Karnataka High Court Refuses Plea of Procedural Aberration

Karnataka High Court Refuses Plea of Procedural Aberration

The Karnataka High Court dismissed a petition filed by M/s Inditrade Fincorp Ltd. challenging the order passed by the Directorate of Enforcement (ED) freezing its bank account under the Prevention of Money Laundering Act (PMLA).

The single judge Justice M Nagaprasanna while refusing to grant any relief observed, “the investigation would be imperative, as any effort of any neighbouring nation to destabilise this country, either economically or otherwise, by any method which would touch upon the security of the nation and safety of its citizens, cannot be turned a blind eye to. Certainly, in the case of the petitioner, investigation cannot be stalled on this specious plea of procedural aberration as alleged by the petitioner.”

In the present case the petitioner- M/S. Inditrade Fincorp Ltd., claimed to be a Type-II non-deposit taking Non-Banking Financial Company (NBFC) incorporated in 2007 under the provisions of the Companies Act, 1956 and further claimed to have secured and unsecured micro lending business and its primary revenue is the interest income on the loans given and other incidental fees. The petitioner claimed that it is a Company wholly governed and regulated by the Reserve Bank of India under the Reserve Bank of India Act, 1934 (the Act) and the relevant Rules therein.

Respondents 2 to 5 are the officers of the Enforcement Directorate, 5th respondent, directed that the account of the petitioner be placed under debit freeze pursuant to a search conducted on M/s Cashfree Payments India Private Limited and M/s Razorpay Solutions India Private Limited which are Payment Gateways utilized by the petitioner for disbursal and collection of digital micro-loans to borrowers/customers.

After directing debit freeze, proceedings were initiated by the Adjudicating Authority under the Act and issued show cause notice to the petitioner on 14-10-2022 in terms of Section 8 of the Act.

The petitioner contended that the orders which direct debit freeze were void ab initio and they were in complete disregard to the procedural safeguards inasmuch as there are no reasons to believe for directing freeze of the account of the petitioner. He asserted that procedural compliance in terms of Section 17 of the Act is mandatory and not ancillary.

According to the Counsel appearing for petitioner, freezing of bank account of the petitioner was a draconian act which entailed serious civil consequences and if the statute directs performance of act of freezing in a particular manner, the respondents cannot deviate from the said procedure and if there is deviation it would become non est in the eye of law. He further submitted that the present proceeding was non est in the eye of law and sought quashment of the same.

On the other hand, the learned counsel representing respondents 2 to 5 contended that only the show cause notice issued to the petitioner was challenged. It was always open to the petitioner to urge all these grounds before the Adjudicating Authority who had issued the show cause notice. The counsel further submitted that the account of the petitioner was used by several Payment Gateways and other Payment Gateways were thus money actions who had links to Chinese apps and, therefore, there was a serious conspiracy that had to be unearthed only by way of investigation.

The Court noted based upon the crimes registered, in those predicate offences search and seizure proceedings were initiated against 5 applications – Razorpay Software Private Limited, Cashfree Payments India Private Limited, Paytm Payment Services Limited and Fast App Technology Private Limited. Based upon the search conducted against those Payment Gateways names of 111 entities figured.

The entities are now alleged to be controlled/operated by citizens of China who have gained access by using forged documents of Indians and by making few Indians as contractors of those entities.

The crux of the allegation against all these companies who were alleged to have dummy contractors on behalf of Chinese citizens was that they would grant small loans to individuals without any documentation, after that they direct those gullible customers to download an app and from the app seek access to the contents of smart phones, grant loans and immediately thereafter begin to blackmail those named gullible customers. Therefore, the allegation of extortion and harassment of public at mass levels of the said entities were unearthed albeit, prima facie, from the investigation both in the predicate offences and offences under the Act, noted the Court.

Further, the judge found that Schedule appended to the said seizure memo contained two transactions in the name of Waterelephant Technologies Private Limited. The petitioner had a service agreement with Waterelephant Technologies Private Limited. The agreement was for the purpose of identification of qualified borrowers; opening and operation of a collection account; collection of receivables and certain roles and responsibilities.

Therefore, the Court found that the petitioner was disbursing small loans to small borrowers, through Cashfree Payments or Razorpay or any other Payment Gateway and did have an agreement with Waterelephant. Waterelephant Company was said to have had several transactions and its directors are said to be Chinese. The link travelled in this manner, opined the judge.

Next, the Court elucidated that Section 17(1A) of the Act, empowers the authorized officer where is it not practicable to seize a record or property, to make an order to seize such property whereupon the property shall not be transferred or otherwise dealt with except with the prior permission of the officer making such an order. This forms part of the said provision for search and seizure. The provision further mandates that within 48 hours the materials of search and seizure should be placed before the Adjudicating Authority.

While applying the said provision to the facts of the case the Judge remarked that submissions of the petitioner that there were no reasons to believe was sans substance. “The original records placed before this Court by the Enforcement Directorate would clearly indicate several reasons directing freezing of the account. It is not the total amount involved in the said freezing order. It is the money trail that is required to be investigated into which is being done against those entities with whom the petitioner and several others admittedly had transactions. Therefore, the money is transferred from the petitioner through the Payment Gateway to the borrowers,” the Court stated.

The Court reiterated that the matter is still at the stage of investigation and what was issued was a show cause notice directing the representative of the petitioner to appear before the Adjudicating Authority. The petitioner would have all the opportunities to urge all these grounds urged now before the Adjudicating Authority in reply to the show cause notice.

The Court observed, “the projection of procedural aberration by the petitioner would not entitle entertainment of the petition, as there is link in the money trail against the petitioner, as the transactions have admittedly happened between Waterelephant and the Payment Gateways and the agreement did subsist with the petitioner and the Waterelephant. In the considered view of this Court, this is enough circumstance for the Adjudicating Authority to issue a notice to the petitioner.”

The Court relevantly commented, “it is again in public domain that several borrowers have committed suicide unable to bear the harassments of the representatives of such loan apps. The office bearers of several of these companies which control and operate such mobile loan apps are said to be entities of China or individuals from China sitting as Directors of such mobile loan apps. Therefore, it becomes necessary for an investigation, in the least to be conducted of any such company who would operate such loan apps and has transactions between each other.”

Unless the said notice was without jurisdiction, entertainment of the petition at this juncture was not warranted at the hands of the Court. Accordingly, the Court dismissed the petition.