Judgment Summaries (High Court) The Deputy Director Directorate of Enforcement Delhi v. Axis Bank & Ors.

  March 3, 2022

The Deputy Director Directorate of Enforcement Delhi v. Axis Bank & Ors.

CRL.A. 143/2018 & Crl. M.A. 2262/2018

High Court of Delhi, Decided on 02.04.2019

It was a common verdict on 5 appeals u/s 42, Prevention of Money Laundering Act, 2002 (‘PMLA’) against similar orders passed under PMLA. In all the cases, the property attached by the authorities were not the derivatives/consequences of money laundering (‘untainted properties’). Instead, the authorities, having failed to recover/attach the properties obtained consequent to money laundering (‘tainted property’), sought to attach legitimately acquired properties (i.e., untainted properties) of the same value as of the pecuniary advantage gained by money laundering. 

In all cases, third-party creditors/banks had held legitimate interests over the attached untainted properties, that they sought to enforce. Thus, the legal issue was to resolve the conflict between the sovereign right of the state to take away and confiscate the property belonging to the money launderer and the claims of third-party bonafide acquirers of certain interests in those properties. Further, since the third-parties/creditors sought to enforce their security interests in the properties under RDBA, SARFAESI and IBC, therefore, another issue was whether these laws would have primacy over the PMLA.

  • Whether IBC, RDBA and SARFAESI prevail over PMLA?

On the issue on whether IBC, RDBA, SARFAESI, all having ‘overriding effect’ clauses, would prevail over PMLA or not. The court, discussing the objectives of these three laws vis-à-vis the objectives of the PMLA, concluded that the objects, reasons, text, etc. of these four laws are different and they all operate in different fields. Therefore, there is no overlap, and hence, these three laws do not override PMLA. 

  • ‘Proceeds of crime’ under PMLA

The court discussed that as per Section 2(1)(u), PMLA, the ‘proceeds of crime’ that the government can attach/confiscate includes (a) tainted property, i.e., the property derived directly or indirectly as a result of scheduled criminal offences, and (b) untainted property, i.e., that includes (a) a property of equal value to that of the tainted property, and (b) if the tainted property is situated abroad, then a property of equivalent value located in India or abroad. The court held that it is lawful for the authorities to confiscate the untainted property if the tainted property cannot be traced. However, in these situations, disputes arise when a third-party has acquired lawful interest in the untainted property either before the commission of money laundering, or after such commission but before the attachment under PMLA. 

 

  • Bonafide third-party claims over untainted property attached as ‘proceed of crime’

The court observed at the outset that an attachment order under PMLA is as lawful as an action initiated by a bank/financial institution/secured creditor for recovery of legitimate dues. Therefore, a PMLA attachment is not illegal just because a secured creditor has the first charge over the property. However, simultaneously, an attachment order cannot per se make illegal any prior bonafide encumbrance over the untainted property. A balanced approach is required in resolving this conflict.

The scheme of PMLA itself provides sufficient safeguards to bonafide third-party interests. For example, Section 8(8), PMLA provides that a person claiming ‘legitimate interest’ can argue that he acted in ‘good faith’, taking ‘reasonable precautions’, himself was ‘not involved in money-laundering’, and seek a release/restoration of the property. Pursuant to such claim, the confiscation may be restored. However, the burden of proof to prove his bonafide lies upon the person claiming so, by rebutting the Section 23/24 presumption. The law also presumes the possibility of third-party interests in the property of the wrongdoers. If the third-party interest lies over a tainted property, the same, even if bonafide cannot lead to the restoration of confiscation/attachment as the PMLA vests a property post attachment ‘absolutely in the Central Govt. free from all encumbrances’. The third-parties can then only sue the wrongdoer for damages. 

However, if the third-party interest lies over an untainted property, the bonafide third-party can approach the adjudicating authority under Section 8(8), PMLA seeking a release order. But even in untainted property, if the bonafide interest is acquired anterior to the commission of criminal activity, such interest cannot be defeated by an attachment of the said untainted property. However, the attachment order would still remain operative, but only for that part of the value of the property as exceeds the claim of the third party. In some other situations, third-party may seek to enforce his security interest before the attachment order. In such situations also, the PMLA attachment order shall remain valid, but only over the value of the property in surplus to the claim of the third party. However, once the newly introduced Sections 26-B-26-E under the SARFAESI Act are enforced, the secured creditor would not be entitled to enforce his security interest unless he is registered. This would be true for a Section 8(8), PMLA application as well.

  • Are ‘proceeds of crime’ debt due and payable to the government?

An argument was raised that the entitlement of government over the ‘proceeds of crime’ under PMLA amounts to a ‘debt’ due/payable to the government. However, the court, refusing to accept this argument, held that the relationship between the government and the money launderer is not that of creditor-debtor. Considering the state to claim the proceeds of crime as a creditor would amount to giving the illicitly acquired assets a colour of legitimacy/lawful earning. Instead, the idea behind confiscation/attachment is to take away what has been illegitimately secured under PMLA. Therefore, the proceeds of crime cannot be treated as ‘debt’, ‘tax’, ‘cess’, ‘revenue’, etc. Hence, the government’s right to attach/confiscate the property cannot take a backseat by a precedence of the interests of ‘secured creditors’ under IBC, SARFAESI, RDBA over the property.

  • Moratorium under Section 14, IBC to not affect actions under PMLA

The court held that the Section 14 moratorium would not restrain the authorities under the PMLA from depriving a person (be it the debtor) of the proceeds of crime. Holding contrary would defeat the objectives of PMLA as it would allow the creditors to satisfy their debts from the proceeds of crime, that did not lawfully belong to the debtor to begin with. However, this conclusion was drawn only when the underlying property was a tainted property. Regarding untainted property, the court came to a different conclusion as discussed hereinafter.

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