Allowed

FPA-PMLA-1030/MUM/2015 of Indian Renewable Energy Development Agency Ltd. v/s The Deputy Director Directorate of Enforcement & Ors., Mumbai

ATFP3 Sept 2019FPA-PMLA-1030/MUM/2015

Case brief

AI extract

What is this about?

The Appellant challenged attachment of properties mortgaged as security for a loan. The Tribunal held that since the mortgage was created before the offence and the creditor acted in good faith, the properties cannot be attached as proceeds of crime and the appeal was allowed.

What did the court decide?

The Impugned Order of attachment and the Provisional Attachment Order were allowed to be set aside.

FPA-PMLA-1030/MUM/2015 of Indian Renewable Energy Development… — Money Laundering | ATFP (2019)

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APPELLATE TRIBUNAL, PREVENTION OF MONEY LAUNDERING ACT AT NEW DELHI

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Date of Decision: 03.09.2019

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MP-PMLA-2003/MUM/2015 (Stay) &

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FPA-PMLA-1030/MUM/2015

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Indian Renewable Energy Development Agency Ltd. … Appellant Versus

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The Deputy Director Directorate of Enforcement & Ors., Mumbai … Respondents

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Advocates/Authorized Representatives who appeared

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For the Appellant : Mr. Abhishek Agarwal, Advocate For the Respondent no.1 (ED) : Mr. Rajeev Awasthi, Advocate CORAM JUSTICE MANMOHAN SINGH : CHAIRMAN SHRI G.C. MISHRA : MEMBER

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JUDGEMENT

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FPA-PMLA-1030/MUM/2015

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The appeal under consideration is an appeal filed under Section 26 of Prevention of Money Laundering Act (hereinafter referred to as “PMLA”), 2002 by the appellant against the order dated 28.05.2015 passed by the Adjudicating Authority, in the matter of O.C. No. 407 of 2015 wherein the Appellant was arrayed as Defendant no.4 on the basis of an application filed by the Appellant before the Ld. Adjudicating Authority.

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It is revealed from the record that a complaint was received by MRA Marg Police Station, Mumbai from an investor. An FIR bearing no. 216/13 dated 30.09.2013 was registered by the local police for commission of offence under Sections 120-B, 409, 465, 467, 468, 471, 474, 477(A) of IPC. It was inter-alia alleged in the complaint that the FPA-PMLA-1030/MUM/2015 Page 1 of 17

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Complainant had been induced into making investments by false representations and assurances given by the promoters and senior management of National Spot Exchange Limited (hereinafter referred to as NSEL) with a deliberate intention to dishonestly misappropriate his funds and had been cheated by NSEL.

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As Sections 120-B, 467 and 471 of IPC are Scheduled Offences under PMLA, an ECIR bearing no. F.No. MZO/ECIR/14/2013 dated 14.10.2013 has been registered by Enforcement Directorate and investigation was undertaken under PMLA. Consequent to the investigation, Provisional Attachment Order No. 24/2014 dated 31.12.2014 was passed by the Deputy Director, Enforcement Directorate, Mumbai Zonal Office. In the said order the following properties are

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attached:

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Sr. No .	Description of property	Sub-Description of Property	Value (Rs. Crore)	Extent of POC value (Rs.)
1.	Plant of M/s. Naraingarh Sugar Mills Ltd.	Land Area of the Sugar Plant – 58.38 Acres	39,99,11,000
	comprising Land,
2.	building, plant & machinery situated at Village: Banondi, PO Shahzadpur, Tehsil – Naraingarh, District – Ambala, Haryana.	Building & Structures – Main factory, Auxiliary building, Misc. allied structure, Residential accommodation, Miscellaneous under construction 25 MW Co-Gen power plant, etc.	27,20,40,000	95,11,40,000
3.		Machinery	27,92,40,000
		Total	95,11,40,000

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A copy of the said Provisional Attachment Order was sent to the Appellant. The Appellant was not made a party either in O.C. or by the

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FPA-PMLA-1030/MUM/2015

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Adjudicating Authority. However, when the Appellant came to know about the pendency of the adjudication of the O.C. before the Adjudicating Authority, on the information of the Enforcement Directorate, the Appellant appeared and contested the proceedings.

