25 March 2023 11:18 AM GMT
Conflict of laws is as old as the legal system itself. One such conflict that litigators tend to face frequently is the conflict between Prevention of Money Laundering Act, 2002 (‘PMLA’) and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’.) To understand the objective behind enactment of the PMLA, first it...
Conflict of laws is as old as the legal system itself. One such conflict that litigators tend to face frequently is the conflict between Prevention of Money Laundering Act, 2002 (‘PMLA’) and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’.)
To understand the objective behind enactment of the PMLA, first it is essential understand what “Money Laundering” means in general parlance. Money laundering is the process of (i) hiding the source of money obtained from illegal sources and (ii) converting it to a clean source, to avoid criminal action.
PMLA is an enactment to prevent money laundering and to provide for confiscation of property derived from, or involved in, money-laundering. To this end, PMLA formalizes the layperson's understanding of money laundering by defining the offense of money laundering under Section 3.
On the other hand, SARFAESI Act seeks to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a Central database of security interests created on property rights. Essentially, it is a law that allows Indian banks and financial institutions to sell or auction the assets/properties of credit defaulters without any intervention from the courts.
Thus, we find that the intent and field of operation of both enactments is different. However, a common thread running between the two laws is the autonomy granted to the designated authorities under the respective legislations. For instance, a secured creditor is permitted to take possession of the property of the defaulting party in accordance with the procedure prescribed under SARFAESI Act. Similarly, an authorized officer of the Enforcement Directorate (‘ED’) is permitted to proceed with the attachment of properties of the accused in accordance with the procedure prescribed under PMLA.
Needless to say, the wide berth granted to the designated authorities both the laws find common ground during their operation and come in conflict.
The provisions under PMLA empower the officers thereunder to attach a property which has been acquired through the proceeds of crime and/ or any other property involved in money-laundering as the non-attachment of such property is likely to frustrate any proceeding under the PMLA. On the other hand, an Authorized Officer of a secured creditor is empowered to take over possession of the property of the borrower which is its secured asset if the borrower fails to make payment within 60 days of receipt of a notice under Section 13(2) of the SARFAESI Act.
The conflict between the two legislations arises when these powers overlap. For such conflict to occur, two common factors are imperative, namely;
a) The borrower/s, co-borrowers/s and/or guarantors of the secured creditor under the SARFAESI Act, and the accused/s, Co-accused/s under the PMLA must be the same persons,
b) The property/ ies being attached under the PMLA and the SARFAESI Act must be the same.
DISCOVERY OF CONFLICT
It is when the ED is establishing the money trail that it discovers for itself that a certain property is secured/ mortgaged with a Bank or Finance Company. The ED usually mentions this fact in the Provisional Attachment order which is passed. The Adjudicating Authority under PMLA (‘AAPMLA’) before confirming the provisional attachment order of the ED sends notice to the Bank/ Finance Company to file its objections, if any, to the confirmation of attachment. It is usually at this stage, when the matter has reached the stage of confirmation of attachment that the Bank or Finance Company gain knowledge of the attachment by the ED. In some cases, ED also issues notices to the Banks and Finance Companies and records their statements at the time of preliminary enquiry/ investigation.
On the other hand, the authorised officer is only supposed to intimate the borrower/ co-borrowers and Guarantors about taking over possession of the secured asset. The same is mandatorily published in two newspapers (English and vernacular) where the borrower resides. This is a notice to public at large and Government (including ED).
The officials of ED and Authorized officers often find themselves laying claim to common properties for attachment. ED attaches properties to weaken the monetary control of the accused on its assets and attaches such properties which have been purchased from proceeds of crime. The Authorized officers on the other hand have a duty to safeguard and recover public money when unscrupulous borrowers have borrowed the amounts and fail to return the same into circulation by repaying their debts. Additionally, the Banks and Finance Companies must prove priority of charge, prior mortgage/first lien/ over the attached property. The only option left with the Banks and Finance Companies in such cases is to take possession of secured assets and auction the same as per the SARFAESI Act.
Here comes the conflict when both the authorities authorized under their respective Acts are attaching and/ or are taking possession of the same properties.
The conflict in the operation of both enactments is further exacerbated by the non obstante clauses contained in Section 71 of the PMLA as well as in Section 35 of the SARFAESI Act.
DATE OF NOTIFICATION
An important aspect under the subject of conflict of laws is the date of notification of each of the laws. It is presumed that when Parliament passes a subsequent law it already has knowledge of the earlier laws passed by itself. Therefore, the subsequent law shall have precedence over the earlier one. In the present context both the laws are of 2002, therefore the date of notification of each is critical. The PMLA was notified on 17.01.2003 and the SARFAESI Act was notified on 17.12.2002.
Therefore, as per the date of notification the non obstante clause of PMLA shall have precedence as it was notified later than the SARFAESI Act.
In this respect, the decision of the Hon’ble Apex Court, in Solidaire India Ltd. v. Fairgrowth Financial Services, [(2001) 3 SCC 71], holds relevance. Here, the Apex Court held as follows:
“Where there are two special statutes which contain non-obstante clauses, the later statute must prevail. This is because at the time of enactment of the later statute, the Legislature was aware of the earlier legislation and its non-obstante clause. If the Legislature still confers the later enactment with a non-obstante clause, it means that the Legislature wanted that enactment to prevail. If the Legislature does not want the later enactment to prevail then it could and would provide in the later enactment that the provisions of the earlier enactment continue to apply.”
However, it is equally relevant to note that if there are any subsequent amendment/s to either of the conflicting legislations, those provisions that were notified later shall take precedence.
