With the introduction of the Prevention of Money Laundering (PMLA) Act, 2002 (‘Act’), which was made effective from 01.07.2005, a number of legal issues arose, which required adjudication in various courts and competent tribunals. One such issue which is plaguing the courts is whether the action taken by the authorities under Section 5, 7 and 8 (as the case may be) of the Act will over-ride the valid and bonafide mortgages created in favour of the Banks and Financial Institutions?
In order to dwell on the said issue, it is necessary to look into the objectives with which the PMLA Act was enacted. The Act was made to prevent money laundering in India, to provide for confiscation and seizure of property obtained from laundered money and to deal with connection issues. Keeping the objectives of the Act in mind, powers have been conferred upon the Director / Deputy Director of the Enforcement Directorate under Section 5 of the Act to provisionally attach the properties, which are a Proceeds of Crime, subject to confirmation by the Adjudicating Authority within a period of 180 days.
The Act under Section 2(1)(u) defines the concept of “Proceeds of Crime” which has been stated to mean any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property;
And recently vide Amendment Act, 2019, notified on 01.08.2019, the following explanation was added to further clarify the concept of proceeds of crime:
[Explanation – For the removal of doubts, it is hereby clarified that “proceeds of crime” include property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence]
From the above definition and the amendment, it is clear that proceeds of crime refer to
(i) any property derived or obtained by any person directly or indirectly, or the value thereof,
(ii) as a result of a criminal activity relating to a scheduled offence (offences provided in the schedule to the Act), or
(iii) in case such property is held or taken outside the country, then property equivalent in value held within the country.
It is clear that the property which is not derived or obtained as a result of a criminal activity relating to the scheduled offence and/or is not taken outside the country cannot be the subject matter of the proceedings under the Act. The amendment further clarifies that such property which is not only derived or obtained from the criminal activity but derived or obtained as a result of the criminal activity relating to the scheduled offence is also included as proceeds of crime.
Hence, the Director must attach only such properties, which are proceeds of crime and not properties, which are outside the purview of the definition as mentioned above. The necessary corollary, thus, is that the property acquired prior to the offence period, and not put in use for the criminal activity relating to the scheduled offence cannot be attached as proceeds of crime.
‘Reason to Believe’ & ‘Material in Possession’
Further, the Act mandates that the Director under Section 5 of the Act and Adjudicating Authority under Section 8 of the Act, must have
(i) reason to believe (which reason must be specifically recorded in writing) and
(ii) have the material in possession to evidence that the property, which is the subject matter of attachment is a proceed of crime.
The use of the term ‘reason to believe’ and ‘material in possession’ clearly shows that the authorities under the Act must apply its mind to the situation, before attaching any property as a proceed of crime. We find that reason to believe has been defined under Section 26 of the Indian Penal Code, 1860, which reads as under:
“Reason to Believe”.—A person is said to have “reason to believe” a thing if he has sufficient cause to believe that thing but not otherwise.
The Hon’ble Delhi High Court had the occasion to deal with this issue, and it was held in the judgment of J. Sekar Vs. Union of India, (2018) 246 DLT 610 as under:
“Reasons to believe cannot be a rubber-stamping of the opinion already formed… The officer… has to independently apply his mind…
A rubberstamp reason can never take the character of ‘reasons to believe’…”
The Court held that both sets of reasons recorded—under Sections 5(1) and 8(1)—must be shared with the noticee, failing which the entire proceedings are illegal and void.
Thus, the enforcement directorate or the adjudicating authority must have good reasons, recorded in writing, based on material in possession. Merely stating that the director “has reasons to believe” without material renders the attachment order non-est.
Banks & Financial Institutions: The Core Issue
The question now arises:
Will the PMLA override valid mortgages created in favour of Banks/Financial Institutions?
In The Deputy Director Vs. Axis Bank (2nd April 2019), the Hon’ble Delhi High Court held that a property mortgaged to a Bank—giving the Bank the right to enforce the security—can still be attached under PMLA, and that the authorities have the power to attach any alternate property of equivalent value.
This matter is now before the Hon’ble Supreme Court.
However, the judgment does not discuss the prior Division Bench judgment in J. Sekar, where it was clearly held that:
- Alternate attachable properties not being proceeds of crime
- cannot be attached under Sections 5 and 7 of the Act.
Thus, the Single Judge’s view may not be the correct position of law.
Impact of IBC Amendment (Section 32A)
The amendment inserted Section 32A into the Insolvency and Bankruptcy Code, giving the IBC an overriding effect over statutes like the PMLA, in so far as it protects the Corporate Debtor from prosecution for pre-CIRP offences.
This is a major development affecting all Banks/Financial Institutions dealing with distressed assets.
Before ending, I must refer to two important judgments of the PMLA Tribunal:
- Punjab National Bank v. The Deputy Director, Directorate of Enforcement
- M/s PMT Machines Ltd. v. The Deputy Director, Directorate of Enforcement, Delhi
In both, the Tribunal held:
Properties mortgaged to Banks/Financial Institutions long before the commission of the offence cannot be attached or confiscated.
Conclusion
The legal position is not settled yet since the Supreme Court is seized of the matters. However, my view is:
Properties of the accused cannot be attached as alternate attachable properties under the Act when such properties were mortgaged to the Bank much prior to the commission of any offence.
This article was originally authored by Mr. Kunal Tandon during his tenure at Tandon & Co. Please note that Tandon & Co. has since been merged with Aretha Legal through its Partner, Ms. Aanchal Tandon.