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The Adjudicating Authority confirmed the Provisional Attachment Order holding that the property which has been attached under Section 5 are involved in money laundering and that the defendants are in possession of proceeds of crime and that the defendants have committed the scheduled offences, generated proceeds of crime and laundered them. It is also held by the Ld. Adjudicating Authority that “no doubt the properties attached are proceeds of crime or value thereof and are involved in money laundering”.

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6. CASE OF THE APPELLANT

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a) The Appellant is a Public Limited and Government of India Company and works under the administrative control of the Ministry of New and Renewable Energy with the objective to promote, develop and extend financial assistance for renewable energy and energy efficiency/conservation projects.

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b) The Co-generation project has been set up with the loan of the Appellant (as per the project cost). The sugar project which is sought to be attached is a part of the security against the financial assistance granted by the Appellant in the year 2012 and was made, constructed and built, out of the loan amount of the Appellant and different lenders financed the sugar project which are nationalised banks and none of the alleged funds raised out of alleged money laundering were either raised or available with the accused at that point of time. As such all those assets were built out of the due and valid legal modes. These assets are under the

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charge of the Appellant as of now, as security for the Term Loan of Rs. 10,339 Lacs for setting up of Cogeneration project.

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c) The loan amount was disbursed and all the securities were obtained by the Appellant after carrying out due diligence and compliance of all KYC requirements.

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d) The land of the Company M/s. Naraingarh Sugar Mills (Respondent No.4) mortgaged with Appellant IREDA was purchased in the year 1995 i.e. much prior to the commission of the alleged offence of money laundering in the year 2013.

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e) The offence is alleged to have been committed/surfaced on or about 2013 whereas the Appellant herein had sanctioned the loan amount for Rs.10,339 Lacs on 12.09.2012 and consequently disbursed Rs.76.84 Crores for the co-generation power plant of M/s. Naraingarh Sugar Mills Ltd. Thus, at the time of disbursement of loan amount, which actually is public money, the Appellant herein was not in the knowledge of any offence of the money laundering committed by M/s. Naraingarh Sugar Mills Ltd.

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f) The amount disbursed by the Appellant was used by the Company towards the setting up of co-generation power plant and purchase of raw material.

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g) The ED admittedly has been able to trace the tainted money and claims/alleges that the same has been utilised for repayment of bank loans. Thus, if ED has been able to trace the tainted money, the ED should recover the said money in the hands of the Banks whose loans have been repaid. ED had neither made any attempt for the same nor made the banks a party to the proceedings. The sole Authority and Powers of Adjudicating Authorities of ED arises out of Section 5 of The Prevention of Money-Laundering Act, 2002.

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Section 5 of The Prevention of Money-Laundering Act, 2002 reads about Attachment of property involved in moneyLaundering that –

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(1) Where the Director or any other officer not below the rank of Deputy Director authorised by the Director for the purposes of this section, has reason to believe (the reason for such belief to be recorded in writing), on the basis of material in his possession, that-

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(a) any person is in possession of any proceeds of crime; and

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(b) such proceeds of crime are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to confiscation of such proceeds of crime under this Chapter, he may, by order in writing, provisionally attach such property for a period not exceeding one hundred and eighty days from the date of the order, in such manner as may be prescribed.

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The assets now sought to be conclusively attached are secured and charged with the Appellant. Till the loans sanctioned by the Appellant are fully repaid M/s. Naraingarh Sugar Mills Limited shall not have any absolute right over the property. The proceeds of crime, even if any, were paid to the erstwhile bankers as such the attachment of the charged assets of the Appellant is bad and not tenable under the law of the land.

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h) Further the attached assets contain two units. (i) Sugar plant and (ii) Co-generation Plant. Whereas the status of the sugar plant i.e. land, plant and machinery has been in existence since 1995 in terms of the submissions in the foregoing paragraphs, it is submitted that the entire Co-generation projects has been constructed and built up, out of the loan funds of the appellant and under no stretch of imagination these assets can be held as proceeds of crime.

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i) The Appellant is Government of India Company and not a party to any of the alleged money laundering activities. Any attachment of the aforesaid assets will result into the loss of the Public Exchequer.

