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FPA-PMLA-2340/MUM/2018 of The Branch Manager Central Bank of India v/s The Deputy Director Directorate of Enforcement, Mumbai

ATFP28 Mar 2019FPA-PMLA-2340/MUM/2018

Case brief

AI extract

What is this about?

The Appellate Tribunal quashed the confirmation of a provisional attachment order against properties mortgaged to the appellant bank. It held that secured creditors have priority over enforcement attachments under amended SARFAESI and RDDBFI Acts, and banks are innocent parties where properties were acquired from lawful loans.

What did the court decide?

The impugned order dated 24.04.2018 and the provisional attachment order were set aside as far as the appellant Bank is concerned.

FPA-PMLA-2340/MUM/2018 of The Branch Manager Central Bank of… — 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:- 28.03.2019

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FPA-PMLA-2340/MUM/2018

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The Branch Manager … Appellant Central Bank of India Versus The Deputy Director Directorate of Enforcement, Mumbai … Respondent

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Advocates/Authorized Representatives who appeared

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For the Appellant	:	Mr. Ashish Wad, Advocate Mr. SukritiJaggi, Advocate
For the Respondent	:	Mrs. Shilpi Satyapriya Satyam, Advocate
CORAM
JUSTICE MANMOHAN SINGH	:	CHAIRMAN

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JUDGEMENT

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FPA-PMLA-2340/MUM/2018

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The appellant – Bank has challenged the impugned order dated 24.04.2018 which was passed by the Adjudicating Authority vide which the provisional attachment order has been confirmed.

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It is submitted by the bank that none of the grounds relied upon by the appellant bank were considered by the Adjudicating Authority while passing the impugned order.

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The brief facts are that in the year 2015, Respondent Nos. 4& 5 approached the Appellant Bank to obtain working Capital facility and requested the Appellant Bank to constitute a consortium for CBI‘s

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working capital facilities of Rs. 42.00 Crores & BOI‘S working capital facilities of Rs. 49.00 Crores, aggregating to Rs. 91.00 Crores.

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As per the Consortium Agreement dated 13.03.2015 the Respondents mortgaged the below mentioned property as a collateral security.

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a. Entire 2^nd Floor, Yshodhan Building, CTS No. 1332, 1332/1 to 4, final Plot No. 103 of Town Planning Scheme No. II OF Vile Parle (East), Mumbai -400057, in the name of Mrs. Varsha M. Patel and Mrs. Manish C. Patel.

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b. Flat No. 1/4th Floor, ―B‖ Wing, jai hind Estate Building No. 1, Co- op, Hsg. Society Ltd. C.S. 2298 of Bhuleshwar Division, Dr. Atmaram Merchant Road, Bhaskar Gali, Bhuleshwar, Mumbai-400002; in the name of Mrs. Varsha M. Patel.

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The owners of the above mentioned properties visited the registrar office on 11.09.2012 and deposited the Original title deeds of their properties in favour of Bank of India (consortium member) as a Mortgage, in order to secure the credit facilities availed by the Appellant Bank.

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The complaint against the Respondent Nos. 5&6 was registered on 16.02.2017 by the Anti corruption Branch of Central Bureau of Investigation, Mumbai vide RC, BA1.2017/A0009 dated 16.02.2017, stating that based on the investigation it was found that during the period of demonetization from 15.11.2016 to 26.12.2016, huge cash amount in old currency were deposited in the account of Respondent No.3 held with Respondent No. 6.

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Appellant bank received Notice dated 18.12.2017 under Section 8(1) of the Act under the Section 5 of PMLA, 2002 in Original Complaint FPA-PMLA-2340/MUM/2018 P a g e 2 | 14

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No. 856 of 2017, asking the Appellant Bank to show cause why the provisional attachment order dated 14.11.2017 should not be confirmed.

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The appellant filed a detailed reply in Original Complaint No. 856/17 stating that 2 of the properties under the provisional attachment are mortgaged with the bank and are not proceeds of the crime, therefore cannot be attached.

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It was also stated that the Appellant Bank has no role in the entire transaction whatsoever nor any charges are framed against the Appellant Bank.

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From the impugned order, it is found that the contention of the Bank has not been considered as per law. Very casual approach is adopted in order to pass the confirmation order.

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The legal issues involved in the matter are quite settled by the Hon‘ble Supreme Court, High Courts and this Tribunal.

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This tribunal has, inter alia, time and again in large number of cases,held that the secured asset of a bank cannot be attached or confiscated when there is no illegality or unlawfulness in the title of the bank and that there is no charge of money laundering against the bank.

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It was also propounded that the bank would be entitled to recover its dues by proceeding against the mortgaged/hypothecated properties under the provisions of SARFESI Act, 2002 and the RDDBFI Act 1993, as the Directorate of Enforcement would have no lien over the property which already stands legally transferred to the bank.

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This Tribunal has perused and examined the material available on records and has also heard the arguments of the learned counsels for both the parties and gone through the written submission filed.

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The Respondent–Deputy Director is relying upon the non-obstante clause in Section 71 of PMLA to claim priority over their debts due to the Appellant Bank. Section 71 of PMLA reads as under:-

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“The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”

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There is no denial on behalf of respondent that appellant is a Secured Creditor and is entitled to priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or Local Authority.

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The amended provisions of Section 26E of the SAR-FAESI Act, 2002 as amended by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 which reads as under:-

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“26E. Priority to secured creditors. -

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Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or StateGovernment or local authority.”

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The amended provisions of Section31B of the Recovery of Debts due to Banks and Financial' Institutions Act, 1993 as amended by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment)Act, 2016 which reads as under:-

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“31B. — Priority to secured creditors.

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Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realize secured debts due and payable to them by sale of assets, over which security interest is created, shall have priority and shall be paid in priority over all other debts and government dues including revenues, taxes, cesses and rates due to the Central Government, StateGovernment or local authority.”

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It was brought to our notice of this Tribunal that the above mentioned provisions had come into force w.e.f. 16.08.2016, empowering this Appellant Bank to have priority over the mortgaged property.

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The Hon'ble Supreme Court, wherein it has been categorically held that if non-obstante clause is contained in two enactments, the nonobstante clause in the later enactment shall prevail over the nonobstante clause in the earlier enactment.In the case of Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd. (2001) 3 SCC 71, the Supreme Court was considering the effect of the non-obstante clause contained in Section 32 of the Sick Industrial Companies (Special Provisions) Act, 1985 and Section 13 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

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The Hon'ble Supreme Court has categorically held that the nonobstante clause in the later Act must prevail over the non-obstante clause in the earlier Act. The following is the relevant portion of the decision of the Hon'ble Supreme Court :-

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“9. It is clear that both these Acts are special Acts. This Court has laid down in no uncertain terms that in such an event it is the later Act which must prevail”

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The Hon'ble Supreme Court, while deciding this issue unequivocally, was pleased to uphold its own catena of decisions echoed earlier, which are reported in-

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(i) AIR 1956 SC 614 - Ramnarayan vs. Simla Banking andIndustrial Company Ltd.

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(1977) I SCC 750 - Sarvan Singh vs Kasturi Lal

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(1993) 2 SCC 144 = Maharashtra Tubes Ltd. vs State I ndustrial Investment Corporation of Maharashtra Ltd. (iv) (2000) SCC 406 - Allahabad Bank vs. Canara Bank

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The Hon'ble Supreme Court in the said case of Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd. has approved the decision of the Special Court rendered by the Hon'ble Mr. Justice Variava, as he was then of the Bombay High Court reported in (1997) 89 Comp cases 547 clarifying that the non-obstante clause in the later enactment will prevail over the non-obstante clause in the earlier enactment.

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The following is the relevant portion of the decision of the Special Court, as appearing at Para 10 of the said Supreme CourtJudgment:-

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“Where there are two special statues 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 nonobstante 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 inthe later enactment that the provisions of the earlier enactment continue to apply.”