In the context of the SARFAESI Act, Section 26E, which accords priority to secured creditors, has been inserted in the SARFAESI Act by way of an amendment in 2016.
The veracity of Section 26E has been examined and upheld by the Hon’ble Apex Court in the case of Kotak Mahindra bank v. Girnar Corrugators Pvt. Ltd. & Ors. (Civil Appeal No. 6662 of 2022), as under:
“Therefore, in absence of any specific provision for priority of the dues under MSMED Act, if the submission on behalf of respondent No.1 for the dues under MSMED Act would prevail over the SARFAESI Act, then in that case, not only the object and purpose of special enactment / SARFAESI Act would be frustrated, even the later enactment by way of insertion of Section 26E of the SARFAESI Act would be frustrated. If the submission on behalf of respondent No.1 is accepted, then in that case, Section 26E of the SARFAESI Act would become nugatory and would become otiose and/or redundant. Any other contrary view would be defeating the provision of Section 26E of the SARFAESI Act and also the object and purpose of the SARFAESI Act.”
Thus, it has been concluded by the Apex Court that subsequent amendment shall have precedence over any earlier enactment. It is necessary to mention here that the date of amendment of SARFAESI Act when Section 26E was added to it which gives it priority of charge postdates the gazette notification of the PMLA. Hence, the same was passed keeping in view the provisions of all the existing laws.
In view of the conflicting legislations, the Apex Court as well as other High Courts and Tribunals have interpreted the law with a view to reconcile the friction between the functioning of public authorities and enabling secured creditors to recover of money for the exchequer. Some of the noteworthy judgements are as follows:
Indian Bank v. Government of India [(2012) 4 CTC 225]: Madras High Court, has held that provisions of PMLA cannot be used to inflict injury upon the victims of crime and allowed the Petitioner Bank therein to proceed with the sale of assets of the defaulting borrower under the SARFAESI Act, while the PAO and further proceedings pursuant thereto were set aside. The Court was dealing with the question of conflicting provisions of the two enactments in the context of rights of the bank as a secured creditor.
Standard Chartered Bank v. Directorate of Enforcement, Mumbai: It has been held by the Ld. Appellate Tribunal under the PMLA that “The intention of the Act could not have been to block the loan amount against the mortgaged properties being innocent person as is sought to be done in the instant case. It is submitted if the impugned order is taken as correct, it would be a patently absurd situation once substantial securities of the bank are not available for the benefit of Bank. Such a result does not advance the objects of the Act.”
Himachal EMTA Power Limited v. UOI, Delhi High Court held as follows:
“16. A plain reading of Section 5(1) of the PML Act indicates that an order of provisional attachment can be passed only where the concerned officer has reasons to believe on the basis of material in his possession that: (a) any person is in possession of proceeds of crime; and (b) such proceeds are likely to be concealed, transferred, or dealt with any manner which would result in frustrating any proceedings relating to confiscation of such proceeds of crime. The expression “proceeds of crime” is defined under clause (u) of Section 2 (1) of the PML Act as under: “Section 2 (u) – “proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property (or where such property is taken or held outside the country, then the property equivalent in value held within the country).” 17. It is clear from the language of Section 2(u) of the PML Act that the expression “proceeds of crime” refers to a property, which is “derived or obtained” by any person as a result of criminal activity. Therefore, in order to pass an order of provisional attachment, it was necessary for the ED to have reasons to believe that the property sought to be attached was “derived or obtained” from any scheduled crime. 18. A plain reading of the impugned order indicates that there is no material whatsoever on the basis of which the ED could have possibly W.P.(C) 5537/2018 Page 9 of 11 concluded that the investments made by HEPL were derived or obtained‟ as a result of any criminal activity relating to a scheduled offence.”
DDDED v. Axis Bank: High Court of Delhi has held as under:
“(viii) The PMLA, RDBA, SARFAESI Act, and Insolvency Code (or such other laws) must co-exist, each to be construed and enforced in harmony, without one being in derogation of the other with regard to the assets respecting which there is material available to show the same to have been “derived or obtained” as a result of “criminal activity relating to a scheduled offence” and consequently being “proceeds of crime: within the mischief of PMLA.”
Aditya Birla Finance Limited v. Directorate of Enforcement, Government of India; First Appeal No. 335 of 2022
The Bombay High Court when recently faced with a conflict of laws between PMLA and SARFAESI Act has passed the following interim order:
“6. In our view, these are issues which requires consideration. But until these issues are considered, if the property which has been attached under the provisions of PMLA, which are also secured to appellant are not disposed, the property may get wasted or encroached upon and the value would also get eroded. It would be to nobody's benefit. Therefore, purely by way of an interim adhoc arrangement, we pass the following order:
(a) The properties which are mortgaged / charged to appellant may be sold by appellant under the provisions of SARAFESI Act. The sale proceeds shall be deposited with the Registrar, Appellate Side, Bombay, of this court within one week of receiving the sale proceeds to be disbursed in accordance with any final order this court may pass in the appeal.
(b) As and when appellant deposits the money with the Registrar, the registrar shall invest the amount in a fixed deposit with a nationalised bank for a minimum period of 13 months to be renewed for the same period until the disposal of the appeal unless otherwise ordered.”
Thus, the Courts are trying to balance the interest of both the public ex chequer as well as ED, however, a totality of factors must be kept in mind. Law is organic. What is required is that it changes with the times and ends conflict to set the tone for lesser litigation in the future.
Authors: Shweta Kapoor (Partner), Kheyali Singh (Principal Associate), Mahima Singh (Senior Associate) and Tia Majumdar (Senior Associate) at Singhania and Co. LLP. Views are personal.