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That the role of the Appellant in the present matter is confined to the fact that in the year 2012 on the application of Respondent no.4 herein i.e. M/s. Naraingarh Sugar Mills Ltd. for grant of financial FPA-PMLA-1030/MUM/2015 Page 5 of 17

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assistance for setting up the 25 MW Bagasse based Cogeneration project in their existing sugar mill capacity of 2500 TCD (to be expanded to 5500 TCD) at Village- Banondi, Taluka- Naraingarh, District- Ambala, Haryana, the Appellant vide sanction letter dated 12.09.2012 and Loan Agreement dated 07.03.2013 sanctioned the loan to the tune of Rs. 10,339 Lacs (Rs. 6,709 Lacs main loan and Rs. 3,630 Lacs Additional/ bridge loan towards the Sugar Development Fund/SDF).

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That the Appellant was shocked to receive the copy of the Provisional Attachment Order no. 24/2014 dated 31.12.2014 where it was stated that the plant of Respondent no. 4 comprising land, building, plant and machinery situated at Village- Banondi, PO- Shahzadpur, Tehsil- Naraingarh, District- Ambala Haryana had been provisionally attached under Section 5(1) of the Act for a period of 180 days pursuant to FIR No. 216 of 2013 dated 30.09.2013, registered with MRA Marg, Police Station, Mumbai against M/s. National Spot Exchange Limited (hereinafter referred to as “ NSEL”).

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That the appellant in order to save their interest issued a letter dated 09.02.2015 to Respondent No.1 to note their charge on the aforementioned property. In response it was stated that the appellant should get themselves impleaded in the pending proceedings being OC No. 407 of 2015 before the Ld. Adjudication Authority and hence the appellant took appropriate steps and got itself impleaded in the aforementioned proceedings. It is pertinent to mention that despite stating their defence and grounds before the Ld. Adjudicating Authority, the provisional attachment order was upheld and hence the Appellant was constrained to file the present appeal.

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Besides above the appellant has also assailed the Impugned Order and the PAO on following grounds:

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(i) The attached property was acquired in 1991 to 1995 from the proceeds of public issue and not from the sources of either of the directors much prior to the complaint filed by Respondent No.1. It is submitted that NSEL was launched in 10.02.2005 and the company was incorporated in May 2005, commenced their membership/ actual trading in October 2008. It can be clearly seen that the property cannot be the crime proceeds as the same was acquired much-much before the entire transactions and formation of NSEL.

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(ii) In the impugned Provisional Attachment Order it is specifically mentioned that the funds transferred from NSEL were used for repayment of loan and all the transactions are traced by the Respondent No.1 and hence even going by that, once the tainted money has been traced, the ED should have proceeded in terms of the Prevention of Money Laundering Act to attach the accounts in which the alleged tainted has been transferred instead of the aforementioned property mortgaged with the Appellant which has nothing to do with the crime proceeds.

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(iii) No substantial evidence has been produced by Respondent no. 1 to prima facie show much less establish that the tainted money allegedly received by Respondent no.4 have been invested in the attached plant by way of bank loan repayments, purchase of raw materials/ working capital requirement.

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(iv) In fact the loan sanctioned by the Appellant was for the purpose of the setting up of the Co-generation project of the Respondent no.4 and it is that loan amount only which has been used to expand the said project for purchase, installation and building of Co-generation project and therefore the attached land and plant machinery cannot be construed to be crime proceeds.

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(v) The title deeds of the aforementioned property are in the possession of the Appellant, since the attached property is

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mortgaged by way of equitable mortgage with the Appellant. All the charges have been created much prior to the impugned order and order of provisional attachment. It is submitted that the rights of the Appellant under the law of the land are superior and has priority, more particularly under Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and Securitization Asset reconstruction and Enforcement Act, 2002 as also under Companies Act, 1956/2013.

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(vi) The appellant did the requisite due diligence before sanctioning the loan and as there was no whisper of the said fraud committed by the Respondent No.4 and prior to the said transactions leading to alleged crime proceeds, the appellant sanctioned the loan to Respondent no. 4 for setting up the cogeneration project and the same is built from the loan extended to it by the appellant and hence to no stretch of imagination the cogeneration project can be construed as proceeds of crime.