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The afore-stated principle laid down by the Hon'ble Supreme Court has been followed by the Full Bench of the Hon'ble Madras High Court in a recent decision dated 10.11.2016 in W.P. Nos. 2675 (authored by

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Hon‘ble Mr. Justice S.K. Koul, who is now the Hon‘ble Judge of Supreme Court). TheAssistant Commissioner (Commercial Taxes) Vs. Indian Overseas Bank], in which the Hon'ble High Court upheld the provisions of the amended Section 31B of Recovery of Debts due to Banks and Financial Institutions Act, 1993. The following is the relevant portion of the said decision:-

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“3. There is, thus, no doubt that the right* of a secured creditor to realize secured debts due and payable by sale of assests 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 LocalAuthority.”

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The said principle laid down by the Hon'ble Supreme Court has also been followed by the Hon'ble Madras High Court in another decision dated 22.12.2016 in W.P. No.27504 of 2015 and has upheld the provisions of the amended Section 26E of SARFAESI Act. The following is the extract of the relevant portion of the said decision of the Madras High Court:-

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“8. Concededly, the mortgage in favour of the petitioner Bank was created on 26.05.2005, which was prior to the date of attachment. The date of attachment, as indicated above, was 19.01.2015. To be noted, attachment entry was made by respondent No. 3, on 13.08.2015. This apart, the matter is now put beyond the pale of doubt, as during the pendency of the writ petition, an amendment has been made to the 2002 Act with the insertion ofSection 26E. "

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26 . It is clear from the material placed on record that the Appellant - Bank being a Secured Creditor, since it had lent its own money to the Predicate Offender earlier, is entitled to priority over all other debts and government dues, including revenues, taxes, cesses and rates due to the Central Government, StateGovernment or local authority. Hence, the

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Respondent - DeputyDirector has no power to attach the property of the mortgagors.

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The Hon'ble Andhra Pradesh High Court in the case of B. Rama Raju vs. Union of India &Ors. reported in (2011) 164 Comp Cases 149 in which the Hon'ble High Court has held that if the Adjudicating Authority is satisfied as to the bona fide acquisition of property, it should relieve such property from provisional attachment by declining to pass anOrder of confirmation of the provisional attachment.

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The following isthe relevant portion of the Para 103 of the said decision passed by theHon'ble Andhra Pradesh High Court :-

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“103. Since proceeds of crime is defined to include the value of any property derived or obtained directly or indirectly as a result of criminal activity relating to a scheduled offence, where a person satisfies the adjudicating authority by relevant material and evidence having a probative value that his acquisition is bona fide, legitimate and for fair market value paid thereof the adjudicating authority must carefully consider the material and evidence on record (including the Reply furnished by a noticee in response to a notice issue under Section 8(1) and the material or evidence furnished along therewith to establish his earnings, assests or means to justify the bona fides in the acquisition of the property); and if satisfied as to the bona fide acquisition of the property, relieve such property from provisional attachment by declining to pass an order of confirmation of the provisional attachment.

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The AdjudicatingAuthority also has no power to confirm the Attachment under Section8(2) of PMLA. Similarly, it is a simple case of recovery by the Appellant-Bank from its Borrower its own stressed Asset,

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since the Bank had already lent the money owned by it, which the Bank is entitled to recover the same.

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The principle laid down in the above decisions of the Hon'ble Supreme Court and the Hon'ble Madras High Court has been followed by this Appellate Tribunal, Prevention of Money Laundering Act, New Delhi, in its catena of decisions, including the decision dated 14.07.2017 in a batch of Appeals filed by various Banks, namely, the State Bank of India vs. The Joint Director Directorate of Enforcement (and connected Appeals) against the Provisional Attachment Order. The Tribunal has held that as per the amended provisions of Section 26E of SARFAESIAct and 31B of the Recovery of Debts due to Banks and Financial Institutions Act, 1993, a secured creditor will have 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 accordingly, set aside the Provisional Attachment Orders.

