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The Delhi High Court has held that banking legislation and the Insolvency and Bankruptcy Code, 2016 (IBC) do not prevail over the Prevention of Money Laundering Act, 2002 (PMLA) when it comes to attachment of properties obtained as “proceeds of crime”.
The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDBA), The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) and the IBC should instead be enforced in harmony with the PMLA, the Court held.
“..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 judgment was pronounced by a Single Judge Bench of Justice RK Gauba in a batch of appeals preferred by the Enforcement Directorate (ED) against an order passed by the PMLA Appellate Tribunal.
While adjudicating the issue of third party rights over a property attached by the ED, the Appellate Tribunal had held that third parties (in the present case, banks) which have legitimately created rights such as a charge, lien or other encumbrances, have a superior claim over such properties.
The decision of the PMLA Appellate Tribunal was based on Section 26-E of SARFAESI Act and Section 31-B of RDBA, which declared the claim of “secured creditors” to have priority over certain other claims as specified by the law.
The ED argued that if the right of third parties such as banks were to be upheld, the PMLA would stand defeated. It was submitted that such an arrangement would be against the power of the sovereign authority to take away the property of a money-launderer. Furthermore, a borrower who has indulged in money-laundering would also derive an illegitimate pecuniary advantage.
The banks, on the other hand, argued that the legislative intent and command was that the RDBA, SARFAESI Acts and the IBC must prevail over PMLA.
Putting the dispute to rest, the Court held that the objective of PMLA being distinct from the purpose of RDBA, SARFAESI Act and IBC, the latter three legislations do not prevail over the former.
“(Hence), 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.”
Nonetheless, the PMLA, by virtue of Section 71, has an overriding effect over other existing laws in matters dealing with “money-laundering” and “proceeds of crime”, the Court added.
It further held that the PMLA allows the concerned authority to attach not only property acquired or obtained, directly or indirectly, from proceeds of criminal activity, but also any other asset or property of an equivalent value belonging to the offender. The latter is an “alternative attachable property” or “deemed tainted property” on account of its nexus with the offence or offender of money-laundering, the Court explained.
However, if the offender objects to the attachment on the ground that the property attached was not acquired or obtained from criminal activity, the burden of proving facts in support of such claim is to be discharged by him.
Meanwhile, if a “bonafide third-party claimant”, such as a bank has cogent evidence to show that it had acquired interest in the “alternative attachable property” at a time anterior to the commission of the criminal activity, the property to the extent of such interest will not be subjected to confiscation so long as the charge or encumbrance of such third party subsists.
The attachment under PMLA will, however, be valid or operative subject to the satisfaction of the third party charge or encumbrance and restricted to such part of the value of the property that is in excess of the claim of the third party.
Also, if the “bonafide third-party claimant” is a “secured creditor” and has initiated action in accordance with law for the enforcement of such interest prior to the order of attachment under PMLA, the directions of such attachment under the PMLA shall again be subject to satisfaction of the charge or encumbrance of the third party. The attachment would thus be restricted to the value of the property which is in excess of the claim of the third party.
Such bonafide third-party claimant shall nonetheless be accountable to the enforcement authorities for the “excess” value of the property subjected to PMLA attachment, the Court has clarified.
However, if the order confirming the attachment has attained finality or the order of confiscation has been passed, or the trial of a case under Section 4 PMLA has commenced, the claim of the bonafide third-party claimant will be inquired into and adjudicated upon only by the special court.
The Court thus set aside the order passed by the Appellate Authority and sent the matters back for further consideration.
ED was represented by Standing Counsel Amit Mahajan with Advocates Mohammed Faraz and Mallika Hiremath.
Read the Judgment: