State Bank Of India & Ors vs Deputy Director Directorate Of Enforcement Mumbai & Ors

,,

MP-PMLA-4930/MUM/2018(COD),,

The State Bank of India and 11 others bank have filed the present appeal against the order dated 22.02.2017 passed in O.C. No. 639/2016 by the,,

Adjudicating Authority, New Delhi (under the Prevention of Money Laundering Act, 2002) inter alia confirming the Provisional Attachment Order",,

bearing PAO No. 16/2016 dated 03.09.2016 passed by the Respondent No. 1 on the basis of case registered bearing ECIR No. ECIR/07/MBZO/2016,,

attaching various movable and immovable properties of the Respondent Nos. 2 to 5.,,

The State Bank of India and other banks have also filed the appeal under Section 26 of the PMLA against the order dated 1.12.2016 passed in,,

O.C. No. 612/2016 issued by the Adjudicating Authority, New Delhi (under the Prevention of Money Laundering Act, 2002) inter alia confirming the",,

Provisional Attachment Order bearing PAO No.11/2016 dated 11.06.2016 passed by the Respondent No.1 in the criminal case bearing ECIR No.,,

ECIR/03/MBZO/2016 inter alia attaching immovable properties of the Respondent No. 4.,,

Along with the appeal, the appellants have also filed three applications for condonation of delay, seeking exemption from filing certified copy of the",,

impugned order dated 1.12.2016 passed in O.C. No. 612/2016 and stay of the impugned order dated 1.12.2016 passed in O.C.NO. 612/2016 bearing,,

no. MP-PMLA-4933/MUM/2018, MP-PMLA-4934/MUM/2018 and MP-PMLA-4935/MUM/2018. By this Order, common order is being passed as",,

facts and legal points are almost same. In the present Order, the facts are taken from appeal no.2538/2018.",,

The case of the appellants is that the appellants herein have prior right over the movable and immovable properties of the Respondent Nos. 3, 4 & 5",,

pursuant to a Personal Guarantee Agreement dated 21.12.2010, Corporate Guarantee Agreement dated 21.12.2010 and the final order dated",,

19.01.2017 (“Final Orderâ€) passed by the Debt Recovery Tribunal, Bengaluru (hereinafter “DRTâ€) in O.A. No. 766 of 2013 (“O.A. NO.",,

766/2013â€) inter alia holding that Respondent Nos. 2 to 5 are jointly and severally liable to pay a sum of Rs. 6203,35,03,879.42 (Rupees Six Thousand",,

Two Hundred and Three Crores Thirty Five Lakhs Three Thousand Eight Hundred and Seventy Nine and Paise Forty Two Only) to the Appellants,,

together with interest @ 11.50% p.a. from the date of the Original Application till the date of recovery (“OA Amountâ€). Pursuant to the above,,

Final Order, the DRT also has issued an Amended Recovery Certificate dated 10.04.2017 (“Recovery Certificateâ€​) in favour of the Appellants.",,

Along with appeals, an application for condonation of delay of 562 days has been filed in both appeals. On the last date, time was granted to file",,

reply, however, no reply is filed.",,

The grounds for condonation of delay are mentioned in paras 4 to 6 of application. The same are reproduced hereunder:-,,

“4. It is further submitted the Impugned Order was passed by the Adjudicating Authority inter alia confirming the Provisional Attachment,,

Order dated 03.09.2016 passed by the Respondent No.1 in the criminal case bearing ECIR No. ECIR/07/MBZO/2016 inter alia attaching,,

movable and immovable properties of the Respondent Nos. 2 to 5 are bad in law as the Appellants have prior right over the movable and,,

immovable properties of the Respondent Nos. 2 to 5 pursuant to the Personal Guarantee dated 21.12.2010, the Corporate Guarantee dated",,

21.12.2010 and the Final Order passed by the DRT on 19.01.2017 in O.A. No.766/2013 inter alia holding that Respondent Nos. 2 to 5 are,,

jointly and severally liable to pay the OA amount and consequently by the Recovery Certificate in favour of Appellants.â€​,,

“5. It is submitted that the Appellants received a copy of the Impugned Order only on June 22, 2018 when the Respondent No. 4 filed it",,

before the Hon’ble High Court of Karnataka in O.S.A. No.5/2017. It is further submitted that on June 29,2-18 the Appellants have filed",,

an intervention application bearing no. MP-PMLA-4307/MUM/2018 in FPA-PMLA-1767/MUM/2017 (an appeal filed by Respondent No. 4),,

wherein the Appellants have sought to intervene in the said appeal and for release of the movable and immovable properties of Respondent,,

