SARFAESI, RDB And PMLA Must Be Reconciled; Recovery Laws Cannot Prevail Over PMLA: Bombay High Court

The Bombay High Court at Nagpur recently held that the provisions of the SARFAESI Act and the Recovery of Debts and Bankruptcy Act do not override the Prevention of Money Laundering Act, observing that the statutes operate in different fields and must be interpreted so as to reconcile their provisions without defeating the object of the PMLA.

A division bench of Justices M. S. Jawalkar and Nandesh S. Deshpande held, “The objective of the legislation in PMLA being distinct from the purposes of two other enactments viz. RDB Act and SARFAESI Act, the latter cannot prevail over the former.Their objects and purposes are different. Therefore, we confirm the view taken by the Delhi High Court in The Deputy Director Directorate of Enforcement Delhi v. Axis Bank & Ors. (supra) that an order of attachment under PMLA is not rendered illegal only because the secured creditor has a prior secured interest in the subject property.”

The court also clarified that although the PMLA would prevail over recovery laws, the statute itself protects the rights of bona fide third parties such as secured creditors, and attachment under the act does not automatically defeat prior charges.

Explaining how competing claims must be balanced, the bench observed, “Conversely, mere issuance of the order of attachment under PMLA cannot, by itself, render illegal the prior charge or encumbrance of a secured creditor, this subject to such claim of the third party being bona fide. In these conflicting claims, a balance has to be struck. On account of exercise of the prerogative of the State under PMLA, the lawful interest of a third party which may have acted bona fide and with due diligence, cannot be put in jeopardy. The claim of bona fide third party claimant cannot be sacrificed or defeated.”

The court further noted that the PMLA itself provides a mechanism for such claimants to seek restoration of property before the Special Court and that such claims must be examined within the framework of the Act.

Referring to Section 8(8), the bench held, “In section 8(8) of PMLA, power is conferred on the Special Court to direct the Central Government to restore a property to the claimant with a legitimate interest even after an order of confiscation has been passed. ....Thus, the Appellate Tribunal as well as Special Court both have jurisdiction to deal with the order of attachment passed by the Adjudicating Authority. However, if the order of attachment is confirmed or order of confiscation has been passed, or trial of a case for the offence under section 4 of the PMLA is commenced, the claim of a party asserting to have legitimate interest will have to be inquired to and adjudicated upon only by the Special Court.”

The court was hearing appeals filed by the Enforcement Directorate against orders of the Appellate Tribunal under the PMLA, which had set aside provisional attachment of mortgaged properties and allowed banks to enforce their security interest by invoking priority under Section 31-B of the Recovery of Debts and Bankruptcy Act and Section 26-E of the SARFAESI Act.

The tribunal had held that secured creditors were entitled to proceed against the assets on the ground that their charge existed prior to the attachment.

The Central Bureau of Investigation (CBI) had registered an FIR alleging irregularities in coal block allocation involving Grace Industries Ltd. and associated entities. The ED had provisionally attached certain immovable properties, treating them as proceeds of crime under the PMLA.

However, the properties had been mortgaged to banks before the attachment. The banks challenged the action before the Appellate Tribunal, arguing that they had a prior secured charge and were entitled to statutory priority under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act. The tribunal accepted this contention and set aside the attachment, which led the Enforcement Directorate to file appeals before the High Court.

Before the High Court, the Enforcement Directorate argued that the Tribunal failed to give effect to Section 71 of the PMLA, which provides that the Act will have an overriding effect over inconsistent laws, and wrongly treated the attachment of proceeds of crime as if it were the recovery of debts.

It was submitted that the PMLA is a penal statute intended to confiscate tainted property and that the priority given to secured creditors under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act cannot defeat attachment under the PMLA.

The banks argued that the mortgage had been created prior to the attachment and that the property was not derived from criminal activity and therefore could not be treated as proceeds of crime.

The High Court held that the tribunal proceeded on an incorrect assumption that the SARFAESI Act overrides the PMLA and failed to examine whether the attachment was supported by material showing a link with proceeds of crime.

The bench observed, “It appears that the Tribunal proceeded to pass order on presupposition that the SARFAESI Act is having overriding effect on the provisions of PMLA. This presupposition is unsustainable. As discussed earlier, provisions of both the Acts are required to be interpreted so as to reconcile both the provisions.”

The court clarified that a prior secured interest does not by itself invalidate attachment under the PMLA, but the statute provides a mechanism to protect bona fide third-party claims.

Holding that the tribunal had set aside the attachment without examining the material relied upon by the Adjudicating Authority, the court quashed the tribunal's orders and granted liberty to the banks to approach the Special Court under the PMLA, which has the power to consider claims of secured creditors.

For Appellant: K.N.Shukul, DSGI with Advocates P.N.Hardas & Gaurav Khatwani

For Respondent: Senior Advocate M.G. Bhangde, with Advocate S.D.Ingole