Court Rules PMLA Provisions Override SARFAESI and RDB Acts in Confiscation of Crime Proceeds
In a significant ruling, the Bombay High Court, Nagpur Bench, has upheld the provisions of the Prevention of Money Laundering Act (PMLA), 2022, asserting its precedence over the Recovery of Debts and Bankruptcy Act (RDB Act) and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) in matters concerning the attachment of properties deemed as "proceeds of crime."
The bench, comprising Justices M.S. Jawalkar and Nandesh S. Deshpande, delivered this verdict in the case of the Joint Director of the Enforcement Directorate versus HDFC Bank Ltd. and others. The appeals were filed challenging the orders of the Appellate Tribunal under the PMLA, which had previously favored the secured creditors by permitting the enforcement of security interests over the attached properties.
The court emphasized that the distinct objectives of the PMLA, aimed at confiscating proceeds of crime, give it an overriding effect over the RDB and SARFAESI Acts, which are primarily concerned with the recovery of debts. The bench clarified that secured creditors could not claim priority over properties attached under the PMLA, as the latter is a special penal statute designed to address and confiscate tainted assets.
The case stemmed from an FIR registered by the Central Bureau of Investigation against Grace Industries Ltd., leading to the attachment of properties by the Enforcement Directorate, which were allegedly obtained through wrongful financial gains from coal block allocations.
The court noted that properties classified as "proceeds of crime" under the PMLA cannot be released to secured creditors merely on the grounds of statutory priority under the RDB and SARFAESI Acts. It highlighted the PMLA's overriding clause, section 71, which asserts its precedence over other conflicting laws.
Furthermore, the bench reaffirmed that the Special Court under the PMLA holds the authority to address claims related to the restoration of attached properties, ensuring that bona fide third-party interests are protected, provided they have acted in good faith and are not involved in money laundering.
The judgment underscores the legal principle that while the RDB and SARFAESI Acts provide mechanisms for debt recovery, they cannot undermine the confiscatory objectives of the PMLA, especially when dealing with assets acquired from criminal activities.
Bottom Line:
The provisions of the Prevention of Money Laundering Act (PMLA) have overriding effect over the Recovery of Debts and Bankruptcy Act (RDB Act) and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) due to their distinct objectives. Secured creditors cannot claim priority of interest over properties attached under PMLA.
Statutory provision(s): Prevention of Money Laundering Act, 2022 Sections 2(1)(u), 5, 8(3), 8(8), 42, 71; Recovery of Debts and Bankruptcy Act, 1993 Section 31-B; Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Section 26-E.