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The following are the relevant paragaphs of the said Judgment

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dated14.07.2017

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“46. In the present case, it is undisputedfact that the attached property were purchased much prior to the period when the facility of loan was sanctioned to borrowers. The Bank whilerendering the facilities were bona fide parties. It is not the case of the respondent that the attached properties were purchased after the loan was obtained. The mortgage of the properties were done as bona fide purposes. None of the bank is involved in the scheduledoffence.

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In view of the entire gamut of thedispute, we are of the considered opinion that the conduct of the banks are always bona fide. Both banks are innocent parties.

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Thus in the present case even thoughthe Ld. Adjudicating Authority had all the reasons to believe that the above mentioned were mortgaged to the Appellant Bank and that the

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Appellant/SBI had prior charge over the subject matter — 5 properties ;still the Ld. Adjudicating Authority confirmed the provisional attachment order of the respondent no. 1 and thus causing huge loss to the appellant SBI.

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We also find that the Adjudicating Authority has not examined the law on mortgages and securities.

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The property of the Appellant bank cannot be attached and confiscated when there is no illegality or unlawfulness in the title of the appellant.

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The respondent has no lien over thesaid properties as the appellant banks are now the legal transferees ofthe saidproperties.

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From the entire gamut of the matter, we are of the view that there is no nexus whatsoever between the alleged crime and the two banks who are mortgagees of all the properties which were purchased before sanctioning the loan. Thus no case of moneylaundering is made out against banks who have sanctioned the amount which is untainted and pure money. They have priority as secured creditors to recover the loanamount/debts by sale of assets over which security interest is created, which remains unpaid.”

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This Tribunal in the above Judgment dated 14.07.2017 has also relied upon its own earlierJudgment dated 22.06.2017 in the case Indian Performing Right Society Ltd. vs. The Deputy Director, Directorate of Enforcement,Mumbai, wherein the Tribunal held as

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follows :-

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―55. Whether innocent party whose properties i.e.movable or immovable are attached can approach the Adjudicating Authority for release of attached property.

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"The Scheme of Prevention of Money Laundering Act clearly provides the mechanism whereby the innocent parties can approach the Adjudicating Authority for the purpose of release of properties which have

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been attached in terms of the provisions ofSection 5 of the Act. This can be seen by reading Section 8(1) and the proviso to Section 8(2) of the Act whereby Adjudicating Authority has to rule whether all or any of the properties referred to in the notice are involved in money laundering or not.

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In the present case, this Appellant - Bank is an innocent party since it had already lent its own money to the Predicate Offender and the property in question being mortgaged to the Bank which is provisionally attached by the Respondent— Deputy Director ought to have been released by the Adjudicating Authority under Section 8(2) of PMLA.

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The Adjudicating Authority did not appreciate that the afore mentioned moveable/Immoveable property cannot be said to have been acquired out of ― proceeds of crime ‖as defined in section 2 (1) (u) of the Prevention of Money Laundering Act (PMLA), 2002 and therefore, the same (cannot be Attached under Section 5 of the PMLA by the Enforcement Directorate vide PAO No 03/2018 dated 28.03.2018.

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Only this Tribunal has got the jurisdiction to examine the PAO or confirmation of attachment. It has come to the notice of this Tribunal that when many writ petitions are filed by aggrieved parties including banks in the High Courts, it is always the stand of the respondent that the jurisdiction of validity of attachment could be examined by this Tribunal. Accepting the stand of the respondent, writ petitions are disposed off with liberty to approach this Tribunal who is competent to decide the said issue. Thus, there is no force in the submission of the respondent that this Tribunal has no jurisdiction to grant the prayers of the bank.

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It has come on record that the Respondent No. 2 to 6 are charged of money laundering, the property which is mortgaged with the bank is much prior to the alleged date of crime. Therefore, the interest of the Bank and general public at large ought to be protected rather.

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The Adjudicating Authority held that the total of Rs. 86.40 Crores is the proceeds of crime in the matter and since the same is not available for provisional attachment, 9 properties of the Respondent No. 2-6, including 2 properties mortgaged with the Appellant Bank are provisionally attached for a period of 180 days. The second proviso to Section 5(1) enables the Competent Authority to attach ―any property of any person‖, the word ―property‖ should be understood only in the context of the definition under section 2(1)(v). Section 5(1) is to be read in consonance with Section 2(1)(v) of the PMLA Act. Consequently, for a property to be attached, following criteria is to be satisfied:

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a) That it was derived or obtained directly or indirectly;

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b) By any person;& c) As a result of criminal activity relating to a scheduled crime.

