Bombay High Court
Aditya Birla Finance Limited, Through ... vs Directorate Of Enforcement,Gov.Of ... on 15 September, 2022
Bench: G.S. Patel, Gauri Godse
904-ASFA-338-2022.DOC
Digitally signed by IRESH
IRESH SIDDHARAM SIDDHARAM MASHAL
MASHAL Date: 2022.09.16 16:38:58 +0530
Iresh
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
CIVIL APPELLATE JURISDICTION
FIRST APPEAL NO. 338 OF 2022
Aditya Birla Housing Finance Limited, through ...Appellant
its authorised representative Mr Nikhil Rodnigues
Versus
Directorate of Enforcement, Government of ...Respondents
India, through Deputy Director MSN Ananthie &
Anr
WITH
FIRST APPEAL NO. 335 OF 2022
WITH
INTERIM APPLICATION NO. 9864 OF 2022
IN
FIRST APPEAL NO. 335 OF 2022
Aditya Birla Finance Limited, through authorised
representative Mr Nikhil Rodnigues
Versus
Directorate of Enforcement, Government of ...Respondents
India, through Deputy Director MSN Ananthie &
Anr
Mr Venkatesh Dhond, Senior Advocate, with Rohan Kelkar,
Ashutosh Tipsay, Lalit Katariya, Ashrita Chindarkar, i/b
Katariya & Associates for the Appellant in First Appeal No. 335 of
2022.
Mr Cyrus Ardeshir, Ziyad Madon, Lalit Katariya, Mahtab Kataria,
Pooja Jhaveri, i/b Katariya & Associates for the Appellant in
First Appeal No. 338 of 2022.
Mr Hiten Venegavkar, Bharat Mirchandani for the Respondent-ED in
both First Appeals.
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15th September 2022
904-ASFA-338-2022.DOC
CORAM G.S. Patel &
Gauri Godse, JJ.
DATED: 15th September 2022 PC:-
1. These two Appeals are by non-banking financial companies or NBFCs. They are part of the Aditya Birla Group. First Appeal No. 338 of 2022 is by Aditya Birla Housing Finance Ltd. ("ABHFL") and First Appeal No. 335 of 2022 is by Aditya Birla Finance Limited ("ABFL").
2. The issue of law raised in both First Appeals is the same. The facts also run on broadly similar lines, since the individual and corporate entities involved are part of the same group. The two NBFCs, ABFL and ABHFL, both claim to have valid mortgages over certain immovable properties. These immovable properties, and in one case the value of the immovable property, is the subject matter of proceedings and attachments under the Prevention of Money Laundering Act, 2002 ("PMLA").
3. Very shortly stated, the question before us is whether the rights of a mortgagee arising from an otherwise valid and legitimate mortgage, i.e., a mortgage that is not itself tainted under the PMLA, is, axiomatically, subordinated to the provisions of the PMLA. Another perspective, perhaps more graphically stated, is whether, once the PMLA begins to operate in respect of any property that stands attached, the rights of an innocent secured creditor, one not involved in money laundering, are obliterated by operation of the Page 2 of 9 15th September 2022 904-ASFA-338-2022.DOC PMLA. Such secured creditors undoubtedly have rights under dedicated statues such as Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI"). The PMLA contains a non obstante provision. So does SARFAESI. Does the PMLA prevail over SARFAESI or can both, given a set of factual circumstances, operate together is the question.
4. Mr Venegavkar points out that this very issue is before the Supreme Court in State Bank of India v Enforcement Directorate, Special Leave Petition (Cri) 4834 of 2021, which is scheduled for hearing on 10th October 2022. Obviously, for that very reason we are not rendering a final decision on these First Appeals today. We will post both shortly after 10th October 2022.
5. However, for clarity so that there is no controversy at a later date, we proceed today to outline at least the factual conspectus and a summary of the arguments advanced by Mr Dhond, learned senior counsel appearing for ABFL and Mr Ardeshir and Mr Madon for ABHFL.
