter alia, that “the property which is determined to be illegally acquired property” only could primarily be forfeited, similar being the law in context of certain other similar enactments some of which shall be noted a little later.
HC notes that in Gunwant Lal Godawat (supra), the Supreme Court held that “the liability for confiscation of property could be purely civil in nature as a consequence of the violation of some prescription of law commonly described as “forfeiture”. In the present context, particularly under PMLA regime, the confiscation of property (which is akin to forfeiture of property) is definitely not envisaged as a criminal sanction, this for the reason that the objective of the legislature clearly is to deprive the offender (of money-laundering) the enjoyment of “illegally acquired” fruits of crime by taking away his right over property thereby acquired, it affecting his civil rights. All the more so, because the jurisdiction to order attachment of the property is vested in the executive and its confirmation is left to decision of the quasi-judicial body i.e. adjudicating authority.
The statutory authorities vested with the jurisdiction to provisionally direct or confirm attachment are, however, expected to assess, even if tentatively, the value of proceeds of crime so that it is ensured that only proceeds or assets of the offender of moneylaundering of equivalent value are subjected to restraint, the evaluation undoubtedly open to variation or modification in light of evidence gathered till the probe is concluded. The provision for “provisional attachment” and its confirmation, pending trial before court (wherein the issue of confiscation would come up at the time of determination of guilt in criminal case), is similar to the one for “attachment before judgment” in civil law. The law conceives of possibility of disposal of ill-gotten assets to “frustrate” the objective. The argument to the contrary is thus repelled by the HC. Ultimately, the confiscation is left to the special court. But then, the order to such effect only follows the determination of the guilt in the criminal trial on the charge for offence of moneylaundering. This view is in sync with the rulings in the cases of S.K. Ghosh (supra) and Biswanath Bhattacharya (supra) in context of Ordinance of 1944 and SAFEMA quoted above.
HC further examines the context of Forfeiture (Confiscation) in terms of other laws – Unlawful Activities (Prevention) Act, 1967 (“UAPA”, for short), Narcotic Drugs and Psychotropic Substances Act, 1985 (“the NDPS Act”, for short), the Prohibition of Benami Property Transactions Act, 2002 (“the Benami Property Act”, for short) and the Fugitive Economic Offenders Act, 2018 (“the Fugitive Economic Offenders Act”, for short) and observes that the civil sanction of forfeiture (for confiscation) of property is directed by all the above-mentioned enactments against property with which there is a link or nexus of the criminal offence. A bonafide holder of such property is protected but the onus to displace the inference arising from the evidence available by proving that his acquisition was legitimate and for adequate consideration is on him.
HC observes that if the enforcement authority under PMLA has not been able to trace the “tainted property” which was acquired or obtained by criminal activity relating to the scheduled offence for money-laundering, it can legitimately proceed to attach some other property of the accused, by tapping the second (or third) above-mentioned kind provided that it is of value near or equivalent to the proceeds of crime. But, for this to be a fair exercise, the empowered enforcement officer must assess (even if tentatively), and re-evaluate, as the investigation into the case progresses, the quantum of “proceeds of crime” derived or obtained from the criminal activity so that proceeds or other assets of equivalent value of the offender of money-laundering (or his abettor) are subjected to attachment to such extent, the eventual order of confiscation being always restricted to take over by the Government of illicit gains of crime, the burden of proving facts to the contrary being on the person who so contends. If such other property as above (the alternative attachable property or deemed tainted property) is owned by, or held in the name of, the accused, objections to attachment (or confiscation) would generally concern the material on which reasons to believe about money-laundering and acquisition of proceeds of crime are founded or the value of the property which has been attached. Again, the possibility of conflict involving interest of a third party comes in for which the bonafides of the acts through which such third party may have acquired interest in the targeted property, as indeed of the lawfulness and adequacy of consideration for such acquisition, would need scrutiny.