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However, in the present matter the properties under question were mortgaged with the banks as collateral for working capital facility, the same is obtained by following the procedure laid down under the Banking rules, set out by Reserve Bank of India and is not illegal or as a result of criminal activity. There is no contrary available on record. 38. This Tribunal in State Bank of India Vs. Joint Directorate of enforcement, the Court held that:

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“However in the present cases, the banks are innocent parties. They are not involved in criminal proceedings. If they are asked to await till the trial is over, the systems in these types of cases, the economy would collapse. “

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In the FPA-PMLA-1026/KOL/2015 State Bank of India Vs. Joint

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Directorate of enforcement, Kolkata, the Court held as under:

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“65. From the entire gamut of the matter we are of the view that there is no nexus whatsoever between the alleged crime and the two bank who are mortgagee of all the properties which were purchased before sanctioning the loan. Thus no case of moneylaundering is made out against banks who have sanctioned the amount which is untainted and pure money. They have priority to the secured creditors to recover the loan amount/debts by sale of assets over which security interest is created, which remains unpaid. The Ld. Adjudicating Authority has not appreciated the facts and law involved in these matters and the primary objective of section 8 of PMLA is that the Adjudicating Authority to take a prima facie view on available material and facts produced. All the contentions raised by Mr. Matta have no substance. The provisional attachment in the present matter is bad and against the law.”

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Therefore, in order to recover the monies taken by the Respondent Nos. 5&6, the only recourse the Bank has is the Mortgaged properties and if the same is attached the Bank will have no other recourse and will lose large amounts without any fault of the Bank. The consequence of the attachment would be borne by the general public and depositors.

¶99

The Bank in its usual course of business provides finance and credit facilities to its customers. The Appellant Bank has therefore no reason to doubt the source for which the money has been borrowed by the Bank.

¶100

In the present case the Respondent Nos. 5&6 had approached the Appellant Bank in the year 2015 and requested the Appellant and Bank of India to constitute a consortium for sum of Rs. 91.00 Crores (Rupees Ninety One Crores only) on the terms and conditions contained in the respective sanction letters of the said banks and also the terms and

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conditions contained in the working capital Consortium Agreement dated 13.03.2015 entered into by and among the borrower and the said banks.

¶103

If the bank is an innocent party and victim from the hand of borrowers, who mortgaged the properties which were not acquired from the proceed of crime, being a secured creditors, the mortgaged properties cannot be attached equivalent to the value thereof if the said properties are not purchased from the proceed of crime or as a result of criminal activity at the time of sanctioning the loan.

¶104

The finding of both authorities are against law for attaching the mortgaged properties without any valid reasons. Banking system cannot be destroyed in this manner.

¶105

It is settled law that the money advanced by them for the purchase of the property cannot be taken to be the proceeds of crime. The Adjudicating Authority is obliged to record a finding to that effect and to allow the provisional order of attachment to lapse. Otherwise, a financial institution will be seriously prejudiced.

¶106

In the light of above, the impugned order dated 24.04.2018 is setaside. Consequently, the provisional attachment order is also quashed as far as Bank is concerned. It is clarified that the Bank has only restricted his prayer qua attachment of mortgaged property. The complaints against the borrowers may continue as per law for which the Bank has no concerned.

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No costs.

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(Justice Manmohan Singh) Chairman

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New Delhi, 28^th March, 2019 ‗skb‘

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FPA-PMLA-2340/MUM/2018 of The Branch Manager Central Bank of India v/s The Deputy Director Directorate of Enforcement, Mumbai

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FPA-PMLA-2340/MUM/2018 of The Branch Manager Central Bank of India v/s The Deputy Director Directorate of Enforcement, Mumbai

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