6. The facts in the ABFL matter are these. Its Appeal No. 335 of 2022 assails a Judgment dated 31st December 2020 of the Appellate Tribunal under the PMLA. By that Judgment, the Appellate Tribunal upheld an order of 16th January 2019 of the Adjudicating Authority, and which order in turn confirmed a provisional attachment order dated 31st July 2018. That provisional attachment order, so far as ABFL is concerned, extended to two immovable Page 3 of 9 15th September 2022 904-ASFA-338-2022.DOC properties. The first is what is called in these papers as the Varadarajapuram Property. It is in Kanchipuram and a fuller description is at page 2 in paragraph 1 of the Appeal memo. The second property, one that stands on a slightly different footing, is called the Kalyanamandapam Property and it is at serial no. 2 of the description in paragraph 1. The Kalyanamandapam property is in Chennai. It admeasures about 25098 sq ft, and there is commercial building of ground and two floors on it.
7. Between 2009 and 2017, one Nathella Sampath Jewelry Private Limited (referred to in Mr Dhond's note as "Jewelers") borrowed money from a consortium of banks. The allegation is that Jewelers diverted these borrowed funds for purposes other than those for which the advances were made, including transferring amounts, whether as payment or otherwise, to entities within the Jewelers' group. Between Jewelers and an associated firm called Nathella Sampath Chetty and Company ("NSCC"), there were some transactions, namely that Jewelers remitted Rs. 114.84 Crores to NSCC between 2010 and 2017 and NSCC rotated back a larger amount, about Rs. 135.48 Crores.
8. Up to this point, ABFL was not in the picture. It is in 2016, by a sanction letter dated 30th March 2016 that ABFL granted NSCC a loan of Rs. 40 Crores. The stated purpose of the loan was that from this amount of Rs. 40 crores, Rs. 20.80 crores were for payment to Jewelers. NSCC made that payment. From the rest, it paid Rs. 4.56 crores to the owners/vendors of the Varadarajapuram Property between 2015 and 2016. Another amount of Rs. 1 crore was routed to these vendors through an intervening set of charities (the name is Page 4 of 9 15th September 2022 904-ASFA-338-2022.DOC very long; and we will simply refer to them as "Charities"). There is no doubt that Charities were also part of the Jewelers'/NSCC group. The same persons are involved. In any case, NSCC thus acquired title to the Varadarajapuram Property and, by a sale deed of 6th May 2016, completed or perfected title. On that very day, NSCC mortgaged the Varadarajapuram Property to ABFL as security for the repayment of the loan of Rs. 40 Crores.
9. Up to this point, and even for some time thereafter, NSCC was a creditor of Jewelers not its debtor. NSC owed Jewelers nothing -- or so goes the narrative.
10. The Kalyanamandapam Property stands on another footing. It was purchased by Charities through six sale deeds between 3rd June 1986 to 24th June 1993, long before the consortium loans in question (which were between 2009 and 2017). This property was therefore acquired some 16 years before any consortium loan.
11. Mr Venegavkar for the Respondent-Enforcement Directorate and the Respondents does not contest this. He clarifies that as regards Kalyanamandapam, the attachment is in respect of the value of the property. That is noted.
12. On 2nd May 2016, Charities mortgaged the Kalyanamandapam Property to ABFL as security for the repayment of the NSCC loan mentioned above.
13. Both mortgage deeds are duly registered.
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14. ABFL is not an accused in any FIR nor in the ECIR. It is not an accused in the PMLA complaint at all. ABFL approached the adjudicating authority seeking a raising of the attachment on both the Varadarajapuram and Kalyanamandapam properties. The adjudicating authority negatived that application. ABFL's appeal failed. Hence, the First Appeal before us.
15. The facts in the ABHFL case relate to a property at Mylapore, Chennai. The cost of acquisition under three sale deeds was about Rs. 47.37 Crores and the case of the ED is that Rs. 22.05 Crores is proceeds of crime, Rs. 16.78 Crores is a bank loan and Rs. 3.55 Crores is from the own funds. Again, there is the same background material of a consortium of banks lending between 2009 to 2017 to Jewelers. Again, there is the same transaction between 2010 and 2017 between Jewelers and NSCC.