HC notes that chronologically, RDBA (in its original form and moniker RDDBFI Act) was enacted in 1993, followed by SARFAESI Act coming on the statute book in 2002, the PMLA being enacted in 2002, commencing in 2005, the Insolvency Code being the latest legislation enforced in 2016. These laws, enacted for different objects and reasons, have come with provisions declaring each of them to have the “overriding effect”. HC observes that clause 34 of the RDBA would not give primacy to RDBA over PMLA since the object of the original first said enactment was to provide for expeditious adjudication of the claims of the banks and financial institutions and quite distinct from the objective of the latter.
HC observes that the SARFAESI Act and RDBA (earlier RDDBFI Act) have an overlap in the matter of judicial remedy and places reliance in Urmila Kumari (supra) h=where it was observes that “39. The procedure prescribed by the law, and rules, for enforcement of security interest, as noted above, at the hands of the secured creditor (or its authorized officer) is subject to the remedy of appeal before the Debts Recovery Tribunal (DRT), constituted under RDDBFI Act, in terms of Section 17 SARFAESI Act. As noted earlier, mere non-acceptance of the objection or representation in response to the initial notice under Section 13(2) does not confer the right of challenge through appeal. The remedy of appeal becomes available as soon as effective action, including taking over of possession of the secured asset (and further process in the nature of sale, etc.) commences. The test to which the process undertaken by the secured creditor is subjected by DRT is indicated in Section 17(2) as under:- “17(2). The Debts Recovery Tribunal shall consider whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor for enforcement of security are in accordance with the provisions of this Act and the rules made thereunder.”
HC observes that prime objective of SARFAESI Act is to facilitate enforcement of “security interest”. Section 37 of SARFAESI Act makes it further clear that the provisions of this law, or rules made thereunder, have been enacted “in addition to, and not in derogation of” other laws including the RDBA. HC finds that section 35 of the SARFAESI Act would not render PMLA subservient to it because of the different objects and reasons of both enactments. Thus, the PMLA, enacted in 2002 (but enforced in 2005), continued to prevail, particularly in the matter of attachment and confiscation, by virtue of Section 71 which reads thus :- “71. Act to have overriding effect – The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”
HC finds that it is the view of the appellate tribunal that the insertion of Section 31-B to RDBA and Section 26-E to SARFAESI Act by the amendment of 2016 renders the said laws to have an overriding effect over PMLA. Though the issue raised by the Resolution Professional (RP) in the fourth captioned appeal with reference to the Insolvency Code was not urged before the appellate tribunal, similar argument is pressed to seek primacy for the Insolvency Code over PMLA on account of Section 238 of the former. At the hearing, however, it was noted that some of the amendments made to the SARFEAESI Act by second chapter of Act No.44 of 2016 are yet to come into force and this includes the chapter (no.IV-A) on the subject of “registration by secured creditors and other creditors”. Section 26-E (priority to secured creditors) with reference, inter alia, to which the aforementioned view has been taken by the Appellate Tribunal falls in said Chapter (no. IV-A) by virtue of Section 18 of the Act No.44 of 2016. Strictly speaking, therefore, a view to the effect taken by the tribunal by reference to Section 26-E (which is yet to come into effect) was impermissible. Be that as it may, since the said Chapter (no.IV-A) has been inserted in SARFEAESI Act by the legislature, and is likely to come into force in future, its effect on the issues being addressed in these matters may be considered also on the assumption that it is part of the law.
