Case: State Bank of India v. Deputy Director, Directorate of Enforcement, Ahmedabad ([2025] 173 taxmann.com 250)

INTRODUTION:

State Bank of India vs. Deputy Director, Directorate of Enforcement, Ahmedabad, is a decision by the Appellate Tribunal, SAFEMA, New Delhi. The order addresses the interplay between section 5 and section 8 of the Prevention of Money Laundering Act 2002 (PMLA) and section 14 and section 32A of the Insolvency and Bankruptcy Code 2016 (IBC). The tribunal was called upon to examine the contours of these sections and decide whether the moratorium under Section 14 IBC 2016 bars the Enforcement Directorate from initiating attachment proceedings under PMLA. Further, it clarifies how section 32A of IBC 2016 operates to protect the interests of secured creditors.

BENCH & TRIBUNAL:

​The matter was decided by the bench of Justice Munishwar Nath Bhandari (Chairman) and Mr Rajesh Malhotra (Member).

​The appeal was presented at the Appellate Tribunal SAFEMA, New Delhi.

​FACTS & PROCEDURAL HISTORY:​

1. The Respondent- Enforcement Directorate attaches the properties of M/s Sai Infosystem (I) Ltd after the CBI filed multiple FIRs against them.
   
2. FIRs alleged the accused company – M/s Sai Infosystem (I) Ltd. had cheated and caused wrongful losses to the consortium of banks, including the Appellant – State Bank of India (SBI). The company entered into arrangements with the banks for availing credit facilities like cash credit and term loans by falsifying their debtors’ details and inflating stock statements.
   
3. The Respondent- Enforcement Directorate filed an Enforcement Case Information Report (ECIR) based on the FIRs, recorded statements of various persons under section 50 of PMLA. It issued a Provisional Attachment Order (PAO) for attaching immovable properties of the company, which was subsequently confirmed by the Adjudicating Authority.
   
4. The Appellant averred that the financial institutions had initiated action under section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The Appellant claims to have possession of the property during the pendency of the matter before the Debts Recovery Tribunal (DRT).
   
5. The Appellant presses that attachment orders were passed on the properties during the period of moratorium. It is their contention that moratorium under section 14 of IBC commences with the initiation Corporate Insolvency Resolution Process (CIRP).
   
6. The Appellant has thus preferred the appeal challenging the impugned order by the Adjudicating Authority.
   

LEGAL PROVISIONS INVOLVED:​

1. Prevention of Money Laundering Act 2002:  Sec 5, Sec 8
2. Insolvency and Bankruptcy Code, 2016 (IBC): Sec 14, Sec 32 A
3. SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002)
   

ISSUES: ​

1. Whether the moratorium u/s 14 bars the attachment of property under PMLA?
   
2. Whether the initiation of CIRP debars the proceedings under the PMLA in reference to sub-section (2) of Section 32A?
   
3. Whether the mortgaged property would be considered as “proceeds of crime” under section 2(1)(u) of the Act of 2002, notwithstanding that the mortgaged properties were purchased before the commission of a crime?
   
4. Whether the proceedings under SARFAESI take precedence over the PMLA proceedings?
   
5. Whether dismissal of the appeal would not affect the appellant-bank from seeking the release of properties under sections 8(6) and 8(8)?

DECISION:​

1. The tribunal held that the moratorium under section 14 of the IBC does not bar attachment of the property under the PMLA.
   
2. The Appellant failed to place on record the approval of the Resolution Plan under Section 31, which is a prerequisite for the operation of section 32A (2).
   
3. The tribunal held that property acquired prior to the commencement of the crime can also come under the radar of attachment if the proceeds of the crime vanish or are siphoned off, and such property has become untraceable for attachment.
   
4. A perusal of section 26 E does not bar an action under PMLA.
   
5. The dismissal of the appeal will not affect the rights of the appellant to proceed under sections 8(6) and 8(8) of PMLA to seek the release of attached property.

REASONING:

The PMLA and IBC 2016 are two statutes that essentially operate over distinct subjects and serve separate legislative aims and policies. ⁽¹⁾ The purpose and objective of the moratorium differ from that of attachment action under PMLA.

While the moratorium provision under IBC envisions maximisation of value, preservation of the assets of the debtor while exploring options of its resurrection and ensuring staving off creditors initiating individual actions, PMLA is concerned with denuding the offender of the economic benefit derived from committing scheduled offences; the disgorgement of illegal gains. ⁽²⁾

Therefore, the moratorium would not prevent the authorities under the PMLA from exercising the powers conferred by sections 5 and 8, notwithstanding the pendency of the CIRP.

