India: Right Over Mortgaged Property: Enforcement Directorate Or Secured Creditors? Effect Of Non Obstante Clauses

Last Updated: 26 February 2019
Article by Vijay Pal Dalmia, Partner

Article by Vijay Pal Dalmia, Advocate, Supreme Court of India and Delhi High Court, Partner & Head of Intellectual Property Laws Division, Vaish Associates Advocates, India

Vijay Pal Dalmia, Advocate
Supreme Court of India & High court of Delhi
Mobile: +91 9810081079  Email: vpdalmia@vaishlaw.com

and

Adeem Ahmed
LL.B. 5th Year, Amity Law School Noida, India  adeemahmedlegal@gmail.com

Section 5 of Prohibition of Money Laundering Act (PMLA) provides that any property which is involved in money laundering shall be provisionally attached for a period not exceeding 180 days. On conviction of said person the property shall be confiscated by the Central Government. The PMLA contains a non obstante provision. The non obstante provision contained in Section 71 states that the Act shall have an overriding effect notwithstanding anything inconsistent therewith contained in any law for the time being in force. Further, the  Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as SARFAESI Act) and The Recovery of Debts Due To Banks And Financial Institutions Act, 1993 (hereinafter referred to as RDDB Act) both contain non obstante provisions. This has created a conflict between the provisions of PMLA and the SARFAESI and RDDB Act.

It is a well settled rule of law that if there is a conflict between two Acts and on construction two Acts can be harmoniously interpreted then such construction should be adopted.

This situation was analyzed by the Honorable Supreme Court of India in the case of Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd. (2001) 3 SCC 711. It has been stated that where there are two special statutes which contain non obstante clauses, then the statute enacted later shall prevail. This is because the legislature while framing the later statute must have been aware of the already existing statute and also the non obstante clause contained therein. By not providing any inclination towards the fact that the provisions of the earlier enactment apply, the legislature has made it amply clear that they wish for the provisions of the later Act to apply.

On the basis of the principle laid down the Apex Court the Appellate Tribunal in a catena of judgments has clarified "whether the Enforcement Directorate (ED) shall have the power to attach property which has been mortgaged and is not a part of proceeds of crime?"

Proceeds of crime as per section 2(u) has been defined as any property which may have been derived or obtained indirectly or directly by any person as a result of criminal activities relating to scheduled offences or the value of any property which is held or taken outside the country then the property equivalent in value held within the country.

The Appellate Tribunal, PMLA,  in the case of Bank of India and Ors. vs. The Deputy Director Directorate of Enforcement, Mumbai MANU/ML/0040/20182 has observed that the SARFAESI Act and RDDB Act both have been enacted before the PMLA. Recently in 2016 both the SARFAESI and RDDB Acts were amended by Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016. The section 31B of the RDDB Act and 26E of the SARFAESI Act both contain non obstante clauses. Since these two Acts were amended in 2016, much later than the enactment of PMLA, then the relevant provisions shall have an overriding effect on the provisions of the PMLA. If the legislature intended to not give the amended provisions an overriding effect over the provisions of the PMLA then they would have specified so.

The amended provisions Section 26 E of SARFAESI Act and 31 B of RDDB Act has an overriding effect and also hold priority over the provisions of PMLA in so far as recovery of the loan by the secured creditors is concerned.

It is pertinent to note that the principle laid down by the Supreme Court of India has been followed by the Madras High Court in the case The Assistant Commissioner (Commercial Taxes) Vs. Indian Overseas Bank wherein it has upheld the provisions of the amended section 31B of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDB Act) wherein it has been mentioned that the right of secured creditors to realize secured debts shall have priority over all debts and government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. Furthermore, in another case the Madras High Court has upheld the provisions of section 26E of SARFAESI Act.

The amended provisions are reproduced as under:

(i) Section 26E of the SARFAESI Act 2002:

"26E. Priority to secured creditors - Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.

Explanation : For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."

(ii) Section 31B of the Recovery of Debts and Bankruptcy Act, 1993:

31B. Priority to secured creditors - Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and other rates due to the Central Government, State Government or local authority.

Explanation : For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."

Furthermore, in the case of Standard Chartered Bank vs The Deputy Director Directorate of Enforcement, Mumbai MANU/ML/0035/20183 the Appellate Tribunal has observed that there is no direct nexus between the crime committed and the consortium of banks and thus they have the priority right over the property mortgaged by them.  Also, the intention of the PMLA Act is not to block the loan against mortgaged property. Where such loan is given out by innocent parties, being banks in this case, then it would be absurd that the securities of the banks are not available to them to recover their losses. Non-performing assets (NPA) are choking the banking system and the system is already struggling for some time and banking conditions are deteriorating day by day. Any order which goes against the banks would create chaos in banking industries and would be against the interest of the nation as a whole ad would also be against the public policy.

Conclusion

It is clear from the above placed material that the secured creditors shall be given priority over all debts since it had lent its money. The sections 26 E OF SARFAESI Act and 31B of RDDB Act shall have an overriding effect on the provisions of PMLA. Secured creditors are innocent parties and Rights of the secured creditors have been hampered by the attachment of properties. The amendments have come as a boon for the secured creditors as now they have a way to facilitate their rights over securities to recover their losses.

Footnotes

1 Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd. (2001) 3 SCC 71: https://indiankanoon.org/doc/965356/

2 The Deputy Director Directorate of Enforcement, Mumbai MANU/ML/0035/2018: http://atfp.gov.in/writereaddata/upload//Judgement/Judgement_FMSMWJERQT_78805.PDF

2 Bank of India and Ors. vs. The Deputy Director Directorate of Enforcement, Mumbai MANU/ML/0040/2018: http://atfp.gov.in/writereaddata/upload//Judgement/Judgement_E2ICX1ACBV_72675.PDF

3 Standard Chartered Bank vs The Deputy Director Directorate of Enforcement, Mumbai MANU/ML/0035/2018: http://atfp.gov.in/writereaddata/upload//Judgement/Judgement_FMSMWJERQT_78805.PDF

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