HC observes that The issue in Bhoruka Steel Ltd. (supra) before the Bombay High Court concerned conflicting claims under the then existing Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA” for short) and Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (“the Special Courts Act of 1992”, for short). The court held that if the language of the law is obscure and ambiguous, the object and purpose of a legislation assumes greater relevance and quoted the following views of the Supreme Court in Sarwan Singh vs. Kasturi Lal, (1977) 1 SCC 750 :-
“When two or more laws operate in the same field and each contains a non-obstante clause stating that its provisions will override those of any other law, stimulating and incisive problems of interpretation arise. Since statutory interpretation has no conventional protocol cases of such conflict have to be decided in reference to the object and purpose of the laws under consideration.“
HC further observes that in Solidaire India Ltd.(supra), the Supreme Court was dealing with similar issues concerning the conflict between SICA and the Special Courts Act of 1992 and quoted with approval the above decision in Bhoruka, observing thus :
“…Where there are two special statutes which contain non obstante clauses the later statute must prevail. This is because at the time of enactment of the later statute, the Legislature was aware of the earlier legislation and its non obstante clause. If the Legislature still confers the later enactment with a non obstante clause it means that the Legislature wanted that enactment to prevail. If the Legislature does not want the later enactment to prevail then it could and would provide in the later enactment that the provisions of the earlier enactment continue to apply.
The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, provides in Section 13, that its provisions are to prevail over any other Act. Being a later enactment, it would prevail over the Sick Industrial Companies (Special Provisions) Act, 1985. Had the Legislature wanted to exclude the provisions of the Sick Companies Act from the ambit of the said Act, the Legislature would have specifically so provided. The fact that the Legislature did not specifically so provide necessarily means that the Legislature intended that the provisions of the said Act were to prevail even over the provisions of the Sick Companies Act…”
HC further observes that in KSL and Industries Ltd. v. Arihant Threads Ltd. and Ors., (2015) 1 SCC 166, the effect of non-obstante clause in Section 32 of SICA on RDDBFI Act was examined by the Supreme Court, the latter enactment also containing non-obstante clause under Section 34(1). While concluding that the objective of the two enactments is entirely different, and observing that “the purpose of one is to provide ameliorative measures for reconstruction of sick companies, and the purpose of the other is to provide for speedy recovery of debts of banks and financial institutions”, the rule laid down in a previous decision reported as LIC vs. D.J. Bahadur, (1981) 1 SCC 315, to the following effect was noted :-
“52. In determining whether a statute is a special or a general one, the focus must be on the principal subjectmatter plus the particular perspective. For certain purposes, an Act may be general and for certain other purposes it may be special and we cannot blur distinctions when dealing with finer points of law. In law, we have a cosmos of relativity, not absolutes — so too in life…”
HC also referred to the principle of contextual construction laid down in earlier ruling of RBI v. Peerless General Finance & Investment Co. Ltd., (1987) 1 SCC 424, holding thus :-
“33. Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the glasses of the statutemaker, provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With these glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place.”
It was further clarified that :
“49. The term “not in derogation” clearly expresses the intention of Parliament not to detract from or abrogate the provisions of SICA in any way. This, in effect must mean that Parliament intended the proceedings under SICA for reconstruction of a sick company to go on and for that purpose further intended that all the other proceedings against the company and its properties should be stayed pending the process of reconstruction. While the term “proceedings” under Section 22 of SICA did not originally include the RDDB Act, which was not there in existence. Section 22 covers proceedings under the RDDB Act.
- The purpose of the two Acts is entirely different and where actions under the two laws may seem to be in conflict, Parliament has wisely preserved the proceedings under SICA, by specifically providing for sub-section (2), which lays down that the later Act, RDDB shall be in addition to and not in derogation of SICA.”
HC further observes that in Assistant Commissioner vs. Indian Overseas Bank (supra), referred to by the tribunal, the issue before the full bench of the Madras High Court arose out of objection of the sales tax authority to recovery proceedings taken out by the bank against the property of the defaulting borrower under RDBA without taking care of the arrears of revenue. The court noted the insertion of Section 31-B in RDBA by the amending Act of 2016, holding the financial institution (a secured creditor) to have the “priority of charge” over the mortgaged property and with reference to said provision (Section 31B) held thus :
“3. There is, thus, no doubt that the rights of a secured creditor to realize secured debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, state Government or Local Authority. this section introduced in the Central Act is with “notwithstanding” clause and has come into force from 01.09.2016.”
