Union Budget 2021: Detaching banks from attachments under economic offences laws is need of the hour

Legislations dealing with economic offences like the Prevention of Money Laundering Act, 2002 (‘Money Laundering Law’) and the Prohibition of Benami Property Transaction Act, 1988 (‘Benami Property Law’) have remained dormant for many years in the past. In fact, the latter legislation got its teeth only in the year 2016, when it was amended to its current form.

These legislations are being used post-2014 and 2016 quite vociferously to bring defaulting persons to justice. The provisions of the two legislations provide the authorities concerned the power to attach properties, which are either proceeds of crime or are involved in a benami transaction.

Attachment of property is an interim measure, which primarily puts a bar on further transfer of property. Attachment is resorted to by the government to ensure that it is not deprived of the opportunity to eventually confiscate/ recover the proceeds of crime or benami property, which has either been ill-gotten by violating laws or has been concealed to avoid payment of taxes, etc.

Though the purpose behind introducing the power of attachment under money laundering and benami property law is for the above-mentioned purposes, such extraordinary power is being increasingly used by the authorities concerned in an arbitrary manner, and such use is creating additional problems for the banking sector which is already grappling with the problem of ever-increasing Non-Performing Assets.

The arbitrariness in the exercise of power is evident wherein the properties mortgaged with banks are attached as the property of the mortgagor on the alleged ground that they are proceeds of crime or benami property. Whilst, in reality, neither the banks nor the attached properties have any nexus with the alleged offence, and the property is attached on a protective basis to ensure recovery.

It is important to understand that loans are provided by banks as part of their business and to secure repayment of such loan, an immovable property is mortgaged. Banks carry out proper due diligence about ownership of the property and about any preexisting charges/ encumbrances upon it. Despite ensuring the above, when the mortgaged property is attached for alleged violation of these laws, the banks become the unintended victims of crime exposing them to the perils of irrecoverable loans.

Once attached, the banks are left with no option but to contest and wait for the outcome of the proceedings. If the proceedings are decided in favour of the mortgagor, the banks stand a chance to recover their dues. In case the proceedings lead to an adverse decision, the same would result in confiscation of the mortgaged property. Effectively, general public, who have deposited/ invested money with the banks, eventually become the victims of these attachments proceedings under the economic offences laws and pay for the crimes committed by someone else.

In the first place, there is lack of clarity that whether a property, mortgaged with banks, can at all be attached by authorities concerned under the Money Laundering and the Benami Property Law for alleged offences committed by the mortgagor, independent of the mortgaged property. Secondly, where a mortgagor is not able to make repayment of loan amount and such loan is secured by way of mortgage, whether the banks can approach the Debt Recovery Tribunal (DRT), in terms of the Recovery of Debts and Bankruptcy Act (RDBA) and the SARFAESI law, for the recovery of the loan amount. However, owing to the lack of clarity on the first point, will it mean that even if proceedings are instituted in DRT, the interests of banks takes a secondary place vis-a-vis that of the government under these laws.

From a legal standpoint, the Supreme Court answered the question and held that a law which comes later in time shall have primacy over the pre-existing law because while bringing into existence a new legislation, the legislature was conscious of the existing legislation. Accordingly, basis the above it could have been said that legislations like the SARFAESI and RDBA will prevail over the money laundering and the benami transaction law as the former came into existence post the coming into effect of the latter. Therefore, any attachment made under the Money Laundering and Benami Property law will be subject to the bona fide interest of the banks protected under the later legislations.

However, the Delhi High Court while deciding whether SARFAESI, RDBA and Insolvency and Bankruptcy Code (IBC) laws will prevail over the money laundering law, ruled that the objects and reasons of bringing into existence the four legislations are distinct and each law operating in a different field and therefore, it cannot be said the former legislation will prevail over the latter legislation.

However, the Appellate Tribunal for Forfeited Properties has taken a view that if a bank is an innocent party, the mortgaged properties cannot be attached inasmuch as the same would go on to destroy the banking system.

The government has tried to ameliorate the situation to some extent by amending the IBC. The amendment provides that the property of a corporate debtor cannot be attached where an alleged offence has been committed prior to the commencement of Corporate Insolvency Resolution Process and which is part of an approved resolution plan.

Similar to the above amendment in IBC, it is the need of the hour that the government provides a solution to ease the pain of the banking sector from the scourge of attachments made by the authorities, which not only goes to substantially reduces the chances of recoveries by the banks from the defaulting parties, but also burdens them and the judicial system with unnecessary and avoidable litigation.

S Vasudevan is executive partner and Shashank Sharma is principal associate at Lakshmikumaran and Sridharan Attorneys

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