By — Vridhi Parakh
Abstract
The intersection of the Prevention of Money Laundering Act, 2002 (PMLA) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) presents a difficult question: when the Enforcement Directorate (ED) provisionally attaches mortgaged property allegedly constituting proceeds of crime, can a bona fide secured creditor nevertheless enforce its prior security interest? This article argues that in such circumstances, a bona fide secured creditor’s prior interest should take absolute priority over PMLA confiscation mechanisms, especially when the creditor’s claim is independent of such allegations because: Parliament expressly enacted Section 26-E of the SARFAESI Act in 2016 with full knowledge of PMLA; the fundamental distinction between SARFAESI’s protection against quantifiable, actual economic loss and PMLA’s discretionary social asset forfeiture; and legislative history demonstrates the imperative need to eliminate institutional friction in financial markets.
Introduction
When the ED attaches mortgaged property under Section 5 of the PMLA, a collision occurs between criminal asset confiscation and commercial debt recovery. The apparent conflict arises when a) the secured creditor under SARFAESI and the accused under the PMLA are the same person and b) when the property being attached is the same. This intersection produces three distinct structural problems within India’s legal landscape. First, it generates doctrinal ambiguity due to overlapping non-obstante clauses. Section 71 of PMLA asserts overriding effect over all other laws, while Section 26-E of SARFAESI declares that after the registration of a security interest, debts due to secured creditors shall be paid in priority over all other debts and all revenues, taxes, etc. payable to the Central or State Government. Second, it causes severe institutional dysfunction, as financial institutions are unable to schedule recovery timelines or manage non-performing assets when administrative seizures indefinitely suspend contractual and statutory rights. Third, it inflicts systemic damage on the credit economy as uncertain collateral protection forces banks to charge punitive interest or refuse credit altogether, retarding economic growth.
Indian courts have attempted to reconcile these competing legislations through the doctrine of harmonious construction. Courts have emphasized that both statutes operate in distinct fields and must be interpreted to co-exist without defeating their respective legislative objects. Under this view, an attachment order under the PMLA is not automatically illegal merely because a secured creditor holds a prior interest; rather, the secured creditor must prove its bona fides before the Special Court to seek the release of the attached property.
Legislative Intent
The temporal sequence of these enactments is of paramount significance as interpreting which provision must ultimately prevail cannot be divorced from the legislative chronology and the specific intent underlying the revision. The 2016 SARFAESI amendment postdates the operationalization and gazette notification of the PMLA by over a decade. In Solidaire India v. Fairgrowth Financial (2001), it was held that when Parliament enacts subsequent legislation, it is presumed to act with complete knowledge of all pre-existing statutes on the same subject matter. Therefore, Section 26-E cannot be dismissed as an inadvertent omission or a general provision yielding to a specialized criminal law. It represents a deliberate legislative choice to shield secured creditors from administrative seizures that had historically hampered bank recovery rights. If the Parliament had intended to exclude the PMLA from the scope of Section 26-E’s non-obstante clause, it would have explicitly drafted an exception within the amended provisions. Instead, Parliament employed maximally broad language, declaring priority “notwithstanding anything contained in any other law for the time being in force”, precisely because it recognized the expansive reach of competing state claims. To force secured creditors into Special Court litigation to reclaim what Parliament expressly prioritized directly subverts the statutory objective of the 2016 amendment rendering the statute illusory. Furthermore, reading Section 26-E as subordinate to PMLA attachments renders the Amendment functionally redundant.
Economic Vs Social Loss
A second substantive rationale for prioritizing secured creditors lies in the fundamental nature of the economic interests at stake. Commercial banking and institutional lending depend entirely on quantifiable capital allocation and predictable recovery frameworks. Prior to the enactment of SARFAESI, credit recovery was governed by general CPC procedures. The resulting delays severely impaired economic growth, prompting Parliament to establish non-judicial enforcement mechanisms that allow lenders to accelerate recovery by permitting banks to take possession of mortgaged property.
