Properties Mortgaged To Bank For Advancement Of Loans Cannot Be Attached Under PMLA: Karnataka High Court

The Karnataka High Court has held that properties which are mortgaged to the Bank are not the proceeds of crime, and an attachment order cannot be passed by the Adjudicating Authority under the Prevention of Money Laundering Act, in respect of the properties mortgaged to the Bank for the advancement of loans.A division bench of Justice D K Singh and Justice Venkatesh Naik T held thus while dismissing the appeal filed by the Enforcement Directorate challenging an order of the Appellate Tribunal under the Act, which allowed the appeals filed by the accused challenging the confirmation order of attachment regarding seven properties and quashed the confirmation order passed by the Adjudicating Authority. The bench said “It is the public money which was advanced by the Bank to the borrowers against the mortgaged properties, the subject matter of attachment. In fact, the Appellate Tribunal has rightly observed that the Bank has been the victim of the crime committed by the Branch Manager and the Manager in conspiracy with the borrowers. By attaching these properties, the Bank would not be able to proceed against these properties to recover its loans and that cannot be the object of the PMLA.” Case Details: The Central Bureau of Investigation (CBI) had registered a case on 15.04.2009 against H.M. Swamy, the then Branch Manager of Syndicate Bank, Mandya Branch, Asadulla Khan of Gandhi Nagar, Mandya and others for the offences punishable under Section 120B read with Sections 409, 420, 467 and 471 of Indian Penal Code, 1860 (IPC) and Section 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988, on a complaint of Chief Vigilance Officer, Syndicate Bank, regarding fraudulent transactions in the sanction and disbursal of Syndicate Jai Kisan loan and other credit facilities. The borrowers had defaulted in making repayment of the loans and credit facilities advanced to them, which resulted in a loss of Rs 12,63,65,210/- to the Syndicate Bank. It was also found that the properties offered as securities for the overdraft credit facilities by the borrowers/accused were not found sufficient to meet the outstanding liabilities of the borrowers. Following this, the Directorate of Enforcement registered an ECIR, and a provisional attachment Order dated 14.03.2012 was passed, which was confirmed by the Adjudiciating authority. On going through the records, the bench noted that it is not in dispute that the Syndicate Bank was not a party to the proceedings before the Adjudicating Authority. No notice was issued by the Adjudicating Authority to the Syndicate Bank to appear before it and make its submissions or reply to the notice. Further, the Bank had initiated the proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, by issuing a demand notice on 04.08.2009 and a possession notice on 12.03.2010 and took physical possession. Noting that the properties offered as collateral security against the loans, which have been found not to be sufficient, could not be described as proceeds of crime as defined under Section 2(u) of the PMLA. These properties had not been acquired from the proceeds of the crime and cannot be confiscated by the Central Government. The bench said, “The period of the alleged offences was prior to 01.06.2009, when the offences of criminal conspiracy and cheating under Sections 120B and 420 of IPC were added in the Schedule to the PMLA. The 7 properties mortgaged to the Bank, which are the subject matter of attachment proceedings, were acquired prior to the alleged offences.” Observing that in the conspiracy alleged against the accused the Bank, as an institution, was not party to the conspiracy, the court said that the loans were advanced from the funds of the Bank. The source of funds of the Bank could not be described as illegal or tainted money. The bench said “When the Adjudicating Authority became aware of the fact of the properties had been mortgaged to the Bank for advancement of the loans, it was incumbent upon the Adjudicating Authority to have issued notice to the Syndicate Bank in terms of Section 8(1) proviso and Section 8(2) proviso for being heard to prove that the properties were not involved in money laundering.” It emphasised that it is the public money which was advanced by the Bank to the borrowers against the mortgaged properties, the subject matter of attachment.The court held, “Considering the provisions of Section 3 and the mandate of Section 8(8) of the Act, we are of the view that the Appellate Tribunal has correctly held that the attachment order was bad in law and has rightly set aside the same. The Bank is a secured creditor and had commenced the recovery proceedings under the SARFAESI Act before the Debt Recovery Tribunal. The blocking of recovery under the SARFAESI Act would cause grave prejudice to the Bank and the recovery proceedings and it would not be in the interest of justice and the...

Properties Mortgaged To Bank For Advancement Of Loans Cannot Be Attached Under PMLA: Karnataka High Court

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