The Bombay High Court has decisively affirmed that the Prevention of Money Laundering Act, 2002 (PMLA) overrides conflicting provisions of the SARFAESI Act and RDB Act, establishing that secured creditors cannot claim priority over properties provisionally or finally attached as 'proceeds of crime'. This ruling reinforces the confiscatory intent of PMLA and clarifies the exclusive jurisdiction of the Special Court to adjudicate third-party claims.
Background & Facts
The Dispute
The Enforcement Directorate (ED) initiated proceedings under the PMLA against Grace Industries Ltd. and associated entities following a Central Bureau of Investigation (CBI) FIR dated 20.09.2012, alleging irregular coal block allocations that generated wrongful gains of Rs. 24,92,49,850. The ED treated these gains as 'proceeds of crime' under Section 2(1)(u) of the PMLA. On 08.12.2015, the ED issued a provisional attachment order under Section 5 of the PMLA, attaching immovable properties owned by the accused entities. The attachment was confirmed by the Adjudicating Authority on 30.05.2016 under Section 8(3). These properties had been mortgaged to HDFC Bank and Punjab National Bank (PNB) prior to attachment, as security for credit facilities extended between 2005 and 2015.
Key Facts
- The scheduled offence (coal block allocation irregularities) was registered on 20.09.2012.
- The properties attached were purchased by the accused entities as early as 2005, well before the commission of the scheduled offence.
- The mortgaged properties were not directly acquired using proceeds of crime, but the ED alleged that proceeds of crime were used to repay the bank loans.
- HDFC Bank classified its loan account as 'NPA' and initiated SARFAESI Act proceedings before the attachment was confirmed.
- The ED filed a charge-sheet before the Special Court on 28.10.2014.
- The respondent banks challenged the confirmation of attachment before the Appellate Tribunal under Section 26 of the PMLA.
Procedural History
- 20.09.2012: CBI registers FIR RC-219/2012/E/0013 against Grace Industries Ltd. and others.
- 08.12.2015: ED issues provisional attachment order under Section 5 of PMLA.
- 30.05.2016: Adjudicating Authority confirms attachment under Section 8(3).
- 28.10.2014: Charge-sheet filed before Special Judge.
- 28.08.2017: Appellate Tribunal allows HDFC Bank’s appeal, sets aside attachment, and grants priority to secured creditor under Section 31-B of RDB Act and Section 26-E of SARFAESI Act.
- 25.01.2018: Appellate Tribunal issues similar order in favor of PNB in Appeal No. FPA-PMLA-1373/GOA/2016.
- 1413/2017 & 9/2019: ED files First Appeals before Bombay High Court challenging the Tribunal’s orders.
- 23.03.2026: Judgment pronounced by Bombay High Court.
The Parties' Positions
For the Appellant (ED)
- Argued that PMLA is a special penal statute with overriding effect under Section 71, intended to confiscate tainted property, not recover debts.
- Contended that Section 31-B of RDB Act and Section 26-E of SARFAESI Act confer priority only on 'debts due' to secured creditors, not on proceeds of crime.
- Emphasized that the State is not a creditor under PMLA but exercises sovereign power to confiscate ill-gotten gains.
- Relied on Vijay Madanlal Choudhary v. Union of India (2023) 12 SCC 1 and National Spot Exchange Ltd. v. Union of India (2026 SCC OnLine SC 161) to argue that 'proceeds of crime' includes property equivalent in value to tainted assets, even if acquired prior to the offence.
- Asserted that the Appellate Tribunal erred in applying civil recovery statutes to override a criminal confiscation regime.
For the Respondents (HDFC Bank & PNB)
- Argued that their security interests, created prior to attachment, are protected under Section 31-B of RDB Act and Section 26-E of SARFAESI Act.
- Contended that the properties were purchased before the scheduled offence and thus cannot be 'proceeds of crime' under Section 2(1)(u).
- Relied on Seema Garg v. Directorate of Enforcement and Pavana Dibbur v. Directorate of Enforcement (2023) 15 SCC 91 to assert that a direct nexus between property and criminal activity is mandatory.
- Claimed that the Appellate Tribunal correctly held that secured creditors must be prioritized to protect financial stability.
Relief Sought
The ED sought quashing of the Appellate Tribunal’s orders dated 28.08.2017 and 25.01.2018, restoration of the confirmation of attachment, and a declaration that secured creditors have no statutory priority over properties attached under PMLA.
The Legal Issue
The central question was whether Section 71 of the PMLA grants overriding effect to the confiscation regime under PMLA over the priority rights granted to secured creditors under Section 31-B of the RDB Act and Section 26-E of the SARFAESI Act, and whether such creditors may enforce their security interest against properties confirmed as 'proceeds of crime'.