The PMLA operates within an entirely different legal and conceptual framework. As observed in Indian Bank v. Government of India (2012) the primary objective of the PMLA was to target the volume of black money generated through the laundering of proceeds derived from serious transnational offenses, such as drug trafficking and organized crime. The court cautioned that expanding the sweep of the PMLA to absorb ordinary commercial offenses and domestic banking defaults produces disastrous consequences for victims of crime.
When a borrower defrauds a financial institution, the lending bank is not a beneficiary or co-conspirator in the offense; it is the direct victim of the predicate crime. The bank’s economic loss is quantifiable and fixed at the point of loan origination based on verified contractual facts. In contrast, the ED’s claim rests on executive discretion: specifically, an administrative determination under Section 5 that property constitutes proceeds of crime subject to sovereign forfeiture. Treating a bank’s prior-mortgaged asset as attachable proceeds of crime fundamentally conflates the offender’s illicit gains with the lender’s legitimate, pre-existing capital. The State’s interest in asset forfeiture is penal and social, aimed at depriving criminals of illicit wealth. The bank’s interest is restorative, aimed at recovering actual capital disbursed into the economy.
If Section 26-E automatically bars all ED attachment of mortgaged property, criminals could mortgage property to sympathetic family before crime and later claim that mortgage defeats confiscation. Thus, the Parliament would have inadvertently created a safe harbor for criminal proceeds. Conversely, if PMLA uniformly prevails, Section 26-E becomes meaningless; Parliament would have amended SARFAESI only to have courts subordinate it, rendering the amendment empty of content. The Delhi High Court in DED v. Axis Bank (2019) held that an order of attachment under PMLA is not rendered illegal merely because the secured creditor has a prior secured interest, but recognized that PMLA itself protects the rights of bona fide third parties through the special court’s jurisdiction. Where these interests conflict over an asset that was encumbered before the crime occurred, the restorative commercial right must take precedence over the penal sovereign claim.
The Objective Test
A property mortgaged chronologically before the predicate crime cannot logically be proceeds of crime derived from that crime. The operational reach of the PMLA is legally bounded by the concept of “proceeds of crime.” Property can only be attached under Section 5 if it was derived, directly or indirectly, as a result of criminal activity relating to a scheduled offense. Applying this legal test yields a clear rule: when a property is mortgaged to a financial institution before the predicate crime is committed, that property cannot logically constitute proceeds of crime derived from that offense. At the time the security interest was created, the asset was untainted by criminality, and the capital advanced by the lender was legitimate commercial funds. The subsequent criminal conduct of the borrower cannot retroactively transform a pre-existing, clean asset into illicit proceeds.
This distinction reinforces the objective framework established in decisions such as National Spot Exchange v. Union of India (2025) and HDFC Bank v. State of Maharashtra (2019). The legal standing of an asset is determined by its historical connection to the offense and the bona fides of the claimant, rather than by mechanical assertions of state power. If an asset was encumbered in good faith prior to the criminal act, the state possesses no legitimate confiscatory claim over the secured creditor’s portion of that asset.
Conclusion
The ongoing conflict between PMLA and SARFAESI cannot be resolved by declaring State interests as universally supreme. To resolve the conflict between the PMLA and SARFAESI without compromising the state’s capacity to prosecute financial crimes, the legal system must adopt an objective, three-tiered adjudication framework grounded in temporal priority and statutory registration. First, temporal priority must serve as an absolute threshold bar. If a security interest was created and registered prior to the date of the alleged predicate crime specified in the PMLA complaint, the mortgaged asset must be declared legally immune from provisional attachment. Second, if a valid CERSAI registration under Section 26E predates a PMLA attachment, the registered debt must take absolute priority, allowing the lender to realize its dues first, with any excess proceeds remitted to the State. Third, the evidentiary burden regarding bona fides must be simplified. Unless the ED represents affirmative evidence establishing that the lender was complicit in the money laundering scheme, the lender’s claim must be recognized immediately without requiring a full-scale trial in the Special Court.
About The Author:
Vridhi Parakh is a second-year student currently pursuing B.A LL.B (Hons) at O.P Jindal Global University. Her interest lies in exploring the various facets of criminal law and forensic sciences.
Image Source: https://m.rediff.com/news/report/pmla-overrides-debt-recovery-laws-high-court/20260330.htm