Nos. 2 to 5 attached by the Respondent No. 1 in favour of the Appellants for recovery of the outstanding dues pursuant to the Final Order,,

passed by the DRT in O.A. No. 766/2013.â€​,,

“6. The Appellants have immediately thereafter taken steps to file the instant appeal.â€​,,

Admittedly, no notice under section 8(1) was issued to the appellant, nor any opportunity was granted to the banks before passing the impugned",,

order.,,

This Tribunal in “Amanpreet Singh Gandhi vs. Deputy Director, Enforcement Directorate,FPA-PMLA-582/JL/2014 has held as follows:",,

“The second proviso to section 8(1) requires that in case the property is held by more than one person, the show-cause notice shall be",,

served to all persons holding such property Section 8(2) empowers the Adjudicating Authority to record a finding by an order whether all,,

or any of the properties referred to in the show-cause notice are involved in money-laundering and the proviso to sub-section (2) of section,,

8 lays down if the property is claimed by a person, other than the person to whom the notice had been issued, such person shall also be",,

given an opportunity of being heard to prove that the property is not involved in money laundering. It is this proviso which casts a,,

responsibility on the Adjudicating Authority to afford an opportunity of hearing to any person who has not issued a notice under section,,

8(1) but claims a right in the property in question.â€​,,

In Amanpreet Singh Gandhi (supra), this Tribunal also ruled on whether the obligation cast by the Proviso to Section 8(2) has to be discharged",,

before the confirmation order under Section 8(3) is passed or a post-decisional hearing would suffice to meet the requirement of law. This Tribunal as,,

follows:,,

“…..The provisions of Section 8 (1), (2) & 3 have to be read harmoniously and a holistic view has to be taken to interpret these",,

provisions correctly. While Section 8 (1) speaks of issue of show cause notice to the persons alleged to have committed an offence under,,

Section (3) and to joint holders of the property and on whose behalf the property is held by some other person, Section 8(2) read with its",,

proviso speaks of Principles of Natural Justice to be followed in the form of considering the reply to the show cause notice, hearing the",,

aggrieved persons and the complainant and also hearing any person other than a person to whom the notice has been issued, who claims a",,

right in the property and Section 3 provides for passing an order in writing regarding confirmation of attachment. This scheme of law has,,

no scope for segregating the proviso to Section 8 (2) from Section 8(2) as well as the Section 8(3) because a hearing after the passing of,,

the order under Section 8(3) has no meaning. The notices as well as any other person who claims a right in the property has to be heard,,

before a final order of confirmation is passed so that the submissions and pleas made by such a person are taken on record and even due,,

consideration before arriving at a final decision by the Adjudicating Authoirty.â€​,,

I have gone through the application filed by the appellants for condonation of delay. This Tribunal is of the considered opinion that as a matter of,,

fact, ED has failed to perform his duty not to implead the appellants (lenders) banks despite of having full knowledge that the loan amounts have to be",,

returned by Vijay Mallya and his associate company to the banks who are the mortgagees of the attached properties. One is failed to understand why,,

have not done so when they were full aware. Thus, the prayer made in the application for condonation of delay is liable to be allowed as the sufficient",,

cause has been shown, the Misc. Petition is disposed of.",,

(i) MP-PMLA-4931/MUM/2018 (EXEM.) & (ii) MP-PMLA-4932/MUM/2018 (STAY) in FPA-PMLA-2538/MUM/2018,,

Issue notice in the appeals as well as in the stay application. The learned counsel for the respondent no.1 accepts the notice. Reply be filed by,,

respondent no. 1 within 6 weeks. Notice be issued to the other respondents for the next date. Exemption is allowed. M.P. 4931/2018 is disposed of.,,

With regard to stay application, the facts are that the Respondent No. 2 to 5 are M/s Kingfisher Airlines Ltd., Shri Vijay Mallya, M/s United",,

Breweries (Holding) Ltd., Kingfisher Finvest India Ltd. The respondent no. 6 to 16 are the other parties which are as follows:",,