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(vii) That the appellant, which is a government of India and a Public Financial Institution is not a party to the alleged criminal activity and only granted a loan to Respondent No.4 after due diligence. It is submitted that the appellant has the first charge on the aforementioned property and is being penalised despite being no default on its part.

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(viii) The said attachment needs to be set aside or else it will cause prejudice to the appellant and huge loss to the public largesse. It is further submitted that the appellant is ready and willing to extend all its cooperation and coordination as required by the concerned authorities in relation to the subject matter.

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(ix) That Anjani Sinha, Ex-MD of NSEL in her statement stated that the Shri Gagan Suri, Proprietor of M/s Yathuri Associates had used the funds received from the NSEL exchange settlement account for setting up a beer plant in Punjab. It is submitted that

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the said statement was made during the investigation under Section 50 of the Prevention of Money Laundering Act, 2002, which further substantiates that the aforementioned property and plant & machinery are not crime proceeds.

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(x) That M/s Yathuri Associates acquired an alleged amount of Rs.361.67 Crores as a result of criminal activity for which police authority registered the FIR which has no connection with the land and plant and machinery of the property in dispute. The said land was acquired in 1995 whereas the NSEL started functioning in 2008 and hence the said land to no stretch of imagination can be crime proceeds.

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(xi) It is case of the ED that the amount received by M/s Yathuri is used for bank loan repayments, business activities of the plant of M/s. Naraingarh Sugar Mills Ltd. It is pertinent to mention that the Respondent No.1 admitted that they were able to trace the tainted money used for bank loan repayment. As such, the Respondent No.1, if at all, should attach the said the accounts in which such tainted money has been deposited whereas without considering that the subject land of the said property was purchased in the year 1995 and expansion of the project was done by the loan sanctioned by the Appellant, the ED has proceeded on basis of conjectures and surmises to attach the subject land along with the plant and machinery.

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The Appellant has relied upon the following Judgments:

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(i) The Deputy Director, Directorate of Enforcement, Delhi v. Axis Bank & Ors. in CRL.A. 143/2018 & Crl.M.A. 2262/2018 and connected matters. Date of Judgment: 02.04.2019.

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(ii) Standard Chartered Bank v. Deputy Director of Enforcement: 2018 SCC Online ATPMLA 15. Date of Judgment: 02.08.2018.

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This appeal was fixed for arguments on 22.08.2019. On the previous date, i.e. 18.07.2019 an adjournment was sought from the side of the Respondent ED to argue the matter and accordingly the appeal was adjourned to 22.08.2019 for arguments. None appeared from the side of the Enforcement Directorate even after passover on 22.08.2019. However, we have taken care of the case of the Respondent ED by going through the entire record. However, the Ld. Counsel for the appellant argued the matter.

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We have gone through the Provisional Attachment Order and documents enclosed therewith, the O.C., the Impugned Order, the reply of the Appellant before the Adjudicating Authority and other materials available on record.

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We have already stated about the case of the Enforcement Directorate in the initial paragraphs. There is no dispute that the property in question have been acquired much prior to the commission of crime and the same has been secured as first charge mortgage with the Appellant against the loan sanctioned for setting-up 25 MW Bagasse based Cogeneration Project at Village- Banondi, Taluka- Naraingarh, District- Ambala, in the State of Haryana. The loan was sanctioned on 12.09.2012 and loan agreement was executed with Respondent no.4 i.e. M/s. Naraingarh Sugar Mills Ltd.

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The said loan is secured by way of :

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(a) First charge by equitable mortgage (deposit of title deeds) in favour of Appellant/IREDA, on immoveable properties of Respondent No. 4 admeasuring 58.38125 acres, situated at Village- Banondi and Bilaspur, Taluka- Naraingarh, DistrictAmbala, Haryana, on first pari-passu charge basis with other

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term lenders including SDF Authorities for Sugar and Cogeneration Project.

