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Bonafide Purchaser And White Collar Crimes

Aastik Dhingra
27 Aug 2020 7:00 AM GMT
Bonafide Purchaser And White Collar Crimes
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The scourge of financial crimes has seen a rapid growth where an act/omission leads to illegal gains and ends with laundering of the illegal money to be portrayed as untainted. Money laundering involves a thick web of transactions with the objective of introducing the money in the financial system without the same being identified as illegal. Once in the financial system, they would lose the character of being illegal and can be used in ordinary business. Many a times innocent buyers (mostly subsequent buyers) who are not aware of the criminal antecedents of the property are caught in the middle of these transactions and could be at severe loss due to no-act of their own. The plea of a bona fide purchaser is essentially to protect such innocent purchasers. Section 41 of the Transfer of Property Act, 1882 provides with the doctrine of bona fide purchase.

WHO IS A BONAFIDE PURCHASER?

The Sale of Goods Act, 1930 defines buyer as anyone who buys or agrees to buy goods; while a seller is someone who wants to sell goods. In general parlance a buyer and a purchaser can be used interchangeably. The Transfer of Property Act defines sale under Section 54 as a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised, transfer of ownership includes a definite exchange for a price. However, the exception to the same is provided under Section 122 wherein a gift is valid without consideration as well. The Merriam Webster Dictionary defines a bona fide purchaser as a purchaser who purchases in good faith without notice of any defect in title and for a valuable consideration.[1]

Legally to constitute a bona fide purchaser, it must be shown that with the consent of the true owner, the ostensible owner was able to represent himself as the owner and the purchaser had no notice.

Thus, the key components in order to seek the defence of a bona fide purchaser are

  1. Representation by the ostensible owner to be the real owner and requisite enquiry,
  2. The purchase was with value i.e. valuable consideration, and
  3. The absence of notice or knowledge of the transferor being not the real title holder.[2]

Therefore, a property received as gift or for an undervalued consideration, will not be considered to be a bona fide purchase.

The general rule in a transaction is "Nemo dat quad non habet" i.e. nobody can give a title better than what he himself possesses. However, the courts have time and again carved exceptions to this rule based on equity to protect the rights of the innocent subsequent buyers in situations of equitable estoppel and fraudulent conveyances.[3] The  Supreme Court in V Chandrasekaran Vs. Administrative Officer held that in order to get the exception of the general rule the transfer must be in good faith for value, and there must be no misrepresentation or fraud, and the property is purchased after taking reasonable care to ascertain that the transferee has the requisite power to transfer the said land, and finally, the parties have acted in good faith.

The subsequent buyer must make enquiries from the relevant persons other than the owners or title holders such as person who are in possession of the property who may be having a pre-emptive right over the land. Failure towards the same may dispel the subsequent purchaser from the title of being a bona fide purchaser. The said principle was followed by the  Supreme Court in R.K. Mohammed Ubaidullah & Ors Vs Hajee C.Abdul Wahab (D) & Ors. It was imperative to weigh in the equities and balance out the interests and protect the right of the subsequent purchaser only when one has acted in complete good faith. The courts being aware of the notoriety, the test of good faith is a strict and accepted only when the person is able to establish every component. As a result, the claimant is entitled to the property only when one strictly fulfils the requirements of making bona fide enquiries as a man of reasonable prudence should do, payment of reasonable consideration and as a result has no notice of defective title.

The acts such as The Prevention of Money Laundering Act (PMLA), The Fugitive Economic Offenders Act (FEO), The Benami Transactions (Prohibition) Act (Benami Act) etc. enable the investigation officer to make attachments where she/he has reasonable belief that the property constitutes proceeds of crime. The legislature cannot be oblivious towards the rights of people who obtained the rights under bona fide belief without being privy to any clandestine activities by the perpetrators of crime. Therefore, if it is proved that the property was purchased under a bona fide it shall be restored after due process to a person with a bona fide interest. The confiscations under these sanctions without first providing an opportunity of being heard to the holder of the property may seem authoritarian, however, certain safeguards provide for some relief to ensure rule of law and safeguard the economic interests of the nation.

