2025 (6) TMI 929 - AT - Money Laundering

Money Laundering - right of auction purchasers - attachment of properties - properties are subject to prior mortgage and sale by the mortgagee bank - floating fictitious shell companies - precedence of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and related recovery proceedings initiated by the mortgagee bank over the attachment proceedings under PMLA - HELD THAT - The contention of learned counsel for Respondent ED agreed upon that after the filing of prosecution complaint it is the prerogative of the Ld. Special Judge PMLA Court to release/dispose of the attached mortgaged properties at the time of conclusion of trial after inviting claim of the creditors. However being a secured mortgagee of the aforementioned properties the appellant bank is at liberty to stake its claim before learned Special Judge PMLA Court even before the conclusion of trial for auction of mortgaged properties as per u/s 8(7) of the PMLA 2002 with an undertaking to deposit the excess amount with ED by way of FDRs if any. All the auction purchasers who already purchased the flats have right to retain the ownership and possession of the properties sold by mortgagee bank. The properties of the said auction purchasers are wrongly attached by ED without appreciating the fact that they are bona-fide auction purchasers and sale certificates are already issued in their favour. As accused company M/s Zylog Systems Ltd. is under liquidation the liquidator will also have right to stake the claim for other secured unsecured creditors before learned Special Judge PMLA Court even before the conclusion of trial for auction of properties as per u/s 8(7) of the PMLA 2002 with an undertaking to deposit the excess amount (if any) with ED by way of FDRs. In absence of any action on the part of liquidators the secured creditors can also move application under section 8(7) of PMLA 2002. Conclusion - While PMLA has overriding effect the rights of bona fide purchasers and secured creditors are protected by judicial mechanisms under the Act particularly Section 8(7). The balance between anti-money laundering objectives and legitimate proprietary and creditor rights upheld. The present appeals are hereby disposed of accordingly and thereby the attachment qua the flats mentioned at S.No. 2 to 4 is hereby set aside in favour of the auction purchasers. Liberty is granted to the liquidator/secured creditor qua the property at S. No. 1 as per section 8(7) of PMLA 2002.

Summary

The core legal questions considered by the Appellate Tribunal under the Prevention of Money Laundering Act (PMLA), 2002, in the present appeals include:

1. Whether the attachment of properties mortgaged with a bank by the Enforcement Directorate (ED) under PMLA is valid and sustainable, especially when the properties are subject to prior mortgage and sale by the mortgagee bank.

2. Whether the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and related recovery proceedings initiated by the mortgagee bank have precedence over the attachment proceedings under PMLA.

3. The rights of bona fide auction purchasers of mortgaged properties when such properties are attached by the ED under PMLA.

4. The entitlement of the liquidator or secured creditors of a company under liquidation to stake claims on attached properties during the pendency of criminal trial under PMLA.

5. The scope and applicability of Section 8(7) of PMLA, 2002, concerning disposal or release of attached properties before the conclusion of trial.

Issue-wise Detailed Analysis:

1. Validity of Attachment of Mortgaged Properties by ED under PMLA

The legal framework governing attachment of properties under PMLA is primarily found in Sections 5 and 8 of the Act. Section 5 permits the ED to provisionally attach properties involved in money laundering offences, and Section 8(7) provides for disposal or release of such properties by the Special Judge during trial.

Precedents have established that PMLA is a special statute with overriding effect over other laws, as per Section 71 of PMLA, which states that the provisions of PMLA shall have effect notwithstanding anything inconsistent in any other law.

The Court noted that the properties in question were mortgaged with the appellant bank before the alleged commission of fraud and money laundering offences. The bank had initiated SARFAESI proceedings and auctioned three flats (Sl. Nos. 2 to 4), with sale certificates issued and physical possession delivered to bona fide auction purchasers in 2015, prior to the ED's attachment order dated 28.02.2019.

The ED contended that attachment under PMLA is permissible notwithstanding prior mortgage or sale, relying on the special status of PMLA and the ongoing criminal prosecution for money laundering. The bank argued that attachment of already auctioned properties violates the rights of bona fide purchasers and that attachment of mortgaged property interferes with the bank's right to realize its dues.

The Court interpreted Section 71 of PMLA to mean that PMLA proceedings have precedence; however, it also recognized the rights of bona fide auction purchasers and mortgagees. The Court held that attachment of properties already sold and delivered to auction purchasers was improper and set aside the attachment in respect of flats at Sl. Nos. 2 to 4.

Regarding the remaining mortgaged property (Sl. No.1), the Court held that the bank's rights as secured creditor are preserved and that the bank or liquidator can seek disposal of the property under Section 8(7) of PMLA before the Special Judge, with an undertaking to deposit any excess proceeds with ED.