(6) The Chief Manager, Standard Chartered Bank",,

(7) M/s Pharma Trading.,,

(8) Devi Investment Pvt. Ltd.,,

(9) Kamsco Industries,,

(10) Gem Investment and Trading,,

(11) Mallya Pvt. Ltd.,,

(12) Chief Manager, HDFC Ltd., HDFC House",,

(13) Chief Manager Yes Bank Ltd.,,

(14) Chief Manager ECL Finance Ltd.,,

(15) Vittal Investment Pvt. Ltd.,,

(16) DIAGEO Holding Netherlands B.V.,,

As per pleadings, the brief facts are mentioned in para no. 4 to 16.",,

The same are reproduced here below:-,,

At the request of Respondent No. 2, many Applicants, since 2005 had provided Working Capital Facilities (both fund based and non fund",,

based) and Rupee Term Loan Facilities including short term loans, to Respondent No. 2 as per the terms contained in the respective",,

Working Capita;/Rupee Term Loan Agreements entered into by each of the Appellants with the Respondent No.2.,,

In April 2010, a Lenders meeting was held between the Appellants and the Respondent No.2 wherein it was decided to re-cast the debts of",,

Respondent No.2 by entering into an agreement which would provide for the re-cast of the aforementioned facilities as per the terms agreed,,

upon by the Appellants and Respondent No.2. In pursuance of the same, the Appellants [Appellant No.1 also as the Lenders’ Agent] and",,

Respondent No.2 entered into the MDRA.,,

Simultaneous with the execution of the MDRA, various other agreements were entered into between the Respondent No.2 and the Appellants,",,

inter alia, to secure and create securities pursuant to the MDRA and as contemplated under the MDRA (“Financing Documentsâ€). A",,

copy of the MDRA DATED 21.12.2010 entered into between the Appellants and Respondent No.2 is herewith produced as Annexure No. A-,,

On 24.12.2010, the Appellants (i.e. SBI Respondent No.2 entered into an Amendatory Agreement to the MDRA bringing about certain",,

amendments to the MDRA. A copy of the Amendatory Agreement to the Master Debt Recast Agreement dated 24.12.2010 is herewith,,

produced as Annexure No. A-3.,,

As per the MDRA, the various Rupee Term Loan Facilities provided to Respondent No.2 were treated as a single Rupee Facility and the",,

various Working Capital Facilities provided to Respondent No.2 were treated as a single Working Capital Facility. The Working Capital,,

and Rupee Term Loan facilities were governed by the terms and conditions contained in the MDRA and the Financing Documents and the,,

same were secured by the Security created pursuant to/as required in terms of MDRA and other Security Documents. It was also agreed,,

upon that the MDRA and the Financing Documents constitute the entire agreement between the parties concerning the Various Facilities,",,

and superseded all previous proposals, agreements, understandings, negotiations and other written and oral communications in relation",,

thereto.,,

The Respondent No.2, the Appellants and SBICAP Trustee Company Ltd., entered into a Security Trustee Agreement dated 21.12.2010",,

under which the Respondent No.2 settled a trust and appointed SBICAP Trustee Company Ltd. as the security trustee for the benefit of the,,

Appellants and to, inter alia, hold the Encumbrances created/ to be created pursuant to the Security Documents in accordance with the",,

respective terms thereof, for the benefit of the Appellants (excluding Appellant No.7). It is pertinent to note that Respondent No.2 created,",,

the Securities in favour of SBICAP Trustee Company Ltd. for the benefit of the Appellants.,,

Due to the common interests of the Appellants in providing the various facilities to Respondent No.2 and in line with such understanding,,

of common interests in the Borrower i.e. the Respondent No.2, an Inter Creditor Agreement dated 21.12.2010 was entered into between the",,

Appellants and SBICAP Trustee Company Ltd. for the purpose of inter alai setting out the relationship between the Lenders and defining the,,

manner of exercising their rights under the Financing Documents.,,

One of the conditions precedent to be fulfilled by Respondent No.2 prior to it being able to implement the debt recast package, as",,

contemplated under the MDRA, was to open a Trust and Retention Account into which all the proceeds/monies from time to time",,

received/receivable by Respondent No.2 (or by any other Person on behalf of/on account of Respondent No.2) from any source whatsoever,,

was to be deposited and appropriated. In terms of the same, the Appellant No.1 (as the Account Bank and Lenders’ Agent), Respondent",,

Pledgor,"Name of company whose shares

are pledged",No. of Shares pledged

United Breweries (Holdings)

Limited",Kingfisher Airlines Limited,"51,02,041

United Breweries (Holdings)

Limited",United Spirits Limited,"6,27,170

United Breweries (Holdings)