Thus, HC concludes that the objects and reasons of enactment of the four legislations are distinct, each operating in different field and there is no overlap. While RDBA has been enacted to provide for speedier remedy for banks and financial institutions to recover their dues, SARFAESI Act (with added chapter on registration of secured creditor) aims at facilitating the secured creditors to expeditiously and effectively enforce their security interest. In each case, the amount to be recovered is “due” to the claimant i.e. the banks or the financial institutions or the secured creditor, as the case may be, the claim being against the debtor (or his guarantor). The Insolvency Code, in contrast, seeks to primarily protect the interest of creditors by entrusting them with the responsibility to seek resolution through a professional (RP), failure on his part leading eventually to the liquidation process.
HC further clarifies that the purpose, purport and import of Section 31-B inserted in RDBA, and Section 26-E inserted in SARFAESI Act, has to be understood in above light. The marginal heads of both the provisions are identically worded – “Priority to secured creditors”. Though Section 26-E of SARFAESI Act requires, as a condition precedent, “the registration of security interest”, which is not requisite for Section 31-B of RDBA to operate, both provisions give precedence to realization of “debts due to” the “secured creditor”, the clause in RDBA also clarifying it by additional words “payable to them by sale of assets over which security interest is created”. Each of these provisions renders secondary “all other debts” and “revenues, taxes, cesses” and “rates” enforced by “the Central Government, State Government or local authority”. Section 31- B of RDBA uses the expression “due to” while Section 26-E of SARFAESI Act uses the words “payable to” in relation to such debts, revenues, taxes, etc., the meaning being similar.
HC observes that it is difficult to accept the proposition that the jurisdiction conferred on the State by PMLA to confiscate the “proceeds of crime” concerns a property the value whereof is “debt” due or payable to the Government (Central or State) or local authority. The Government, when it exercises its power under PMLA to seek attachment leading to confiscation of proceeds of crime, does not stand as a creditor, the person alleged to be complicit in the offence of money-laundering similarly not acquiring the status of a debtor. The State is not claiming the prerogative to deprive such offender of illgotten assets so as to be perceived to be sharing the loot, not the least so as to levy tax thereupon such as to give it a colour of legitimacy or lawful earning, the idea being to take away what has been illegitimately secured by proscribed criminal activity. Thus HC observes that the reliance by the respondents in support of argument of government dues taking a back seat, on Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co. & Ors., (2000) 5 SCC 694; Union of India & Ors. vs. SICOM Limited & Anr., (2009) 2 SCC 121; Bank of Bihar vs. State of Bihar & Ors., (1972) 3 SCC 196; and Pr. Commissioner of Income Tax vs. Monnet Ispat and Energy Limited, SLP No.6483/2018, decided on 10.08.2018, is misplaced.
HC examines the reliance placed by the respondents on the Supreme Court in order dated 10.08.2018 in Special Leave to Appeal (Civil) No.6483/2018, Principal Commissioner of Income Tax vs. Monnet Ispat and Energy Limited and observes that the effect of Insolvency Code on PMLA was not in issue before the Supreme Court in the aforesaid case, the prime concern being the conflict arising out of claims of revenue under Income Tax Act, 1961 vis-à-vis proceedings under the Insolvency Code. Furthermore, for the same reasons, HC states that the ruling of the full bench of the Madras High Court in Indian Overseas Bank (supra) also would have no effect here.
HC states that the objective of the legislation in PMLA being distinct from the purposes of the three other enactments viz. RDBA, SARFAESI Act and Insolvency Code, the latter cannot prevail over the former. There is no inconsistency. The purpose, the text and context are different. HC thus rejects the argument of prevalence of the said laws over PMLA.
