Properties Mortgaged to Banks for Loan Advances Not Proceeds of Crime under PMLA: Karnataka High Court Dismisses ED Appeals Upholding Bank’s Right to Recover Secured Assets
Sanchayita Lahkar
The High Court of Karnataka, Division Bench of Justice D.K. Singh and Justice Venkatesh Naik T held that properties mortgaged to a bank for obtaining loans cannot be treated as proceeds of crime, and therefore, no attachment order can be sustained under the Prevention of Money Laundering Act, 2002 in respect of such assets. Dismissing the Enforcement Directorate’s appeals against the Appellate Tribunal’s decision, the Court affirmed that the mortgaged properties involved in the case—seven in total—belonged to borrowers who had availed loans, and the lending bank, being a victim of the alleged fraud, retained the right to recover dues under the SARFAESI Act.
The Central Bureau of Investigation (CBI) registered a case on 15 April 2009 against H.M. Swamy, then Branch Manager of Syndicate Bank, Mandya Branch, along with Asadullah Khan of Gandhinagar, Mandya, and others for offences under Sections 120B, 409, 420, 467, and 471 of the Indian Penal Code and Section 13(2) read with Section 13(1)(d) of the Prevention of Corruption Act, 1988. The allegations involved fraudulent sanction and disbursal of Jai Kisan loans and other credit facilities, causing a reported loss of Rs. 12.63 crore to the bank.
After completion of the investigation, the CBI filed a charge sheet against the accused, including Ayesha Najam, Nasreen Taj, and others. Subsequently, the Directorate of Enforcement filed a complaint under Section 5(5) of the PMLA, leading to a provisional attachment order dated 14 March 2012, which was confirmed by the Adjudicating Authority on 27 July 2012. The Appellate Tribunal later quashed the confirmation order on 18 September 2017.
The properties in question included residential, industrial, and agricultural holdings belonging to Asadullah Khan and his family, all mortgaged to Syndicate Bank. The bank had initiated recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), issuing demand and possession notices in 2009 and 2010. The Directorate of Enforcement contended that the properties were liable to attachment as proceeds of crime under PMLA, whereas the bank maintained its rights as a secured creditor.
The Bench observed that “the properties which can prima facie be said to be the properties acquired from the proceeds of the crime only can be subjected to the attachment proceedings under the provisions of the PMLA.” The Court further stated that “the properties offered as collateral security against the loans, which have been found not to be sufficient, could not be described as proceeds of crime as defined under Section 2(u) of the PMLA.”
The Court recorded, “When the Adjudicating Authority became aware of the fact that the properties had been mortgaged to the Bank for advancement of the loans, it was incumbent upon the Adjudicating Authority to have issued notice to the Syndicate Bank in terms of Section 8(1) proviso and Section 8(2) proviso for being heard to prove that the properties were not involved in money laundering.”
The Bench clarified that the bank had already commenced proceedings under SARFAESI and had taken symbolic and physical possession of some of the properties. “As the properties have been mortgaged against the loans advanced by the Bank, the mortgagor or the accused would have only the right of redemption in respect of these properties,” the Court stated.
Addressing the core issue of whether mortgaged properties could be attached, the Court held that the loans were advanced from legitimate banking funds and could not constitute proceeds of crime. “The Bank, as an institution, was not party to the conspiracy. The source of funds of the Bank could not be described as illegal or tainted money,” the judgment recorded.
Further, the Bench noted that the alleged offences occurred before 1 June 2009, when cheating and criminal conspiracy under Sections 420 and 120B IPC were added to the PMLA schedule. Hence, the Act could not retrospectively apply to the transactions in question.
In conclusion, the Bench remarked, “When prima facie the properties mortgaged to the Bank are not the proceeds of the crime, we are of the view that the attachment order passed by the Adjudicating Authority in respect of the seven properties mortgaged to the Bank for advancement of loans cannot be justified in law.”
The judgment stated, “It is the public money which was advanced by the Bank to the borrowers against the mortgaged properties, the subject matter of attachment. In fact, the Appellate Tribunal has rightly observed that the Bank has been the victim of the crime committed by the Branch Manager and the Manager in conspiracy with the borrowers.”
The Court observed that attachment of the properties would prevent the bank from recovering its dues and “that cannot be the object of the PMLA.” Referring to Section 8(8) of the Act, the Bench reiterated that the Enforcement Directorate could not nullify the secured rights of the bank.
It recorded, “The Bank is a secured creditor and had commenced the recovery proceedings under the SARFAESI Act before the Debt Recovery Tribunal. The blocking of recovery under the SARFAESI Act would cause grave prejudice to the Bank and it would not be in the interest of justice.” The judgment added that conflicting actions between the Enforcement Directorate and the bank would “put the Bank in a precarious position” and “undermine the statutory power of enforcement under the SARFAESI Act.”
“In view of the dismissal of the appeals, pending IAs, if any, do not survive for consideration and accordingly, they stand disposed of.”
Advocates Representing the Parties
For the Appellant (Directorate of Enforcement): Sri Madhukar M. Deshpande, Advocate.
For the Respondents: Sri Bhargava D. Bhat, Advocate, Ayesha Najam, Nasreen Taj, and Zareena Taj; Sri C. Vinay Swamy,
Case Title: Deputy Director, Directorate of Enforcement v. Asadullah Khan & Others
Case Number: MSA Nos. 78, 87, 88 & 89 of 2020
Bench: Justice D.K. Singh and Justice Venkatesh Naik T