The definition of proceeds of crime especially under PMLA is wide and includes the properties which have values equivalent to the proceeds of crime. Thus, a bona fide purchase will not be a valid defence in case the involvement of the accused is definite. However, the third parties can validly use the shield of a bona fide purchase where the transfer has not been made with an intention of defeating the proceedings i.e. lawfully and for adequate consideration. However, no party can seek default right over the property in question. Even a secured creditor including that of a bank cannot claim an automatic right and must to prove the bona fides before having a successful claim for restoration of the attached property.

CIVIL AND CRIMINAL FORFEITURE

The nature of sanction depends on the act itself, which enables the legislation to divide the acts into civil or criminal. In a civil wrong the sanctions aim to achieve damages or compensation for the party that has been wronged. Whereas, in criminal law the aim is to punish the wrong doer while there are some sanctions could be quasi criminal/civil in nature. To simplify, civil sanction aides the injured while a criminal sanction hurts the enabler/wrong doer. Another parameter to decide upon the sanctions are that while civil injuries affect the rights of an individual while a criminal wrong affects the society at large. The  Supreme Court stated that a wrong punishable with criminal sanctions must be a public wrong against society as a whole which would justify public censure.[4]

The Allahabad High Court observed that "Penalty is a civil sanction. So is interest. The object of both is to render evasion or infraction of the law unprofitable, and to secure to the state compensation for damages caused by attempted evasion. Prosecution resulting in fine and/or imprisonment is a criminal sanction"[5] However, the Calcutta High Court differed in it stating that interest is not for an infraction of law but a form of damages due to passage of time for non-performance. Thus, attaching a form of sanction is largely dependent on the nature of the act.[6]

Forfeiture or confiscation of a property could be both a civil as well as a criminal sanction. The nature of sanction depends on its treatment in a particular law. It is important to understand that a civil forfeiture is an action in rem, while a criminal forfeiture is an action in personam. In American Jurisprudence, a civil forfeiture the authorities can seize the property without providing the possessor a benefit of doubt and the possessor has to prove that the purchase was bona fide, while in a criminal sanction the burden lies on the government to prove the guilt before the property could be forfeited.

Usually, civil sanctions are attached when personal rights are affected such as non-performance of obligations by a party, like in real estate transactions where forfeiture of earnest money is very common. However, for a criminal sanction the forfeiture happens after the guilt has been proved. The Indian Penal Code under Section 53 also provides forfeiture of property under punishments thereby categorically establishing confiscation as a criminal sanction as well.

The statutes which are enacted to curb the menace of financial crimes provide for attachment based on reasonable belief that the property may be connected, directly/indirectly, to a criminal activity, with the objective of preserving the proceeds of crime. The accused is afforded an opportunity to present her/his case by showing that the purchase is bona fide and can claim restoration of the property. The attachment herein carries a civil sanction and not a criminal sanction. However, once the guilt is proved the property stands seized and it then becomes a criminal sanction. The  Delhi High Court, stated that the sanction attached with the forfeiture as envisaged in the acts to prevent the economic offences is civil in nature with a nexus with the criminal offence"[7].

A purchaser who lays the claim of a bona fide purchaser has the option of making the said claim before the adjudicating authorities, however, the investigating officer does not have to provide them a hearing and is empowered to provisionally attach on a mere suspicion. However, the reasons are compulsorily to be recorded in writing, therefore it leaves out the scope of arbitrariness in the procedure. Besides that, the purchaser has the option of challenging the attachment before the Appellate Tribunal as well. However, the courts are handed a difficult task of keeping the investigating officers in check, if not, the whole purpose of justice would be defeated.

  • The Benami Transactions (Prohibition) Act

Ursula K. Le Guin said "to make a thief, make an owner; to create crime, create laws".[8] The Benami Act was implemented to curb the practice of hiding the unaccounted money into properties by way of benami transactions. Till 1998 benami transactions were not illegal and were often used for tax avoidance. However, there was a rise in mala fide transactions leading to tax evasion and benami transactions were used for parking illegal gains. Therefore, an act prohibiting the benami transactions was first passed in the year 1988 and was subsequently amended in the year 2016.