And opines that the said laws (or similar other laws, some referred to above) must co-exist, each to be construed and enforced in harmony, without one being in derogation of the other, with regard to assets respecting which there is material available to show the same to have been “derived or obtained” as a result of “criminal activity relating to a scheduled offence” rendering the same “proceeds of crime”, within the mischief of PMLA. The PMLA, declares, by virtue of Section 71, that it has over-riding effect over other existing laws, such provision containing non-obstante clause with regard to inconsistency apparently to be construed as referable to the dealings in “money-laundering” and “proceeds of crime” relating thereto. An order of attachment under PMLA, if it meets with the statutory pre-requisites, is as lawful as an action initiated by a bank or financial institution, or a secured creditor, for recovery of dues legitimately claimed or for enforcement of secured interest in accordance with RDBA or SARFAESI Act. An order of attachment under PMLA is not rendered illegal only because a secured creditor has a prior secured interest (charge) in the subject property. Conversely, mere issuance of an order of attachment under PMLA cannot, by itself, render illegal the prior charge or encumbrance of a secured creditor, this subject to such claim of the third party (secured creditor) being bonafide. In these conflicting claims, a balance has to be struck. On account of exercise of the prerogative of the State under PMLA, the lawful interest of a third party which may have acted bonafide, and with due diligence, cannot be put in jeopardy. The claim of bonafide third party claimant cannot be sacrificed or defeated. A contrary view would be unfair and unjust and, consequently, not the intention of the legislature. The legislative scheme itself justifies this view. To illustrate, reference may be made to sub-section (8) of Section 8 PMLA where-under a power is conferred on the special court to direct the Central Government to “restore” a property to the claimant with a legitimate interest even after an order of confiscation has been passed.
HC further opines that in terms of Sections 23 and 24 of PMLA presumptions that can be drawn that the burden of proving facts contrary to the case of money-laundering being on the person claiming to have acted bonafide. HC examines the reliance of the appellate tribunal has referred to the decision in V. M. Ganesan (supra) wherein the issues relating to the attachment order under PMLA involved in that case concerned the claims not only of the person accused of money-laundering and also of predicate offences, they including those punishable under Sections 294(b), 406, 420, 465, 468, 471, 197, 419, 506 (ii) of IPC and Section 19 of Transplantation of Human Organs Act, 1994, it involving illegal kidney trade, but also of a financial institution (LIC Housing Finance Ltd.) which had advanced money to the said accused. HC observes that the ruling in V.M. Ganesan (supra), referred to above, is not of much help since the claim of third party (secured creditor) was yet to be inquired into or adjudicated upon. HC states that it finds it difficult to accept that a property may be allowed escape from civil sanction under PMLA only on the plea of the third party claiming to be at “no fault” or to have acted “without notice” of the criminal activity engaged in by the person from whom interest is acquired. HC states that the burden to prove facts to rebut the statutory presumptions necessitates more than mere ignorance to be shown. HC further observes that the third party whose interest in a property may be adversely affected on account of it being attached under PMLA would be one who may have acquired such interest, right or title by a transaction involving, directly or indirectly, the person who is accused of, or charged with, the offence of money-laundering. Such acquisition of interest, right or title may be by transactions in the nature of sale / purchase, gift, lease, mortgage, pledge, hypothecation, etc. In the present cases, the respondent banks cried foul by objecting to the attachment orders respecting properties which were subject matter of mortgage or hypothecation with them.
HC observes that it is well settled that by hypothecation, no interest or property is transferred to the hypothecatee, the latter acquiring nothing more than an equitable and notional charge to have his claim realized by sale of goods hypothecated [Paramatha Nath Talukdar v. Maharaja Probirendra M. Tagore, AIR 1966 Calcutta 405]. The possession remains with the hypothecator, the hypothecatee having the right to take possession of the hypothecated property, in the event of default, and to sell it for realization of the debt secured by hypothecation [Syndicate Bank vs. Official Liquidator, AIR 1985 Delhi 256]. HC observes that a hypothecatee or a mortgagee, thus, has a limited interest in the property, the right restricted to have the debt realized by putting the hypothecated goods or mortgaged property to sale. There is no ownership, or right to possess, vesting in either. At the same time, it must be added that the charge or encumbrance of a third party in a property attached under PMLA can be treated as “void” if there is material to show that it had been created “to defeat” the law, such declaration rendering the property liable to attachment and confiscation in favour of the Government vesting it “free from all encumbrances”.
