PMLA Attachment of Property Mortgaged to Banks and Financial Institutions

When the Enforcement Directorate attaches property already mortgaged to a bank or financial institution, two public-law regimes intersect. PMLA seeks to preserve proceeds of crime for confiscation; secured-creditor laws protect legitimate security interests and orderly recovery of public money. Neither label—“attachment” nor “mortgage”—automatically decides the contest.

The first question is whether the property is tainted

The starting point remains Section 2(1)(u) PMLA. If the mortgaged asset was itself acquired from proceeds of a scheduled offence, the fact that a later mortgage was created cannot cleanse the taint. A lender’s rights must then be assessed under PMLA, including the provisions for claimants acting in good faith and suffering quantifiable loss.

If, however, the property was lawfully acquired and mortgaged before the alleged criminal activity, the ED must explain whether it claims the asset as direct proceeds, indirectly derived property, or equivalent value. A mortgage predating the alleged offence, supported by genuine disbursement and due diligence, is strong evidence of an independent third-party interest.

The Delhi High Court’s Axis Bank framework

Deputy Director, Directorate of Enforcement v. Axis Bank, 2019 SCC OnLine Del 7854, is the leading Delhi High Court authority on competing claims. It recognises that PMLA attachment does not automatically destroy a bona fide secured interest created before the attachment. It also recognises ED’s power, in an appropriate case, to attach other property of equivalent value when the actual proceeds are unavailable.

The adjudicating forum must therefore examine chronology and bona fides: acquisition of the property, creation and registration of the charge, loan disbursement, default, the scheduled offence, generation of alleged proceeds, attachment and enforcement action. Collusive or sham security cannot defeat PMLA; a genuine prior charge cannot be ignored as though the secured creditor had no legal interest.

Statutory priority is important but not mechanically conclusive

Section 26E of the SARFAESI Act gives priority to secured creditors after registration of the security interest, subject to its statutory terms. Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 similarly provides priority to secured creditors. These provisions strengthen the bank’s claim, but the court must still identify whether the asset is proceeds of crime and consider the stage of PMLA proceedings.

Priority over debts and a claim to confiscate criminal proceeds are not identical concepts. A secured creditor should therefore avoid arguing only that SARFAESI overrides everything. The stronger case establishes lawful source, prior security, real consideration, registration, absence of notice, reasonable due diligence and lack of collusion.

What banks and financial institutions should place on record

The lender should file the sanction memorandum, valuation and title-search reports, loan and security documents, proof of disbursement, CERSAI registration, account statements, end-use monitoring, classification of the account, recall notice and SARFAESI or DRT steps. It should also identify whether the borrower acquired the property before the alleged offence and whether any alleged tainted funds were used to discharge the loan or improve the asset.

The ED’s order should do corresponding analytical work. It should identify the proceeds, quantify them, state the property’s alleged connection, acknowledge the registered charge and explain why attachment is still necessary and proportionate. A formulaic assertion that PMLA overrides other laws is not a substitute for determining the nature of the property and the rights already created in it.

Remedies and forum strategy

Depending on the stage, a secured creditor may object before the PMLA Adjudicating Authority, appeal under Section 26 PMLA, seek appropriate relief before the Special Court, and continue remedies available under SARFAESI or the RDB Act subject to operative restraint orders. The relief sought should be specific: release, recognition of priority, permission to enforce subject to safeguards, or substitution of security.

The governing principle is reconciliation through facts. PMLA should not become a mechanism for confiscating a bank’s independently acquired security interest, while secured-creditor law should not become a route for laundering or insulating criminal proceeds. Chronology, traceability, registration and good faith decide the balance.

Sources

Delhi High Court, Deputy Director, Directorate of Enforcement v. Axis Bank, 2019 SCC OnLine Del 7854.

Prevention of Money-Laundering Act, 2002: https://upload.indiacode.nic.in/showfile?actid=AC_CEN_2_2_00035_200315_1517807326550&filename=a2003-15.pdf&type=actfile

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, including Section 26E: https://www.indiacode.nic.in/handle/123456789/2006

Recovery of Debts and Bankruptcy Act, 1993, including Section 31B: https://www.indiacode.nic.in/indiacode/bitstream/123456789/1775/1/A1993-51.pdf

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