In a landmark ruling, the appellate tribunal on matters related to the Prevention of Money Laundering Act has ruled that Enforcement Directorate cannot claim rights over assets of people suspected of criminal activity if banks have created prior rights over them through lending.
The tribunal has ruled in favour of Standard Chartered Bank in a dispute involving the ED on the Winsome Diamonds & Jewellery case saying that it would be against the spirit of the Money Laundering Act if assets pledged are not available for banks to recover their dues.
“The mortgaged properties of the appellant bank cannot be attached or confiscated unless link and nexus directly or indirectly established,” Justice Manmohan Singh, chairman of the tribunal wrote in his order passed on August 2, a copy of which is in possession of ET.
“The mortgaged properties are security to the loans and cannot be subject matter of attachment particularly when the same were purchased and mortgaged prior to the events of funds diversion and fraud committed by the borrowers.”
The ruling could be a huge relief for banks fighting to recover money from defaulters some of whom are also being prosecuted by investigating agencies like ED and CBI.
The ruling, if upheld, could help banks recover money and clean up their books. The order can be appealed against in the Supreme Court. The adjudicating officer has relied on the definition of ‘proceeds of crime’ to rule that agencies cannot claim rights over assets that were not acquired through criminal activity for which a company or an individual is being prosecuted.
Proceeds of crime is defined as ‘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.’
In many cases where the judiciary moves slowly, banks have to wait for more than a decade to recover their dues. State Bank of IndiaNSE 1.53 % is facing such a situation in recovering money lent to bankrupt Kingfisher Airlines where agencies are prosecuting its promoter Vijay Mallya for violation of laws.
“There are many companies where the Enforcement Directorate has attached assets making it difficult for the resolution professional to draw a fruitful resolution plan or to find resolution applicants at acceptable price,” said Anil Goel, founder of AAA Insolvency Professionals. “Such assets can be sold with higher valuation yielding more for the lenders.
The order should help see the light of the day for many NCLT cases stuck in litigation process,” he said. Winsome Diamonds is a company where lenders are trying to recover more than Rs 4,600 crore after the company went belly up because of fraudulent transactions by the promoters, including Jatin Mehta who is under investigation. Frauds have crippled banks.
PNB has incurred more than Rs 13,000 crore of losses due to frauds by jeweller Nirav Modi.
Winsome Diamonds borrowed Rs 4,617 crore from 14 different banks by 2012 by pledging its properties at many locations. The loans were given to three group companies, Winsome Diamond & Jewellers, Forever Precious Diamond and Jewellery and Suraj Diamonds.
By 2013, these companies started defaulting on loans and were soon declared wilful defaulter leading to banks initiating recovery process which got stalled by the ED’s attachment of assets. “The mortgage properties are not derived or obtained, directly or indirectly from the criminal activity or the proceeds of crime,’’ the order said.
The scope of the Act is to punish the accused person involved in money laundering, but not to punish an innocent person.’’ While it may not be a blanket approval towards banks getting their dues ahead of the investigative agencies, the mindless attachments by the agencies may come to an end.
“The order indicts the routine attachment of properties by ED without examining the facts of the case,” said Vinay Chauhan, Partner, Corporate Law Chambers India. The observations in the order will come as big relief to similarly placed banks, companies, who cannot enforce their securities because of routine attachment of properties by ED.”
According to Dhaivat Anjaria, a distressed assets specialist who led the resolution for one of the large 12 corporate insolvency accounts, the order reinforces the supreme hierarchy of financial creditors’ rights in matters classified as distressed debt or under insolvency process.
“By recognising their superior standing vis a vis other government dues including rights over attached assets of the debtor, the guidance will facilitate faster and seamless decision making by creditor committees towards achieving corporate insolvency resolutions,” he said.