Limited",McDowell Holdings Limited,"27,00,000

may not agree to dispose of the properties by the banks (in view of the decree passed) till the completion of trial under Section 5(5) of the Act, the",,

banks have decided to challenge the impugned order before this Tribunal.,,

It is undisputed fact that in the connected appeal no. FPA-PMLA-1767/MUM/2017 (in the common order in stay petitions filed by the appellant),",,

the stand of the ED was that the properties are in possession with the ED and those properties cannot be sell till the completion of the trial under,,

Section 5(5) of the Act and in case such order is passed, it will harm an injury to the ED. Therefore, it appears that in the present appeal, the banks",,

are seeking the interim order. Admittedly, the trial may take number of years in view of the nature of the case and bulky records. The banks are the",,

secured creditors against the unpaid loans by the Vijay Mallya and his associate companies.,,

The proceeds of crime are defined in Section 2(1) (u) of the Prevention of Money Laundering Act, 2002 which reads as under:-",,

“Proceeds of crime means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating",,

to a scheduled offence or the value of any such property.â€​,,

The scope of the Act and the provisions of PML Act, 2002 is to punish the accused person involved in money laundering, but not to punish an",,

innocent person, who is not involved in the crime within the meaning of Section 2(u) of the Act.",,

The appellants are admittedly secured creditors who have obtained decree against the borrowers who have provided security. As per “The,,

Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016†which came into effect on",,

01st September, 2016:",,

a. a new Section 31B in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 under the heading of “Priority of",,

Secured Creditorsâ€​ states that,,

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 rates due to the Central Government, State Government or local",,

authority.;,,

b. in Section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 after the words ""the date of the application"",",,

and includes any liability towards Debt Securities which remains unpaid in full or part after notice of 90 days served upon the Borrower",,

by the Debenture Trustee or any other authority in whose favour security interest is created for the benefit of holders of Debt Securities,,

or;"" is added which makes the said amendment or the 1993 Act applicable to all the debts which remains unpaid.",,

The amendment prima facie gives the Secured Creditor, a priority over the rights of Central or State Government or any other Local Authority.",,

It is evident that the amendment has been introduced to facilitate the rights of the Secured Creditors which are being hampered by way of,,

attachments of properties, belonging to the Financial Institutions/Secured Creditors, done by/in favour of the Government institutions.",,

The Full Bench of the Madras High Court while acknowledging the amount of losses suffered by the Banks and while approving the latest,,

amended Section 31B of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 held in the case “The Assistant Commissioner",,

(CT), Anna Salai- III Assessment Circle Vs. The Indian Overseas Bank and Ors. MANU/TN/3743/2016â€​ that",,

“There is, thus, no doubt that the rights of a Secured Creditor to realize secured debts due and payable by sale of assets over which",,

security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the",,

Central Government, State Government or Local Authority. This section introduced in the Central Act is with ''notwithstanding'' clause and",,

has come into force from 01.09.2016. Further it was also held that the law having now come into force, naturally it would govern the rights",,

of the parties in respect of even a lis pending.â€​,,

In a case contested by one of the branches of the Appellant Bank, the High Court of Madras “State Bank of India Vs. The Assistant",,

Commissioner, Commercial Tax, Puraswalkam Assistant Circle and Ors. MANU/TN/3619/2016â€, while upholding the Amendment Act, 2016",,

inserting Section 31B of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and Section 26E of the SARFAESI Act and",,

reaffirming the view of the Full Bench of the same Court in The Assistant Commissioner (CT), Anna Salai-III Assessment Circle (supra) lifted the",,

attachment entry and held that:,,

“In other words, not only should the amendment apply to pending lis, but the declaration that the right of a Secured Creditor to realize",,

the Secured Debts, would have priority over all debts, which would include, Government dues including revenues, taxes, etc., should hold",,

good qua 2002 Act as well.â€​,,

In another Madras High Court judgment in the case of “Dr. V. M. Ganesan vs. The Joint Director, Directorate of Enforcement",,

MANU/TN/2475/2014â€​ has explained the grievances faced by the financial institutions while holding that,,

“For instance, if LIC Housing Finance Limited, which has advanced money to the Petitioner in the first Writ Petition and which",,

consequently has a right over the property, is able to satisfy the Adjudicating Authority that the money advanced by them for the purchase",,

of the property cannot be taken to be the proceeds of crime, then, the Adjudicating Authority is obliged to record a finding to that effect",,

and to allow the provisional order of attachment to lapse. Otherwise, a Financial Institution will be seriously prejudiced. I do not think that",,

the Directorate of Enforcement or the Adjudicating Authority would expect every Financial Institution to check up whether the contribution,,

made by the Borrowers towards their share of the sale consideration was lawfully earned or represent the proceeds of crime . Today, if the",,