2. Precedence of SARFAESI and Recovery Proceedings vis-`a-vis PMLA Attachment

The bank contended that its recovery proceedings under SARFAESI and the DRT Recovery Certificate dated 28.06.2018 entitle it to realize dues by selling mortgaged properties, and that ED's attachment interferes with this right.

The ED argued that PMLA is a special law and overrides other statutes, including SARFAESI, thus attachment under PMLA is valid despite prior mortgage or recovery actions.

The Court acknowledged the special status of PMLA but clarified that Section 8(7) allows the Special Judge to dispose of attached properties after inviting claims of creditors. The bank, as a secured creditor, can approach the Special Judge for auction of mortgaged properties even before trial conclusion, subject to depositing excess proceeds with ED.

This balances the competing interests of the State's interest in preventing money laundering and the secured creditor's right to recover dues.

3. Rights of Bona Fide Auction Purchasers

The bank submitted that the flats at Sl. Nos. 2 to 4 were auctioned and sale certificates issued in 2015, with physical possession delivered to purchasers, prior to ED's attachment in 2019.

The ED's attachment of these flats was challenged as infringing on the rights of bona fide purchasers.

The Court held that bona fide auction purchasers have the right to retain ownership and possession and that attachment of these properties by ED was improper. Consequently, attachment orders in respect of these flats were set aside.

4. Rights of Liquidator and Secured Creditors in Liquidation Proceedings

The company, being under liquidation, raised issues regarding the effect of attachment on liquidation proceedings.

The Court held that the liquidator has the right to stake claims on attached properties before the Special Judge under Section 8(7) of PMLA, with an undertaking to deposit excess amounts with ED. In absence of action by the liquidator, secured creditors may also approach the Special Judge similarly.

This preserves the rights of creditors and liquidators to realize assets despite attachment under PMLA.

5. Application of Section 8(7) of PMLA

Section 8(7) provides the Special Judge with discretion to release or dispose of attached properties during trial, after hearing claims of interested parties.

The Court emphasized that this section enables creditors and liquidators to apply for disposal of attached properties, balancing the interests of investigation and recovery.

Key Evidence and Findings:

The investigation revealed that the accused officials floated shell companies and created fictitious invoices to obtain loans fraudulently from multiple banks, including Dena Bank, Andhra Bank, and Union Bank of India. The loans were diverted and laundered through these entities.

Loan amounts defaulted significantly, and the properties attached were mortgaged assets or auctioned flats.

Documents and statements from bank officials, company employees, and auction purchasers established the timeline and ownership of properties, as well as the fraudulent scheme.

Treatment of Competing Arguments:

The bank's argument that attachment interfered with its rights as secured creditor and bona fide purchasers' rights was accepted in part, leading to setting aside attachment of auctioned flats.

ED's contention of PMLA's overriding effect was accepted concerning the mortgaged property, subject to claims under Section 8(7).

The Court balanced the competing rights by allowing secured creditors and liquidators to seek disposal of attached properties under judicial supervision, preserving the integrity of money laundering proceedings while protecting legitimate creditor interests.

Significant Holdings:

"After the filing of prosecution complaint it is the prerogative of the Ld. Special Judge, PMLA Court, to release/dispose of the attached mortgaged properties at the time of conclusion of trial, after inviting claim of the creditors."

"Being a secured mortgagee of the aforementioned properties, the appellant bank is at liberty to stake its claim before learned Special Judge, PMLA Court, even before the conclusion of trial for auction of mortgaged properties, as per u/s 8(7) of the PMLA, 2002, with an undertaking to deposit the excess amount with ED by way of FDRs, if any."

"All the auction purchasers, who already purchased the flats have right to retain the ownership and possession of the properties, sold by mortgagee bank. The properties of the said auction purchasers are wrongly attached by ED, without appreciating the fact that they are bona-fide auction purchasers and sale certificates are already issued in their favour."

"The liquidator will also have right to stake the claim for other secured & unsecured creditors, before learned Special Judge, PMLA Court, even before the conclusion of trial for auction of properties, as per u/s 8(7) of the PMLA, 2002, with an undertaking to deposit the excess amount (if any) with ED by way of FDRs."

"It is made clear that nothing expressed herein will affect the right of any party in the criminal trials."

These holdings establish the principle that while PMLA has overriding effect, the rights of bona fide purchasers and secured creditors are protected by judicial mechanisms under the Act, particularly Section 8(7). The Court upheld the balance between anti-money laundering objectives and legitimate proprietary and creditor rights.