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(b) First charge by hypothecation of movable assets, including all buildings, structures, erections etc. constructed and/or to be constructed on the mortgaged land and plant and machinery attached to the earth or permanently fastened to anything attached to the earth, fixtures, fittings erected/installed or to be erected/installed thereon and every part thereof present or future, on first pari-passu charge basis with other term lenders including SDF Authorities for sugar and Cogeneration Project.

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(c) First charge of Trust and Retention Account/ Special Account of Respondent No. 4 with a Scheduled Bank for servicing Appellant/IREDA.

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(d) 2^nd pari passu charge on current assets of Respondent No. 4, along with other Consortium lenders; and

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(e) Personal Guarantees of: (i) Shri Onkar Anand (ii) Shri Jitendra Anand (iii) Smt. Renu Anand (iv) Shri Rahul Anand (after death of Shri Onkar Anand).

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All these charges have been registered with ROC, Ministry of Corporate Affairs, Government of India under Form 8.

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16. There is no allegation nor there is any evidence that the properties attached hereunder have been acquired out of proceeds of crime, nor there any allegation against the Appellant that they are involved in money laundering. The Appellant is a Government Company which has lent public money to the Respondent no.4 against security. There is also no allegation that the Appellant knew about the involvement of the Respondent no.4 in any money laundering. It is the case of the Respondent ED that proceeds of crime have been used for repayment of

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Bank loans. Therefore, it appears that the properties attached herein are attached as value thereof.

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17. It is seen from the materials available on record that the Appellant has bonafidely advanced the public money for setting-up of the Bagasse based Cogeneration Project after due diligence.

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18. The Hon‟ble High Court of Delhi at New Delhi, in the matter of Deputy Director, Directorate of Enforcement, Delhi Vs. Axis Bank in CRL.A. 143/2018 & Crl.M.A. 2262 of 2018 dated 02^nd April, 2019, has dealt with identical matter involving identical issues.

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19. The rights of Appellant being the secured creditor would survive in spite of the order of the attachment under PMLA remains operative. Therefore, the Appellant being the lawful mortgagee/transferee of the interest in the Subject Properties are entitled to recover its dues with the sale of the Subject Properties as the Hon‟ble High Court in the Judgment has also held that “mere issuance of an attachment order does not ispo facto render illegal prior charge of encumbrance of secured creditor, the claim of the latter of release (or restoration) from PMLA attachment being dependent on its bona-fides” . The court further held “ if it is shown by the cogent evidence by bona-fide third party claimant (as aforesaid), staking interest in an alternate attachable property (or deemed tainted property), claiming that it had acquired the same at a time around or after the commission of prescribed criminal activity, in order to establish a legitimate claim for its release from attachment it must additionally prove that it had taken “due diligence” (eg. taking reasonable precautions and after due enquiry) to ensure that it was not a tainted asset and the transactions indulged in where legitimate at the time of acquisitions of such interest ”.

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The Hon‟ble High Court further held that “ if it is shown by the cogent evidence by the bona-fide 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 proscribed criminal activity, the property to the extent of such interest of 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 in is excess of the claim of the said third party” .

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The acquisition of such interest cannot be presumed to have been created with mala fide intent to defeat and/or frustrate the proceeding under the PML Act and hence the said properties can not be held to be “tainted property”. Since in the present case, the bona-fide third party claimant, secured creditor, had initiated action in accordance with law for enforcement of interest prior to the order of attachment under PMLA, the PMLA attachment takes a back seat allowing the secured creditor to enforce its claim and only the remainder to be made available for purposes of PMLA. The properties in the present case are thus not liable to be attached even as “alternative attachable property”, as held in Para 165 of the judgment of Hon‟ble Delhi High Court ( supra ).

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As already mentioned in the present case, it has come on record that the security interest in respect of the aforesaid properties were created before the date of registration of FIR.

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The Hon‟ble Delhi High Court on the Axis Bank Judgment ( supra ) had observed that:-

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“… the charge or encumbrance of third party in property attached under PMLA cannot be treated or declared void unless material is available to show that it was created to defeat the PMLA, such FPA-PMLA-1030/MUM/2015 Page 13 of 17

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declaration rendering such properties available for attachment and confiscation under PMLA, free from encumbrance …”

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The Hon‟ble Delhi High Court further observed that:-

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“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 complacent in, the offence of money laundering, and that it had made all compliances with the existing law including, if so required, by having said security interest registered”

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It is submitted on behalf of the Appellant that the properties attached cannot be attached under Section 5 of the PML Act because the properties are not purchased from the alleged proceeds of crime. As per the provisions of Section 5(1) (c) the primary requirement for the attachment is that the proceeds of crime are likely to be concealed, transferred or dealt with in any manner.