A benami transaction is when the person in whose name the property is bought is a "dummy front" while the funds and the benefits of the property are made/used by a third party who remains undisclosed. The dummy front is the benamidaar and the subject property is the benami property. The inception of benami transactions can be traced to purchases done for the benefit of family members or for people with fiduciary relationship etc. Therefore, certain transactions are provided exemption under the act as well and if proved to be falling in those categories they will not be benami but bona fide transactions. The  Supreme Court has in various judgments provided the following parameters for ascertaining the nature of the property if benami or not, however, the list not being exhaustive.

  • Source of money to be a third person for whose benefit property is alleged to be held,
  • Intention of the parties which can be ascertained from surrounding circumstances,
  • Possession of the title-deeds.[9]

In order to balance the rights of bona fide individuals and public at large simultaneously, the benami act provides the bona fide purchaser with a right to show that his/her property falls within the exceptions as provided by the Act and/or that of a bona fide purchaser.

Under section 24(1) read with section 24 (3) of the Act, the initiating officer with the permission of the approving authority, attach the property if he has reasons to believe that the property is held by a benamidaar and that he/she may dispose of the same. The person who purchases from the benamidaar has an imperfect title. However, if the purchaser proves that the purchase was made after required due diligence, for a reasonable value without notice of the benami nature of the property, she/he shall have the protection under Section 41 of the Transfer of Property Act.[10]

In a recent judgment of the  Income Tax Appellate Tribunal, the tribunal weighed in the judgments and ascertained that prior to the amendment the burden of proof was on the prosecution authorities to prove the property to be a benami property. However, after the amendment the same is on the possessor. The Tribunal further held that when the initial burden of proof is discharged by the person claiming the transaction to be bona fide by showing relevant documents such as sale deed and loan document the onus shifts on the Initiating Officer who is taking a contrary view with regard to Section 91 and 92 of the evidence act.[11] The possessor of the property can defend his property from attachment by either showing the authorities that he does not fall under the categories of a benamidaar or by showing that though he bought the property from a benamidaar but at the relevant time he had no knowledge of the same and had bought the property for reasonable value.

  • Prevention of Money Laundering Act (PMLA)

The PMLA was enacted with the object of curbing the menace of money laundering. The act has been useful tool for reining the malice of black money and financial crimes in the past few years. However, one of the foremost challenges remain in identification of the proceeds of crime which is defined under Section 2(u). The ambit of the proceeds of crime under the section is very large and covers properties derived/obtained as well as directly or indirectly be derived/obtained as a result of any criminal activity relatable to the scheduled offence. In furtherance of the objectives, the act empowers a deputy director under Section 5 to provisionally attach a property which he has reasons to believe that proceeds of crime are likely to be concealed, transferred or dealt with in a manner which will frustrate the proceedings. Further, under Section 8 the adjudicating authority after the provisional attachment the authority after due procedure and considering the reply has the right to confirm the order of provisional attachment.

It is imperative to mention that in case the property is held by a person not the accused, the authority is supposed to send a notice to her/him as well. This act under Section 8(8), provides an opportunity of restoration of property if the same has been obtained under a bona fide interest. The section itself mandates that the special court may direct the government to restore the property of a claimant with legitimate interest, provided the claimant acted in good faith and had taken reasonable precautions and has no role in any illegal activity.

That without doubt, the burden of proof is on the person claiming who is taking the defense of a buyer under good faith. In a recent case, the  ATPMLA, restored the property of the Appellant wherein, he was successful in proving that his property has no link with the alleged illegal activity and has paid valuable consideration for the properties in question.[12]

The  Delhi High Court has further crystallized the law under the PMLA by deciding the rights/claims of third parties which emanate from legitimately created encumbrances. Here the  Court decided the rights of the government to confiscate properties which bear the reasonable belief of connection with illegal activities in respect of the honest parties who obtain rights in those properties without being aware of the illegal origins of the property. The  Court[13] held that the legislature has made the forfeiture to be a civil sanction in such proceedings where the holder of the property has to show that he/she acquired the property for legitimately after reasonable due diligence for an adequate consideration. At this point, a perusal of section 23 would show that there is a presumption of inter-connectedness of the transactions which makes it clear that presumption has to be dispelled by the holder of the property.

