Pre-attachment property sales to non-involved buyers cannot be covered by KPIDFE attachment under Section 3, rules Karnataka HC

M/s Brundavan Properties Private Limited and certain associated persons were accused of collecting deposits and failing to repay depositors.

The State invoked Section 3(2) of the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004 (“KPIDFE Act”) and attached, among other properties, 2 acres and 5 guntas in Sy. No. 706/3, Handinakere Village, Hassan Taluk, which had earlier belonged to Respondent No. 4, a promoter-director of the company.

Respondent No. 4 had formed sites in the land and sold individual sites to the six petitioners.

The petitioners claimed to be bona fide purchasers for valuable consideration and contended that their purchases predated the attachment order.

The petitioners therefore sought quashing of the attachment order insofar as it covered their individual sites.

Whether the State authorities could attach, under Section 3 of the KPIDFE Act, properties that had been sold to and were owned by the petitioners before the attachment order was passed.

Whether an allegation that the transfers in favour of the petitioners were mala fide or intended to defraud depositors could be adjudicated through proceedings under Section 3, or had to be pursued before the Special Court under Section 13 of the KPIDFE Act.

The Court applied Section 3 of the KPIDFE Act, which permits attachment of property acquired by a financial establishment, whether in its own name or in another person’s name, from deposits collected by it, and, where such property is unavailable or insufficient, the personal assets of promoters, partners, directors, managers, members or other persons associated with the financial establishment.

Section 5 requires the Competent Authority to apply to the Special Court for making the attachment absolute and to place before it the grounds and details supporting the attachment.

Section 13 provides the specific mechanism for proceeding against transferees where the Special Court has reasonable cause to believe that property was transferred otherwise than in good faith or for proper consideration; the transferee must be given notice and an opportunity to show cause.

The governing principle was that property belonging to an independent third-party purchaser cannot be attached under Section 3 merely because it was once owned by a promoter-director; any allegedly fraudulent or mala fide transfer must be examined under Section 13 by the Special Court.

The Court found that Respondent No. 4 had previously owned the larger property but had sold the individual sites to the petitioners before the attachment order was issued.

Consequently, at the relevant time, neither Respondent No. 4 nor the financial establishment or its associated persons owned the petitioners’ sites, and the petitioners themselves were not promoters, directors or persons involved in the affairs of the financial establishment.

On a plain reading of Section 3, the statutory power extended to property of the financial establishment or the personal assets of specified persons associated with it, not automatically to property already transferred to third-party purchasers.

The State’s contention that the sales were fraudulent did not validate the Section 3 attachment.

Such a contention required proceedings under Section 13, including an application to the Special Court, notice to the transferees and adjudication of good faith and consideration.

The impugned order had relied on revenue records showing the larger survey extent and had failed to account for the prior sales in favour of the petitioners.

It set aside the attachment order dated 7 December 2022, bearing No. E-RD 99 GRC 2021, insofar as it related to the six sites described in Schedule B of the writ petition.

The Competent Authority was granted liberty to approach the Special Court under Section 13 of the KPIDFE Act for proceeding against those properties, if legally permissible; any such application was to be considered by the Special Court in accordance with law.

The writ petition was accordingly disposed of.