NAGPUR: In an important judgment with national implications for financial institutions and the Enforcement Directorate (ED), the Nagpur bench of the Bombay high court recently held that laws governing recovery by banks (secured creditors) cannot override the provisions of the Prevention of Money Laundering Act (PMLA), reaffirming the primacy of govt’s action against ‘proceeds of crime‘.
A division bench comprising Justices Mukulika Jawalkar and Nandesh Deshpande set aside order of the appellate tribunal that allowed banks, including respondents HDFC Bank and Punjab National Bank, to enforce their secured interests over properties attached by the ED in a money laundering case linked to alleged irregularities in coal block allocation.
The court held that the PMLA appellate tribunal’s assumption that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002, and the Recovery of Debts and Bankruptcy (RDB) Act would prevail over the anti-money laundering framework under PMLA was “unsustainable” and contrary to established legal principles.
At the heart of the dispute was whether banks, as secured creditors, could claim priority over properties provisionally attached as ‘proceeds of crime‘. The bench answered in the negative, emphasising that the objectives of the anti-money laundering law are fundamentally distinct from debt recovery statutes.
The court underscored that the state, while acting under the law, is not a ‘creditor’ seeking recovery but exercising sovereign authority to confiscate ‘proceeds of crime’.
The case arose after the ED, through its joint director, Panaji Zonal Office, attached properties allegedly linked to financial gains of nearly Rs24.92 crore, which were treated as proceeds of crime. These properties were earlier mortgaged to banks, which initiated recovery proceedings after the accounts turned non-performing assets. The HC held that attachment under the anti-money laundering law remains valid even where a mortgage exists.
The justices clarified that such attachment does not automatically extinguish the rights of bona fide third parties. It noted that banks and other legitimate claimants retain the right to seek restoration of property before the Special Court under the statutory framework. The court pointed to provisions that allow restoration if the claimant proves good faith and lack of involvement in the offence.
“It appears that the tribunal proceeded to pass order on presupposition that the SARFAESI Act is having overriding effect on the provisions of PMLA. The tribunal failed to point out how there is no reasoning or material for attachment of property in question, which is mortgaged with the respondent-Bank. Thus, the order by the appellate tribunal quashing the attachment order is illegal, arbitrary and contrary to law,” the HC bench said.
The ED, through advocates Kartik N Shukul, the deputy solicitor general of India (DSGI) assisted by Prutha N Hardas and Gaurav Khatwani, had challenged the tribunal’s order in HC. The HDFC Bank was represented by senior advocate MG Bhangde along with adv SD Ingole, and the Punjab National Bank was represented by senior advocate MG Bhangde along with adv MY Wadodkar.
