The Nagpur bench of the Bombay High Court has established that the Prevention of Money Laundering Act (PMLA) holds an overriding effect over debt recovery statutes, including the SARFAESI and RDB Acts, specifically concerning the attachment of properties identified as “proceeds of crime.”
In a judgment delivered on March 23, a division bench comprising Justices M.S. Jawalkar and Nandesh Deshpande set aside an earlier order by the PMLA Appellate Tribunal that had prioritized the rights of banks to recover debts from properties already attached by the Enforcement Directorate (ED).
The central legal question before the High Court was whether the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and the Recovery of Debts and Bankruptcy Act (RDB) could render the PMLA “subservient” due to the prior secured interest of a bank.
The bench emphasized that the distinct objectives of these legislations prevent the debt recovery laws from prevailing over the PMLA.
“The objective of the legislation in PMLA being distinct from the purposes of two other enactments—RDB Act and SARFAESI Act, the latter cannot prevail over the former,” the court observed.
The dispute stems from a 2012 investigation by the Central Bureau of Investigation (CBI) into Grace Industries Ltd regarding alleged irregularities in coal block allocations. Following the probe, the Enforcement Directorate identified approximately ₹24.92 crore as “proceeds of crime.”
In 2015, the ED provisionally attached several immovable properties belonging to the accused. However, these properties had been mortgaged to HDFC Bank as security for credit facilities extended before the attachment took place.
HDFC Bank successfully challenged the attachment before the PMLA Appellate Tribunal. The Tribunal ruled in favor of the bank, holding that secured creditors enjoy “statutory priority” under debt recovery laws. The ED subsequently moved the High Court to challenge this interpretation.
The ED contended that the Tribunal incorrectly equated the attachment of “proceeds of crime” with standard government dues. As a special penal statute, the ED argued, the PMLA aims for the confiscation of tainted property rather than simple debt recovery. Subordinating the PMLA to civil recovery proceedings, the agency claimed, would undermine the Act’s confiscatory objectives.
The Bank maintained that since the mortgage was created prior to the ED’s action, it held a statutory priority that should protect its interest in the property.
The High Court referred to the Supreme Court’s stance and aligned its decision with the Delhi High Court’s precedent in The Deputy Director, Directorate of Enforcement Delhi v. Axis Bank & Ors.
The Court noted:
“We confirm the view… 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 bench clarified that the different “objects and reasons” of the enactments mean they do not necessarily override each other in all contexts, but the PMLA’s specific focus on penal confiscation of crime proceeds takes precedence in attachment proceedings.
The High Court declared the Tribunal’s order “illegal, arbitrary and contrary to law.” While the attachment stands, the Court provided a window for the bank to seek relief.
It clarified that if a trial for an offence under Section 4 of the PMLA has commenced or a confiscation order has been passed, any party asserting a “legitimate interest” must have their claim adjudicated by the Special Court designated under the PMLA. Consequently, the High Court granted HDFC Bank the liberty to move an application for the release of the property attachment before the Special Court.