16. Here ABHFL is not the original lender. It is an assignee from ICICI Bank Ltd which originally advanced the loan. There are altogether five properties involved described by their "Property document Nos." Property doc. No. 2316 of 2013 relates to an acquisition by two individuals of a property valued at about Rs. 15.42 Crores, of which Rs. 5.46 Crores approximately is said to be proceeds of crime and Rs. 8.12 Crores is said to be a loan. The rest is the private funds of the two individuals. Property Doc No. 2317 of 2013, bought by other two individuals is valued at Rs. 13.59 Crores. The POC component is Rs. 3.06 Crores and the loan component is Rs. 8.66 Crores.
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17. Property Doc No. 2318 of 2013 relates to a purchase by NSCC at the rate of Rs. 18.05 crores. Of this, the POC is alleged to be Rs. 14.70 Crores and Rs. 2 crores are said to be company funds. NSCC carved up this property. It retained 3933 sq ft. It separated 1362 sq ft and sold this by Property Doc No. 2682 to the two individuals who had bought the property under Property Doc. No. 2317 of 2013. Another 1271 sq ft was similarly sold by NSCC under Property Doc. 2618 of 2014 to the same individuals who had bought the property under Property Doc No. 2316 of 2013.
18. Now the loans by ICICI were two. There was loan of Rs. 9 crores sanctioned on 31st March 2016 to the first pair of individuals (who had taken under Property Doc No. 2316 of 2013). There was a separate loan of Rs. 9.24 Crores on 30th March 2016 to the two individuals who took the property under Property Doc No. 2317 of 2013.
19. The submission in the ABHFL case is that the security that was provided was in the form of four immovable properties at Mylapore, Chennai, described in paragraph 1 of ABHFL's Appeal memo. The submission by Mr Ardeshir is that ABHFL is in no way connected to any transaction that can be traced to "proceeds of crime". Indeed, the submission seems to be that if any of the secured properties have been partly acquired by POC amounts, then a substantial portion of the loan has also been used to acquire those very properties. He submits that it simply cannot be that a fractional component comprised in the POC deployment to acquire property results in an eradication of ICICI Bank's and now ABHFL's otherwise valid and secured mortgage. For his mortgage to fail, Mr Page 7 of 9 15th September 2022 904-ASFA-338-2022.DOC Ardeshir submits -- and this would apply equally to Mr Dhond's case for ABFL -- it would have to be shown that both Appellants were involved in the money laundering transactions in question and wittingly lent money knowing of the money laundering or criminal activities. Both Mr Dhond and Mr Ardeshir point out that their clients entered the picture and advanced their respective loans long before the Enforcement Directorate began to act. All the loans in question are of 2016 and pre-date by at least two years the initial provisional attachment order of 31st July 2018. Both point out that their respective clients have never been issued notices under the PMLA and nobody has ever said that these two NBFCs are in any way involved in a scheduled crime or any activity that is the subject matter of the PMLA proceedings.
20. The submission before us by both counsel is that the overriding provision of Section 71 of the PMLA Act and which says that PMLA will have "overriding effect" notwithstanding anything inconsistent therewith contained in any other law for the time being in force does not and cannot operate to allow the PMLA to prevail over the SARFAESI Act. Mr Dhond points that in fact there is nothing inconsistent between the two Acts. He is in a position to show that the PMLA Act itself contemplates precisely such a situation where a third party has a legitimate and valid interest in the property that is sought to be attached. He submits that the rights of such a person and the entitlements in law are expressly saved by the PMLA Act itself. One of those rights, he points out. is to be found in Section 5(4) of the PMLA and this would entitle the NBFC in question to its remedies including under the SARFAESI Act. Both Mr Dhond and Mr Ardeshir are quick to accept that this exception Page 8 of 9 15th September 2022 904-ASFA-338-2022.DOC can only apply where the third party claimant stands outside the PMLA proceedings, i.e., it is not itself involved in the PMLA proceedings. Therefore, if a mortgage is itself fraudulent or is one of the devices used for money laundering, then such a mortgage will not be saved. That, in Mr Dhond's submission, is what is meant by the 'overriding effect' under Section 71.
21. These questions undoubtedly do fall for determination. We will, however, have to await the decision of the Supreme Court after the listing on 10th October 2022. We should not be understood to have expressed any opinion on the merits of the matter. We have recorded the factual background for clarity and noted some of the rival submissions.
22. List the matter on 18th October 2022 on the supplementary board.
(Gauri Godse, J) (G. S. Patel, J)
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