Appellare Tribunal PMLA-If property mortgaged with a secured creditor cannot be attached for recovery of government dues, such as PMLA

The Appellate Tribunal for SAFEMA, FEMA, PMLA, NDPS, PBPT Act, New Delhi, on January 2, 2019 in the case of Punjab National Bank vs The Deputy Director, Directorate of Enforcement, Raipur (FPA-PMLA-2633/RP/2018) held that the property mortgaged with a secured creditor cannot be attached for recovery of government dues. Facts The Respondent No. 2 had taken a loan of Rs. 546,77,00,000 (Rupees five hundred forty six0000000 and seventy seven00000) from a consortium of banks (lead by the “Appellant Bank”), by way of equitable mortgage and hypothecation of the properties in issue (“Properties”). When the Appellant Bank defaulted in payment, one of the consortium banks filed an application under Section 7 of IBC with the NCLT, Mumbai, whereby a moratorium was declared. Believing that the Respondent No. 2 had used ‘proceeds of crime’ to purchase land, construct factory building, plant and machinery for the proposed power plant on the Property, the Deputy Director, Directorate of Enforcement, Raipur (“Respondent”) passed an attachment order against the Properties under the Prevention of Money-Laundering Act, 2002 (“PMLA”). The provisional attachment order was confirmed by the Adjudicating Authority. The Appellants are now contesting the impugned order as well as the provisional attachment order. Arguments The Respondent relied on the non-obstante clause contained in Section 71 of PMLA to argue that the attachment order was just. The Appellant Bank relied on the insertion of Section 26B to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest. Act, 2002 (“SARFAESI”) and Section 31B to the Recovery of Debts due to Banks and Financial Institutions Act, 1993 to emphasise that, “notwithstanding anything contained in any other law”, the rights of the secured creditors shall take priority over “all other debts and government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority”, and therefore the attachment order was illegal. They also argued since the NCLT Mumbai had declared a moratorium under Section 14 of the IBC, 2016, continuation of pending suits or proceedings against the Respondent No.2 was prohibited and the Adjudicating Authority could not have confirmed the attachment order. Judgment and Analysis The Tribunal held that in Solidaire India Limited vs. Fairgrowth Financial Services Limited ((2001) 3 SCC 71), the Supreme Court had settled the law that if a non-obstante clause is contained in two enactments, the non-obstante clause in the later enactment shall prevail over the non-obstante clause in the earlier enactment. Relying on the same, the Tribunal held that the Respondent had no power to attach the Properties. The Tribunal further held that even if the PMLA and SARFAESI were inconsistent with each other, SARFAESI would prevail over the PMLA “as The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is a special law applicable to secured assets wherein Security Interest has been created in favour of banks and financial institutions.” While observing that there was no evidence or material to establish that the Properties were acquired by the Respondent No.2 by ‘proceeds of crime’, the Tribunal noted the following “The provisions of The Prevention of Money-Laundering Act, 2002 cannot be construed and implemented to the detriment of third parties having no connection with and involvement in the scheduled offences which fall within the domain of the Act. The provisions of the Act can only entail penal consequences on those who are not guilty of committing of scheduled offences. The rights of a third party having no involvement in the scheduled offences cannot be jeopardized and decimated by the operation of Act as the same would be violative of their legal right under bond fide contracts.” The Tribunal also clarified that since no one would purchase the attached Propertied unless the attachment is lifted, the Respondents cannot approach any special court if they wish to dispose of the Properties before trial, and therefore the only jurisdiction in this regard lies with the Tribunal itself. The Tribunal finally held that in view of the moratorium declared by NCLT Mumbai, the Adjudicating Authority could not have confirmed the attachment order. Setting aside both the orders, the Tribunal noted that “The appellant is a Public Sector Bank. The money must come to the public forthwith not after the trial of criminal case against the borrowers which may take many years. The banks are in crisis, no attempt should be made to block the loan amount in order to avoid worsen positions in the commercial market. The trial may continue against the borrowers. One is failed to understand why the bank loan amount be blocked in view of settled law.” Download Pdf