Court Upholds Decision Allowing Salary Payments from Frozen Accounts Despite PMLA Proceedings
In a significant ruling, the Karnataka High Court dismissed the Directorate of Enforcement's (ED) appeal against Zo Pvt Ltd, thereby upholding the decision of the learned Single Judge that allowed the company to pay employee salaries from its frozen bank accounts. The appeal, which challenged the order permitting salary payments despite ongoing investigations under the Prevention of Money Laundering Act (PMLA), 2002, was heard by a division bench comprising Justices Anu Sivaraman and Vijaykumar A. Patil.
The case stemmed from allegations of money laundering involving Zo Pvt Ltd's parent company, Winzo Games Pvt Ltd. The Enforcement Directorate had frozen Zo Pvt Ltd's bank accounts as part of an investigation into proceeds of crime amounting to Rs. 3,522.05 crores generated through alleged fraudulent gaming operations. Despite the ongoing investigation, the Single Judge had allowed Zo Pvt Ltd to pay January 2026 salaries, leading to the ED's appeal.
The ED contended that the freezing order was justified under Section 17(1A) of the PMLA due to the risk of fund flight and argued that the Adjudicating Authority under Section 8 of the PMLA lacked the power to defreeze accounts partially for salary payments. The bench, however, highlighted that the proceeds of crime must have a direct linkage to a scheduled offence, as per the Supreme Court's interpretation in previous judgments.
The High Court emphasized that the definition of 'proceeds of crime' requires a strict interpretation and cannot be expanded based on assumptions. The bench noted that while an FIR existed against Winzo Games Pvt Ltd, the alleged predicate offence amounted to Rs. 42 lakhs - a sum not justifying the freezing of Rs. 690 crores in Zo Pvt Ltd's accounts.
The court also underscored that while the PMLA's intent is to prevent money laundering, it ensures procedural fairness, including timelines and adherence to due process. The bench ruled that the learned Single Judge's discretion in allowing salary payments was neither perverse nor unwarranted, given that the Adjudicating Authority could not adjudicate on interim salary disbursements.
Citing the Supreme Court's rulings, the High Court reiterated that actions under the PMLA must be linked to a registered scheduled offence, and the authorities cannot act on presumption or conjecture. Consequently, the appeal was dismissed, maintaining the status quo on salary payments, while reminding the ED of the necessity for due legal procedure in such financial investigations.
Bottom Line:
Proceeds of crime under Prevention of Money Laundering Act (PMLA) must have direct or indirect linkage to criminal activity relating to a scheduled offence. Authority under PMLA cannot act on assumptions or presumptions about property being proceeds of crime without proper registration of a predicate offence.
Statutory provision(s):
Prevention of Money Laundering Act, 2002: Sections 2(1)(u), 2(1)(y), 3, 5, 8, 17(1A), 20