Arguments Presented
For the Appellant
The ED argued that the PMLA is a special penal statute designed to dismantle the financial infrastructure of organized crime. Section 71 explicitly states that PMLA overrides any inconsistent law. The attachment under PMLA is not a claim for debt recovery but a preventive and confiscatory measure. The Appellate Tribunal erred in treating the State as a creditor and the attached property as a debtor’s asset. The Supreme Court in Vijay Madanlal Choudhary and National Spot Exchange Ltd. clarified that 'proceeds of crime' includes property equivalent in value to tainted assets, even if acquired prior to the offence. The Tribunal’s reliance on SARFAESI and RDB Act ignored the distinct objectives of PMLA and misapplied civil recovery principles to a criminal confiscation framework.
For the Respondent
The banks contended that their security interests were created before the PMLA attachment and were validly registered. Section 31-B of RDB Act and Section 26-E of SARFAESI Act explicitly grant priority to secured creditors over all other claims, including government dues. The properties were purchased in 2005, long before the scheduled offence in 2012, and thus could not be proceeds of crime under Section 2(1)(u). The Supreme Court in Pavana Dibbur held that property acquired before the offence cannot be treated as proceeds of crime unless directly traceable. The Tribunal correctly applied these principles and protected legitimate financial interests.
The Court's Analysis
The Court undertook a detailed analysis of the legislative intent behind PMLA, SARFAESI Act, and RDB Act. It emphasized that while SARFAESI and RDB Act are recovery statutes designed to facilitate debt realization, PMLA is a penal statute aimed at confiscating ill-gotten wealth to deter money laundering and protect financial integrity.
"The Government, when it exercises its power under PMLA to seek attachment leading to confiscation of proceeds of crime, does not stand as a creditor... the idea being to take away what has been illegitimately secured by proscribed criminal activity."
The Court held that the Appellate Tribunal fundamentally erred in equating the State’s confiscatory power under PMLA with a claim for government dues. The priority granted under Section 31-B and Section 26-E applies only to debts due to secured creditors, not to properties confiscated as proceeds of crime. The Court further noted that the definition of 'proceeds of crime' under Section 2(1)(u) is expansive and includes property equivalent in value to tainted assets, as affirmed in Vijay Madanlal Choudhary and Nav Nirman Builders.
The Court rejected the respondents’ reliance on Seema Garg and Pavana Dibbur, noting that these judgments were superseded by the Supreme Court’s broader interpretation in Vijay Madanlal Choudhary. The Court also clarified that while the banks’ prior security interest is not rendered illegal by the attachment, it does not confer a right to enforce that interest ahead of the State’s confiscatory claim.
Crucially, the Court observed that Section 8(8) of the PMLA provides a specific remedy for bona fide third parties: they may apply to the Special Court for restoration of property during trial, provided they prove good faith and lack of involvement in money laundering. The Appellate Tribunal, by bypassing this mechanism and granting priority under civil recovery statutes, acted beyond its jurisdiction.
The Court concluded that the Appellate Tribunal’s order was legally unsustainable, arbitrary, and contrary to the overriding effect of PMLA under Section 71. The Tribunal failed to examine whether the properties were indeed proceeds of crime or whether the banks’ claims were bona fide.
The Verdict
The appeals are allowed. The impugned orders dated 28.08.2017 and 25.01.2018 passed by the Appellate Tribunal under the PMLA are quashed and set aside. The confirmation of attachment of the mortgaged properties under Section 8(3) of the PMLA stands restored. The respondent banks are granted liberty to file applications under Section 8(8) of the PMLA before the Special Court for restoration of the properties, subject to proving bonafide interest and lack of involvement in money laundering. No costs are awarded.
What This Means For Similar Cases
Secured Creditors Cannot Bypass PMLA’s Confiscatory Regime
- Practitioners must now recognize that SARFAESI Act and RDB Act cannot override PMLA’s attachment and confiscation powers, even if security interests were created prior to attachment.
- Banks and financial institutions cannot initiate SARFAESI proceedings against properties under PMLA attachment without first seeking relief under Section 8(8).
Burden of Proof Shifts to Third Parties Seeking Restoration
- A secured creditor claiming bona fide interest must now prove: (i) the property was acquired before the scheduled offence, (ii) no knowledge of criminal activity, and (iii) due diligence in extending credit.
- Mere prior mortgage is insufficient; the claimant must demonstrate good faith under Section 8(8).
Special Court Is Exclusive Forum for Third-Party Claims
- Any claim by a third party (including mortgagees, hypothecatees, or lessees) against attached property must be raised before the Special Court under Section 8(8), not before the Appellate Tribunal.
- The Appellate Tribunal lacks jurisdiction to release attached property on grounds of secured creditor priority.
Definition of 'Proceeds of Crime' Is Broad and Flexible
- Property acquired before the scheduled offence may still be treated as 'proceeds of crime' if it is equivalent in value to tainted assets, as clarified in Vijay Madanlal Choudhary.
- The nexus requirement is not limited to direct traceability; indirect links through fund flows or loan repayments are sufficient for attachment.
Procedural Compliance Is Non-Negotiable
- ED must ensure that provisional attachment is supported by material showing a reasonable belief that the property is proceeds of crime.
- Failure to establish nexus may still lead to release, but only through the Special Court, not via civil recovery statutes.