The Tribunal noted that section 32A contains a non obstante clause that gives an overriding effect to the provision. Further, it noted that in order to apply for the release of property under section 32A(2) of IBC, not only the approval of the resolution plan under section 31 is necessary, but also the other conditions given under clause (I) & (ii) to subsection (2) of section 32A should be satisfied.

Mere initiation of CIRP does not halt the proceedings under the PMLA per sub-section (2) of section 32A; rather, it is on the occasion of approval of the Resolution Plan covering the property under attachment and on satisfaction of other conditions, as already stated.

Relying on the Delhi High Court Judgement in the Axis Bank case ⁽³⁾, the tribunal reiterated that the expression “proceeds of crime” carries both the tainted property and the untainted property. If the property so attached is untainted property, it must be equal to the “value of any such (tainted) property” or “property equivalent in value held within the country or abroad”.

However, both categories would be invoked where the actual tainted property cannot be traced or found. It is only in the case where tainted property is untraceable that the authorities can take statutory recourse to move against properties which may fall within the scope of “value of any such property” or “property equivalent in value held within the country or abroad.”

The SARFAESI Act of 2002 does not hold any precedence over the PMLA 2002, as a result of the 2018 amendment in the SARFAESI Act 2002. A simple perusal of Section 26A shows that it does not provide an overriding effect on all the statutes; instead, it has limited operation.

However, the non-obstante clause applies when there is a conflict between two provisions and not otherwise.

The Tribunal found the impugned attachment order legally sound and, therefore, held the appeal to be rightfully dismissed. However, it held that such dismissal would not affect the appellant bank from seeking release of the attached properties by invoking sections 8(6) and 8(8) of the PMLA.

The attachment of the property does not affect or transfer the title, and it can only happen upon confiscation of property, i.e. when the accused is convicted. ⁽⁴⁾

Even during the period of trial, the Appellant can seek release of the property from the Special Judge, who would proceed on such a request only after hearing the mortgagor of the property to ensure the principles of natural justice.

Ratio:

The tribunal held that the moratorium under Sec 14 of the IBC 2016 does not bar the authorities from proceeding under Sec 5 and Sec 8 of the PMLA. The scope of PMLA can only be curtailed under the protection of Sec 32 (A) (2), given that the approval of the Resolution Plan under Sec 31 is given by the Adjudicating Authority, and the conditions enumerated under clauses (I) and (ii) in Sec 32 (A) 2 are met.

ANALYSIS:

The bench of Justice Munishwar Nath Bhandari (Chairman) and MrRajesh Malhotra (Member) in SBI v. Deputy Director, Directorate of Enforcement (173 taxmann.com 250) deals with the crisscrossing contours of PMLA and IBC 2016, and the intent and purposes of the Acts. The decision affirms that the Enforcement Directorate can exercise the PMLA provisions independently and concurrently with IBC 2016.

It elucidates that the moratorium does not provide blanket protection, as the acts under PMLA are criminal in nature and not merely intended to recover debts. IBC 2016 aims at revitalising financial distress.

The tribunal impresses upon that mere initiation of CIRP does not provide any protection against PMLA; safeguarding of the corporate debtor is only provided when the Resolution Plan has been approved by the adjudicating authority. The tribunal further clarifies that the “untainted assets” could also be treated as tainted, but only if they are equivalent to the amount of proceeds of the crime. This signifies secured creditors could lose their primacy if the assets are obtained from proceeds of crime. Notably, financial institutions have statutory recourse under section 8(8) or section 8(6), depending on the outcome of the PMLA proceedings.

Although the proceedings under IBC are time-bound, PMLA proceedings, from the beginning of the trial to confiscation, can be time-consuming. This presents conflict between PMLA and IBC matters in situations where CIRP fails, and liquidation proceedings begin. Since PMLA cases are criminal in nature, the ED would stand against the sale of property as it defeats the purpose of PMLA.  Although the order emphasises the statutory recourse available to the Appellant, it fails to acknowledge the limbo until the PMLA trial begins.

REFERENCES:

1. Nitin Jain, Liquidator of PSL Limited v. Enforcement Directorate, reported in 2021 SCC Online Del 5281
2. Rajiv Chakraborty Resolution Professional of EEIL v. Directorate of Enforcement, 2022 SCC OnLine Del 3703, decided on 11-11-2022
3. Axis Bank, 2019 SCC Online Del 7854
4. JM Financial Asset Reconstruction Company Ltd. v. Deputy Director, Directorate of Enforcement, Mumbai [FPA-PMLA-3223/MUM/2019, dated 26-4-2024]