  • The Fugitive Economic Offenders Act (FEO)

The FEO defines a fugitive economic offender under Section 2(f) against whom a warrant of arrest in relation to a scheduled offence has been issued by a court in India who has fled the country and refuses to return for facing the prosecution, threshold being Rs. 100 Crore. On declaration of a person being a 'fugitive economic offender' the special courts are at liberty to confiscate proceeds of crime anywhere in the world whether the property is owned by the fugitive economic offender and any other property benami or otherwise held by the fugitive economic offender. The ambit of confiscation is wide and covers properties even in the possession of third parties. Therefore, the act travels on sensitive contours which could create tremendous financial trouble. However, the legislature has been careful of the complexity of confiscation of properties of innocent purchasers and thus has provided for an exception under Section 12(7) for bona fide purchaser, who can claim restoration of their property if they are successful in proving that they are holding the property under a bona fide title. Though, the Act is recent and the two persons who have been declared fugitive economic offenders under the act are Mr. Vijay Mallya and Mr. Nirav Modi.

While considering the petition of Mr. Vijay Mallya wherein the counsel for Mr. Vijay Mallya stated the law to be draconian and harsh, the Bombay High Court stated that the situation in itself is harsh which the act is trying to handle.[14] Further, the Delhi Court in the Axis Bank Judgment stated that even this Act for the purpose of attachment carries a civil sanction and not a criminal sanction.

BONA FIDE PURCHASER: A BALANCED DEFENCE OR A FORMALITY

In my opinion, the law as scribed by the legislature is balanced, especially when the adversary is one with incredible know-how. It is important to trace and get hold of the property in order to ensure that the illegal money does not slip into channel from which the recovery will be impossible. It is for these reasons that the investigation authorities are empowered with wide powers. As Leo Tolstoy said, "Writing laws is easy, but governing is difficult." One may write the best law but the difficulty arises in its interpretation. Though the legislature has been careful in providing checks and balances, accountability is easily scorned off by the investigating agencies on many levels. The difficulty arises in its adjudication wherein a number of prejudices are at play. As the famous saying goes 'that power corrupts and absolute power corrupts absolutely', the powers could be disastrous for individuals and the economy as well. The Indian judicial system provides appeals at various levels to ensure that innocent should not be persecuted. However, the cost at which all these remedies are available may not be feasible for everyone. Therefore, though the legislature has provided for genuine defence for bona fide purchasers while keeping an air-tight legislation for preventing financial crimes, there is a need for ensuring that when these officers present reasons to believe for attachment the same should not be imaginary and mildly probable, they should be of substance which should bend the curve in favour of the prosecution. The reasons to believe being the benchmark for a provisional attachment should not be allowed to be arbitrary and certain definite parameters should be introduced to protect the same. Having said that the law on the subject is still being shaped and has a long way to go.

Views are personal only.

[2] Seshumull M. Shah Vs. Sayed Abdul Rashid AIR 1991 Kant 273

[3] P. James, introduction to English Law 10 (3d ed.1955)

[4] Joseph Shine Vs Union of India – 2019 3 SCC 39

[5] Saraya Sugar Mills Vs CIT 116 ITR 387,391

[6] Balrampur Sugar Co. Ltd. Vs Commissioner Of Income-Tax 1982 51 STC 38 Cal

[7] The Deputy Director, Directorate of Enforcement Vs. Axiz Bank & Ors. CRL.A. 143/2018

[8] Ursula K. Le Guion is an American Author famous for works such as The Dispossessed among others

[9] Bhim Singh Vs. Kan Singh AIR 1980 SC 727

[10] Panika Bhoi Vs. Kunu Bariha MANU/OR/0152/2011

[11] Shri Akashdeep Singh Vs. Manpreet Estates LLP & Others - FPA-PBPT-206/MUM/2018

[12] Vivek Mathias Vs. Deputy Director, Enforcement Directorate – 2018 SCC Online ATPMLA 22

[13] Deputy Director, Enforcement Directorate Vs. Axis Bank & Others

[14] Economic Times- Declaring me as fugitive offender is like giving 'economic death penalty': Mallya tell high Court dated 24.04.2019

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