Adjudicating Authority confirms the provisional order of attachment and the property vests with the Central Government, LIC Housing",,

Finance Limited will also have to undergo dialysis, due to the illegal kidney trade that the Petitioner in the Writ Petition is alleged to have",,

indulged in. This cannot be purport of the Act.â€​,,

The Supreme Court in (2010)8 Supreme Court Cases 110 (Before G.S. Singhvi and A.K. Ganguly, JJ) in the case of United Bank of India V/s.",,

Satyawati Tondon and Ors. In paras no. 6, 55 & 56 has held as under:-",,

To put it differently, the DRT Act has not only brought into existence special procedural mechanism for speedy recovery of dues of banks",,

and financial institutions, but also made provision for ensuring that defaulting borrowers are not able to invoke the jurisdiction of the civil",,

courts for frustrating the proceedings initiated by the banks and other financial institutions.,,

It is a matter of serious concern that despite repeated pronouncement of this Court, the High Courts continue to ignore the availability",,

of statutory remedies under the DRT Act and the SARFAESI Act and exercise jurisdiction under Article 226 for passing orders which have,,

serious adverse impact on the right of banks and other financial institutions to recover their dues. We hope and trust that in future the High,,

Courts will exercise their discretion in such matters with greater caution, care and circumspection.",,

Insofar as this case is concerned, we are convinced that the High Court was not at all justified in injuncting the appellant from taking",,

action in furtherance of notice issued under Section 13(4) of the Act. In the result, the appeal is allowed and the impugned order is set",,

aside. Since the respondent has not appeared to contest the appeal, the costs are made easy.â€​",,

The Section 26E of the SARFAESI (Amendment) Act, 2002 is reproduced herein below for ready reference:-",,

26E. 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.,,

The Honâ€ble Supreme Court of India in the case of Attorney General of India and Ors. (AIR 1994 SC 2179) while dealing with the matter under,,

Conservation of Foreign Exchange and Prevention of Smuggling Activities Act has defined the illegally acquired properties and held that such,,

properties are earned and acquired in ways illegal and corrupt, at the cost of the people and the state, hence these properties must justly go back",,

where they belong. In the present case as the money belongs to the Appellant bank it is public money.,,

In view of settled law on the subject, I am of the opinion that the appellant bank is the rightful claimant who have already obtained decree against",,

the borrower from DRT under the SARFAESI Act and has a priority rights to recover the loans amount forthwith.,,

The Respondent No.1 is not having any lien over the said properties as the Appellant banks are now the Legal transferee of said properties. The,,

Respondent No. 1 may not retain the said property till the trial is over. They have no legal title and the property is to be returned to the persons,,

lawfully entitled to recover the debts as they are the victim.,,

Being a victim party u/s 8(8) of the Act, second proviso which is incorporated very recently in April, 2018, the banks are entitled to dispose of the",,

properties if they are victim and sufferer due to non-return of loan amount by the borrowers.,,

There is no nexus whatsoever between the alleged crime and the banks who are merely the secured creditor and were not aware that the,,

borrowers would avoid returning the loan-amount. Prima facie, no case of money-laundering is made out against banks. The banks have priority rights",,

on assets of the secured creditors to recover the loan amount/debts by sale of assets over which security interest is created.,,

As far as the appeal is concerned, the same will be considered on the next date of hearing. At present, this Tribunal is only concerned with the",,

interim order as prayed by the appellants.,,

In view of facts and nature of the present case, I am of the opinion that once the banks are secured creditors and have obtained the final decree",,

from the court which has attained finality, the banks are bound to receive the default loan amount from Vijay Mallya and his companies. He was/is the",,

active person of the companies. The loans amount has to be paid by the borrowers. It is a banks money. It must come to the banks. These are public,,

sector banks. The decretal amount is recoverable in law being pubic money.,,

Thus, till the next date of hearing, Vijay Mallya is restrained not to deal with and alter the status of the movable and immovable properties as per",,

Schedule A to C in appeal no.2538/2018 and Schedule-A in appeal no. 2539/2018 and shall not create third party interest in any manner directly or,,

indirectly till the next date. The respondent no.1 shall also maintain the status quo with regard to the properties, the details of which are mentioned in",,

the impugned orders in both appeals till the next date.,,

List this appeal on 26.11.2018.,,