HC observes that if a bonafide third party claimant had acquired interest in the property which is being subjected to attachment at a time anterior to the commission of the criminal activity, the product whereof is suspected as proceeds of crime, the acquisition of such interest in such property (otherwise assumably untainted) by such third party cannot conceivably be on account of intent to defeat or frustrate this law. In this view, it can be concluded that the date or period of the commission of criminal activity which is the basis of such action under PMLA can be safely treated as the cut-off. From this, it naturally follows that an interest in the property of an accused, vesting in a third party acting bona fide, for lawful and adequate consideration, acquired prior to the commission of the proscribed offence evincing illicit pecuniary benefit to the former, cannot be defeated or frustrated by attachment of such property to such extent by the enforcement authority in exercise of its power under Section 8 PMLA. Though the sequitur to the above conclusion is that the bonafide third party claimant has a legitimate right to proceed ahead with enforcement of its claim in accordance with law, notwithstanding the order of attachment under PMLA, the latter action is not rendered irrelevant or unenforceable. HC finds that in such situations as above (third party interest being prior to criminal activity) the order of attachment under PMLA would remain valid and operative, even though the charge or encumbrance of such third party subsists but the State action would be restricted to such part of the value of the property as exceeds the claim of the third party.
HC opines that situation may also arise, as seems to be the factual matrix of some of the cases at hand, wherein a secured creditor, it being a bonafide third party claimant vis-a-vis the alternative attachable property (or deemed tainted property) has initiated action in accordance with law for enforcement of such interest prior to the order of attachment under PMLA, the initiation of the latter action unwittingly having the effect of frustrating the former. Since both actions are in accord with law, in order to co-exist and be in harmony with each other, following the preceding prescription, it would be appropriate that the PMLA attachment, though remaining valid and operative, takes a back-seat allowing the secured creditor bonafide third party claimant to enforce its claim by disposal of the subject property, the remainder of its value, if any, thereafter to be made available for purposes of PMLA.
HC observes that in the event of the newly inserted provision contained in Sections 26-B to 26-E falling in Chapter (no. IV-A) on “registration by secured creditors and other creditors” of SARFEAESI Act coming into force a creditor will not be entitled to exercise the right of enforcement, inter alia, of security interest over the property of borrower unless such “security interest” has been duly registered under the said law. Upon such amended law being enforced, a bona fide third party claimant seeking relief against an order of attachment under PMLA will also be obliged to show due compliance with such statutory requirements. the provisional order of attachment is subject to confirmation by the adjudicating authority. The order of the adjudicating authority, in turn, is amenable to appeal to the appellate tribunal. The said forum (i.e. the appellate tribunal) may pass such orders as it thinks fit “confirming, modifying or setting aside the order appealed against” [Section 26(4)]. Undoubtedly, an aggrieved party is entitled in law to invoke the said jurisdiction of the appellate tribunal to bring a challenge to the orders of attachment (as confirmed) but, the law in PMLA, at the same time, also confers jurisdiction on the special court to entertain such claim for purposes of restoration of the property during the trial of the case [Section 8]. The jurisdiction to entertain objections to attachment conferred on the appellate tribunal on one hand and, on the special court, on the other, thus, may be co-ordinate, to an extent.
