NAGPUR: The Nagpur bench of the Bombay High Court has delivered a landmark ruling affecting financial institutions and the Enforcement Directorate (ED). The court determined that banks’ recovery laws cannot supersede the Prevention of Money Laundering Act (PMLA), highlighting the government’s priority action against ‘proceeds of crime’.
A division bench consisting of Justices Mukulika Jawalkar and Nandesh Deshpande annulled an order from the appellate tribunal that permitted banks, including HDFC Bank and Punjab National Bank, to enforce secured interests over properties seized by the ED in a money laundering case involving alleged misconduct in coal block allocation.
The court declared that the appellate tribunal’s claim that the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002, and the Recovery of Debts and Bankruptcy (RDB) Act take precedence over the PMLA framework was “unsustainable” and inconsistent with established legal principles.
The core issue was whether banks, as secured creditors, could assert priority over properties provisionally attached as ‘proceeds of crime’. The bench responded negatively, emphasizing the distinct objectives of anti-money laundering laws compared to debt recovery statutes.
The court stressed that the state, when acting under the law, is not a ‘creditor’ seeking recovery; it is exercising sovereign authority to confiscate ‘proceeds of crime’.
The case was prompted by the ED attaching properties allegedly linked to financial gains of approximately Rs24.92 crore, classified as proceeds of crime. These properties had previously been mortgaged to banks, which began recovery actions after the accounts became non-performing assets. The High Court maintained that the attachment under anti-money laundering law remains legitimate even with a mortgage in place.
Justices clarified that such attachment does not automatically nullify the rights of legitimate third parties. They noted that banks and other rightful claimants retain the option to seek property restoration from the Special Court under the statutory framework, provided they prove good faith and lack of involvement in the offense.
“The tribunal appears to have passed its order based on the flawed assumption that the SARFAESI Act overrides the provisions of the PMLA. It failed to provide valid reasoning for the attachment of the mortgaged property in question. Therefore, the appellate tribunal’s order quashing the attachment is deemed illegal, arbitrary, and contrary to law,” stated the HC bench.
The ED, represented by advocates Kartik N. Shukul, the deputy solicitor general of India (DSGI), along with Prutha N. Hardas and Gaurav Khatwani, challenged the tribunal’s decision in the HC. HDFC Bank was represented by senior advocate MG Bhangde and advocate SD Ingole, while Punjab National Bank was represented by senior advocate MG Bhangde and advocate MY Wadodkar.