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It is not denied on behalf of the respondent that the Appellant being the mortgagee and secured Creditor is entitled to recover amounts outstanding against Respondent no.4 from the sale of the Mortgaged Properties as it was never the case of the ED that the attached properties were purchased out of proceeds of crime.

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It has also come on record that the Appellant acted bonafidly while rendering the facilities and mortgage of the Properties was done for bonafide purposes. The Appellant is not involved in the schedule offence. There is also no criminal complaint under the schedule offence under PMLA is pending against the Appellant or any of its officials.

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Thus, the mortgaged properties are security to the loans and cannot be subject matter of attachment particularly when the same were purchased much prior to the commission of alleged offences.

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The Respondent has failed to consider that it has attached all the properties without properly examining the case of the Appellant. The mortgaged properties of the Appellant cannot be attached or confiscated unless link and nexus directly or indirectly established and there is no illegality or unlawfulness in the title of the Appellant and there is no charge of money laundering against the Appellant. The mortgaged of properties are under the Transfer of Property Act as there is no dispute as regards the origin of funds or the title of the Property.

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The Respondent does not have any lien over the said properties as the Appellant is now the Legal transferee of said Properties. The Respondent cannot retain the properties over which they have no legal title and the property is to be returned to the persons lawfully entitled as the Appellant is the victim.

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As such the properties acquired by Appellant before the initiation of the proceeding under PML Act and properties in respect of which security interest has been created in favour of the bona-fide secured creditor ought not be subjected to attachment in view of the aforesaid observations of the Hon‟ble Delhi High Court and the State Action would be restricted to such part of the value of the properties as it exceeds the claim of the bona-fide third party.

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As such, in the present case once it has been showed by the Appellant that proper and due diligence was conducted before the properties were mortgaged to them, the properties thus cannot be attached, neither as a „tainted property‟ nor as „alternative attachable property‟ since it is nobody‟s case that the secured creditor had not done the due diligence and/or the transactions were not legitimate.

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It is not possible to hold that the mortgaged properties claimed by the Appellant in anyway can be considered to be “Proceeds of Crime” under Section 2(u) of PMLA. The impugned order does not disclose any reasoning. There is no application of mind whatsoever and it is assumed that the properties in question are the proceeds of the crime. The Adjudicating Authority has not analysed the facts at all. The order suffers from a fundamental error.

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The legal implication of a mortgage must be understood by both authorities. When a property is mortgaged, the only right which is left in the mortgagor is that of the equity of redemption. Otherwise, the entire corpus of the property passes to the mortgagee i.e. the Appellant in this case. The mortgagee has a right to take over the possession of the property and to realise it whereas the mortgagor who is left only with the equity of redemption has only the right to make full payment of the dues of the mortgagee and then redeem the property. Otherwise the mortgager is not left with any vested right. In other words, the mortgaged assets are essentially assets of the mortgagee and not of the mortgager.

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The Appellant undertakes to deposit any amount realized, which is in excess of its outstanding dues, with the ED if such situation would arise.

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The Appellant is a Public Limited Government Company. The money must come to the public forthwith not after the trial of criminal case against the borrowers which may take many years. The trial may continue against the borrowers.

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No material has been placed before us to show that the properties attached are part of any prosecution complaint arising out of the present ECIR.

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36. Considering the materials placed on record, oral arguments advanced by the learned counsel for the Appellant, relying on the judgment of the Hon‟ble High Court of Delhi and in view of the discussions made above, we are of the considered view that the Impugned Order of attachment and the PAO are not in accordance with law, so not sustainable. Hence, the appeal is allowed. The Impugned Order is set aside.

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37. No costs.

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(Justice Manmohan Singh) Chairman

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(G. C. Mishra) Member

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New Delhi,

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03^rd September, 2019

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„AS‟