HC observes that if the order confirming the attachment has attained finality, or if the order of confiscation has been passed or, further if the trial of a case for the offence under Section 4 PMLA has commenced, the claim of a party asserting to have acted bonafide or having legitimate interest will have to be inquired into and adjudicated upon only by the special court. But, the above exception cannot be applied to all cases of bona fide third party claimants so as to confer a general right to seek release of such property as last mentioned above from attachment even in cases where the encumbrance is created or interest acquired at a time around or after the date or period of criminal activity. In this category of cases, the third party will have the additional burden to prove that it had exercised due diligence having “taken all reasonable precautions” at the time of acquisition of such interest or creation of such charge, the jurisdiction to entertain and inquire into such claim and grant relief of release after order of attachment has attainted finality, or of restoration after order of confiscation, vesting only in the special court under Section 8(7) & (8) PMLA. The due diligence is to be tested amongst others, on the touchstone of questions as to whether the party had indulged in transaction after due inquiry about untainted status of the asset or legitimacy of its acquisition.
HC draws its conclusions as under :
- The process of attachment (leading to confiscation) of proceeds of crime under PMLA is in the nature of civil sanction which runs parallel to investigation and criminal action vis-a-vis the offence of money-laundering.
- The empowered enforcement officer is expected to assess, even if tentatively, the value of proceeds of crime so as to ensure such proceeds or other assets of equivalent value of the offender of money-laundering are subjected to attachment, the evaluation being open to modification in light of evidence gathered during investigation.
- The empowered enforcement officer has the authority of law in PMLA to attach not only a “tainted property” – that is to say a property acquired or obtained, directly or indirectly, from proceeds of criminal activity constituting a scheduled offence – but also any other asset or property of equivalent value of the offender of moneylaundering, the latter not bearing any taint but being alternative attachable property (or deemed tainted property) on account of its link or nexus with the offence (or offender) of money-laundering.
- If the “tainted property” respecting which there is evidence available to show the same to have been derived or obtained as a result of criminal activity relating to a scheduled offence is not traceable, or the same for some reason cannot be reached, or to the extent found is deficient, the empowered enforcement officer may attach any other asset (“the alternative attachable property” or “deemed tainted property”) of the person accused of (or charged with) offence of money-laundering provided it is near or equivalent in value to the former, the order of confiscation being restricted to take over by the government of illicit gains of crime.
- If the person accused of (or charged with) the offence of money-laundering objects to the attachment, his claim being that the property attached was not acquired or obtained (directly or indirectly) from criminal activity, the burden of proving facts in support of such claim is to be discharged by him.
- The objective of PMLA being distinct from the purpose of RDBA, SARFAESI Act and Insolvency Code, the latter three legislations do not prevail over the former.
- The PMLA, by virtue of section 71, has the overriding effect over other existing laws in the matter of dealing with “money-laundering” and “proceeds of crime” relating thereto.
- The PMLA, RDBA, SARFAESI Act and Insolvency Code (or such other laws) must co-exist, each to be construed and enforced in harmony, without one being in derogation of the other with regard to the assets respecting which there is material available to show the same to have been “derived or obtained” as a result of “criminal activity relating to a scheduled offence” and consequently being “proceeds of crime”, within the mischief of PMLA. (ix). If the property of a person other than the one accused of (or charged with) the offence of money-laundering, i.e. a third party, is sought to be attached and there is evidence available to show that such property before its acquisition was held by the person accused of money-laundering (or his abettor), or it was involved in a transaction which had interconnection with transactions concerning money-laundering, the burden of proving facts to the contrary so as to seek release of such property from attachment is on the person who so contends.
- The charge or encumbrance of a third party in a property attached under PMLA cannot be treated or declared as “void” unless material is available to show that it was created “to defeat” the said law, such declaration rendering such property available for attachment and confiscation under PMLA, free from such encumbrance.
- A party in order to be considered as a “bonafide third party claimant” for its claim in a property being subjected to attachment under PMLA to be entertained must show, by cogent evidence, that it had acquired interest in such property lawfully and for adequate consideration, the party itself not being privy to, or complicit in, the offence of money-laundering, and that it has made all compliances with the existing law including, if so required, by having said security interest registered.
