CASE ANALYSIS ON:-
M/S. Satyam Computer Services Limited vs Directorate Of Enforcement
IN THE HIGH COURT OF TELEGANA
WRIT PETITION NO:- 37487 of 2012
DECIDED ON:- 31/12/2018
Author: Ayushi Mendhiratta, Panjab University
BACKGROUND OF THE CASE: The case, well known as the Satyam Scam, exhibits one of the largest corporate fraud cases in Indian history. M/s Satyam Computer Service Limited, a pre-eminent company, lost its credibility in the market after hoodwinking and falsification of its account details to enlist a large number of investors in the company. Eventually, after the evaluation of deceitful invoices and bank details, it eroded the market’s confidence in the company. The Indian Government intervened in the case to stabilize and protect the interests of over 53,000 employees and 3 lakh stakeholders by recruiting new professional members under section 397 of the Companies Act, 1956. However, despite the government’s effort to settle the company’s credit system by appointing Tech Mahindra as the successful bidder, the criminal proceedings against the earlier management system continued to be conducted by CBI and ED (Enforcement Directorate) by issuing the provisional attachment order of listing certain properties as ‘proceeds of Crime’.
FACTS OF THE CASE:- In January 2009, B. Ramalinga Raju, the then chairman of M/s Satyam Computer Services Limited, confessed to the falsification of the company’s accounts, which assisted in gaining the profits of over 7,000 crores. The Enforcement Directorate made an investigation into the case. After assessing the fraud, made provisional attachment order was made as per section 5 of the Prevention of Money Laundering Act 2002 to prevent the properties from being concealed or transferred. The Tech Mahendra, which acquired the lawful ownership after acquiring the government’s approval, challenged the order before the special court in Hyderabad dealing with Money laundering cases.
The special court passed an order under Section 8(3) of the Prevention of Money Laundering Act stating that the properties attached in a provisional order were indeed ‘proceeds of the crime’.
The New owner of the company challenged the verdict passed by the special court in the Telangana High Court.
ISSUES BEFORE THE COURT:- 1) Can the property be attached under PMLA even after a change in the ownership and management of the company?
2) If the property is purchased by a third party as a bona fide purchaser under the proceedings of the government, is still liable for the attachment order under 8(3) of the PMLA?
ARGUMENTS BY PETITIONER:- 1) The counsel on behalf of the petitioner, or Tech Mahendra, argued that as per Section 8 (3) of PLMA, to enlist the property as proceeds of crime, it must belong to a person currently having its ownership rights. Since the old management was replaced by new bidders as per the government’s approval, the same should not be treated as proceeds of crime.
2) The objective behind the Prevention of Money Laundering Act 2002 was to dissuade the illegal owners from enjoying illicit gains.
ARGUMENTS BY RESPONDENT:- The counsel on behalf of the Enforcement Directorate opined that the purpose of the PMLA would be defeated if the property obtained from the criminal origin was simply transferred to a bona fide purchaser.
2) The term ‘proceeds of crime’ refers to any property acquired through the origin of criminal activity . Thus , the property being transferred to other person does not invalidate the order pass the special court .
RELEVANT LEGAL PROVISIONS:- “Section 397 in The Companies Act, 1956
Application to [Tribunal] for relief in cases of oppression
(1)Any member of a company who complain that the affairs of the company [are being conducted in a manner prejudicial to public interest or] [ Substituted by Act 53 of 1963, Section 10, for ” are being conducted” (w.e.f. 1.1.1964).] in a manner oppressive to any member or members (including any one or more of themselves) may apply to the [Tribunal] [ Substituted by Act 11 of 2003, Section 44, for ” Company Law Board” .] for an order under this section, provided such members have a right so to apply in virtue of section 399.
(2)If, on any application under sub-section (1) the [Tribunal] [ Substituted by Act 11 of 2003, Section 44, for ” Company Law Board” .] is of opinion-(a)that the company’s affairs [are being conducted in a manner prejudicial to public interest or] [ Substituted by Act 53 of 1963, Section 10, for ” are being conducted” (w.e.f. 1.1.1964).] in a manner oppressive to any member or members; and(b)that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up, the [Tribunal] [ Substituted by Act 11 of 2003, Section 44, for ” Company Law Board” .] may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.”
* “Section 5 in The Prevention of Money-Laundering Act, 2002
5. Attachment of property involved in money laundering.
– [(1) Where the Director or any other officer not below the rank of Deputy Director authorised by the Director for the purposes of this section, has reason to believe (the reason for such belief to be recorded in writing), on the basis of material in his possession, that-(a)any person is in possession of any proceeds of crime; and(b)such proceeds of crime are likely to be concealed, transferred or dealt with in any manner which may result in frustrating any proceedings relating to confiscation of such proceeds of crime under this Chapter, he may, by order in writing, provisionally attach such property for a period not exceeding one hundred and eighty days from the date of the order”
Section 8. Adjudication- 8(3) (3) Where the Adjudicating Authority decides under sub-section (2) that any property is involved in money-laundering, he shall, by an order in writing, confirm the attachment of the property made under subsection (1) of section 5 or retention of property or 3 [record seized or frozen under section 17 or section 18 and record a finding to that effect, whereupon such attachment or retention or freezing of the seized or frozen property] or record shall— (a) continue during 1 [investigation for a period not exceeding 2 [three hundred and sixty-five days] or] the pendency of the proceedings relating to any 3 [offence under this Act before a court or under the corresponding law of any other country, before the competent court of criminal jurisdiction outside India, as the case may be; and] 4 [(b) become final after an order of confiscation is passed under sub-section (5) or sub-section (7) of section 8 or section 58B or sub-section (2A) of section 60 by the 5 [Special Court];] 6 [Explanation.—For the purposes of computing the period of three hundred and sixty-five days under clause (a), the period during which the investigation is stayed by any court under any law for the time being in force shall be excluded.]”
DECISION OF THE COURT:- The High Court passed the verdict in favour of ‘ The Enforcement Directorate’, implying a strict interpretation of sec 2(1)(u) of the Prevention of Money Laundering Act 2002. The court opined that the term ‘proceeds of crime’ refers to any property obtained either directly or indirectly from fraudulent activity. The attachment order passed by the special court can not be invalidated solely on the basis of the transfer of ownership of the property.
Though the new owners of the property acquired the company’s assets as per transparent government proceedings, allowing them to retain assets from being attached would defeat the purpose of the act.
The confirmation order passed by the special court as per Section 8 of the aforementioned act obligates to cessation of the property regardless of the innocence of the present owners.
ANALYSIS OF THE AUTHOR:- The judgment delivered by the High Court possesses a strict interpretation of the provisions of the Prevention of Money Laundering Act 2002. It prevents the criminals from acquiring benefits directly or indirectly from illicit acts. However, it does not take into consideration the effect that will be borne by a bona fide purchaser. The company might have to face severe punishment or penalities regardless of their involvement in the crime .
It exhibits that the laws made by the government do not provide protection to the Bonafide purchaser from attachment of their property . The decision passed by the court will impact the decisions made by investors in the future . It can lead to economic instability if the laws do not bridge the gap between protecting the purpose of the act and the interest of bona fide purchasers.
CONCLUSION: – It can be deduced from the verdict that the property obtained from an illegal act can be attached under the Act even if it is transferred to another person. The objective of the act is to prevent criminals from gaining benefits from criminal activities. In this sense, it empowers or strengthens the statutory provisions passed by parliament; however, it portrays a backlash in sheltering the interests of bona fide purchasers.
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