Karnataka High Court dismisses ED appeal on attachment of properties mortgaged to bank

Bengaluru: When the properties, prima facie mortgaged to the bank, are not the proceeds of the crime, the attachment of such properties under the Prevention of Money Laundering (PML) Act cannot be justified in law, the Karnataka High Court has said in a recent judgement.

A division bench comprising Justices DK Singh and Venkatesh Naik T ruled this while dismissing the appeal filed by the Enforcement Directorate (ED) regarding the attachment order over seven properties in Mandya which were also subjected to recovery proceedings by Syndicate Bank (now Canara Bank) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.

The CBI case was that the bank was induced to advance the loans to the borrowers in violation of the lending norms and in excess of the delegated powers of the manager, which resulted in loss to the bank to an extent of Rs 12.63 crore. The CBI filed the chargesheet against HM Swamy, then Branch Manager, Sadulla Khan of Gandhi Nagar, Mandya, borrower, and others for various IPC offences and also under the Prevention of Corruption Act. In 2012, the ED filed a complaint under the PML Act and subsequently issued attachment orders on the seven properties mortgaged to the bank, alleging them as proceeds of crime. In 2017, the Appellate Authority under PMLA quashed the attachment orders.

The division bench noted that the bank was not a party to the proceedings before the Adjudicating Authority and no notice was issued to the bank to appear and make its submissions. The bench further noted that the bank had initiated proceedings before the Debt Recovery Tribunal and also under the SARFAESI Act.

“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. Considering the provisions of Section 3 and the mandate of Section 8(8) of the PML 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 division bench said.

The court further said, “The Bank is entitled to enforce its security interest by attaching the secured assets. The Bank's right should not be nullified. If the Enforcement Directorate is permitted to proceed with the matter, this conflict puts the Bank in a precarious position. Their address on SARFAESI Act, which empowers the Bank to enforce security interests without Court's intervention, would be undermined by a simultaneous Enforcement Directorate's action.”