- An order of attachment under PMLA is not illegal only because a secured creditor has a prior secured interest (charge) in the property, within the meaning of the expressions used in RDBA and SARFAESI Act. Similarly, mere issuance of an order of attachment under PMLA does not ipso facto render illegal a prior charge or encumbrance of a secured creditor, the claim of the latter for release (or restoration) from PMLA attachment being dependent on its bonafides.
- If it is shown by cogent evidence by the bonafide third party claimant (as aforesaid), staking interest in an alternative attachable property (or deemed tainted property), claiming that it had acquired the same at a time around or after the commission of the proscribed criminal activity, in order to establish a legitimate claim for its release from attachment it must additionally prove that it had taken “due diligence” (e.g. taking reasonable precautions and after due inquiry) to ensure that it was not a tainted asset and the transactions indulged in were legitimate at the time of acquisition of such interest.
- If it is shown by cogent evidence by the bonafide third party claimant (as aforesaid), staking interest in an alternative attachable property (or deemed tainted property) claiming that it had acquired the same at a time anterior to the commission of the proscribed criminal activity, the property to the extent of such interest of the third party will not be subjected to confiscation so long as the charge or encumbrance of such third party subsists, the attachment under PMLA being valid or operative subject to satisfaction of the charge or encumbrance of such third party and restricted to such part of the value of the property as is in excess of the claim of the said third party.
- If the bonafide third party claimant (as aforesaid) is a “secured creditor”, pursuing enforcement of “security interest” in the property (secured asset) sought to be attached, it being an alternative attachable property (or deemed tainted property), it having acquired such interest from person(s) accused of (or charged with) the offence of money-laundering (or his abettor), or from any other person through such transaction (or inter-connected transactions) as involve(s) criminal activity relating to a scheduled offence, such third party (secured creditor) having initiated action in accordance with law for enforcement of such interest prior to the order of attachment under PMLA, the directions of such attachment under PMLA shall be valid and operative subject to satisfaction of the charge or encumbrance of such third party and restricted to such part of the value of the property as is in excess of the claim of the said third party.
- In the situations covered by the preceding two subparagraphs, the bonafide third party claimant shall be accountable to the enforcement authorities for the “excess” value of the property subjected to PMLA attachment.
- If the order confirming the attachment has attained finality, or if the order of confiscation has been passed, or if the trial of a case under Section 4 PMLA has commenced, the claim of a party asserting to have acted bonafide or having legitimate interest in the nature mentioned above will be inquired into and adjudicated upon only by the special court.
HC thus, orders to set aside the impugned decisions of the appellate tribunals as it finds a need for further scrutiny particularly on facts, of the claims of the respondents, in their appeals which were presented before the said forum to challenge the orders of attachment, as confirmed by the adjudicating authority in the five cases. HC finds that the assets which have been the subject matter of attachment in the appeals at hand are not “tainted property”, the same having been seemingly acquired prior to the criminal activity giving rise to accusations of money-laundering. But, they are sought to be attached and subjected to eventual confiscation on account of they being the alternative attachable properties or deemed tainted properties, which is permissible in law. The audi car (subject matter of first appeal) was acquired by a transaction which has no direct connection with the case of money-laundering. HC observes that there is no clarity as to the value of proceeds of crime which are to be confiscated as against value of the attached property as indeed the extent of the debt yet to be recovered by the secured creditor. The monetary gains made by the transactions which are subject matter of the accusations of money-laundering on account of illicit foreign exchange transactions (third appeal) or the case of cheating by use of fabricated defence supply orders (fourth appeal), both involving public servants, require closer scrutiny as to the claim of the respondent banks of bonafide action. Though there is no such element of complicity on part of any of the officials of the respondent banks in the case relating to fictitious hospital equipment (second appeal) or the one involving consortium of banks (fifth appeal), scrutiny respecting legitimacy and bonafide of the claim on the touchstone, inter alia, of the subsisting value of the secured interest and chronology of events leading to attachment would be necessary. Allows appeal.