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The Bombay High Court has ruled that properties attached under the Prevention of Money Laundering Act (PMLA) cannot be claimed by banks as secured assets, establishing that anti-money laundering provisions take precedence over recovery laws such as SARFAESI and the RDB Act. The decision arose from a dispute involving banks seeking to enforce security interests on properties already attached by the Enforcement Directorate (ED) in connection with alleged proceeds of crime. The court set aside an earlier tribunal order that had favoured the banks, holding that the state's right to confiscate tainted assets overrides creditor claims. The ruling clarifies the legal hierarchy governing such disputes and has implications for lenders dealing with stressed assets linked to criminal investigations.
The Nagpur bench of the Bombay High Court has held that banks cannot claim priority over properties attached under the Prevention of Money Laundering Act (PMLA), reaffirming that statutory provisions governing anti-money laundering take precedence over financial recovery laws, in a ruling with implications for real estate-backed lending and asset enforcement. Advertisement
The case emerged from a dispute in which banks, including secured creditors, sought to enforce their claims on mortgaged properties that had already been provisionally attached by the Enforcement Directorate (ED) in connection with alleged proceeds of crime. The attachment was linked to a broader investigation involving financial irregularities, where certain assets were identified as potentially derived from unlawful activities.
The High Court set aside an earlier decision of the PMLA appellate tribunal that had allowed banks to proceed with recovery under statutes such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and the Recovery of Debts and Bankruptcy (RDB) Act. The bench held that the tribunal's interpretation that bank recovery laws would prevail over PMLA provisions was legally untenable and inconsistent with the framework of the anti-money laundering legislation.
In its observations, the court clarified that the state, while acting under the PMLA, is not functioning as a creditor seeking repayment but is exercising sovereign authority to confiscate assets classified as proceeds of crime. As a result, such attachment remains valid even where the property has been mortgaged to a financial institution. This distinction, the court noted, separates the objectives of criminal enforcement from those of debt recovery mechanisms.
The judgment further stated that secured creditors do not automatically acquire priority over such assets, even if loans have turned non-performing and recovery proceedings have been initiated. However, it acknowledged that bona fide third parties, including banks, retain the right to approach the designated PMLA Special Court to seek restoration of property, provided they can establish that they acted in good faith and had no involvement in the underlying offence.
The dispute also highlighted the complexities arising when real estate assets serve as collateral in financial transactions but subsequently become subject to criminal investigation. The court's decision reinforces that once properties are attached under PMLA provisions, their treatment is governed primarily by the objectives of preventing money laundering and confiscating illicit gains.
This ruling is expected to influence how lenders assess risk in property-backed financing, particularly in cases where underlying transactions may later be scrutinised under anti-money laundering laws. It underscores the need for enhanced due diligence and legal safeguards, as the enforceability of security interests may be subordinate to statutory enforcement actions in cases involving alleged proceeds of crime.
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