Madras High Court lets off senior executive of a tainted company

Madras High Court lets off senior executive of a tainted company

The court held that the salaries drawn by an employee before the commission of alleged money laundering activities by a company would not constitute the proceeds of a crime under the Prevention of Money Laundering Act

The Madras High Court earlier this month ruled on a vexed question that whether salaries drawn prior to the alleged commission of the Prevention of Money Laundering Act (PMLA) offences would constitute "proceeds of crime.

The two-Judge bench of Justices PN Prakash and V Sivagnanam on 4 February 2021 ruled in favor of the former vice president of First Leasing Company of India Limited (FLCI) S Dilliraj in the S Dilliraj and anr v. The Deputy Director, The Directorate of Enforcement case.

S Dilliraj, who worked as vice president of the company between 1996 and 2007, and his wife Kotieswari were being prosecuted in connection with money laundering cases lodged in 2015 against the FLCI.

The Reserve Bank of India (RBI) conducted an inspection of FLCIL in 2007 and found serious irregularities and diversion of funds to 15 satellite companies. FLCI, promoted by the Chennai-based industrialist AC Muthiah and the former President of the Board of Control for Cricket in India (BCCI), was subsequently declared a non-performing asset (NPA) in 2013.

The Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) lodged cases against persons associated with the FLCI in 2015 for offences under Sections 120-B (criminal conspiracy) read with 420 (cheating), 467 (forgery of valuable security), 468 (forgery for the purpose of cheating), 471 (forgery-related offence) and 477-A (falsification of accounts) of the Indian Penal Code (IPC).

IDBI Bank and the State Bank of India (SBI) had lodged a complaint that the company had obtained loans based on fudged and hyped-up financial statements, which were fraudulently diverted to 15 shell companies floated by FLCI.

IDBI Bank alone had given FLCI loan of Rs 300 crore as working capital of which Rs 273 crore were outstanding along with interest as of 2 September 2014. Initially, SBI and IDBI Bank had given Rs 20 crore and Rs 18 crore respectively as working capital to the company.

The allegation against Dilliraj was that as the vice president of FLCIL he was paid salaries, incentives and perquisites from the amounts that were borrowed by FLCI from the banks based on fudged records.

The bench in its judgement observed that these funds or the proceeds of the crime were stated to have gone into the kitty of the FLCIL's former Managing Director Farouk Irani, its former Chairman AC Muthiah, and others.

"The proceeds of the crime have gone into the kitty of the aforesaid persons and Dilliraj is not a beneficiary of the proceeds of the crime. When that being so, the statement of Mr B.Kumar, learned Senior Counsel appearing for the petitioners that the act of the Enforcement Directorate in prosecuting Dilliraj and his wife, leaving out AC Muthiah and his family members, does show that they are adopting a pick and choose attitude, merits serious consideration. However, this Court can only raise its eyebrows and stop with that and cannot quash the prosecution against Dilliraj, on the ground of discrimination under Article 14 of the Constitution of India," the bench noted in its judgement.

Dilliraj had resigned from the company in 2007.

"Though it is true that Dilliraj is facing the music in the prosecutions that have been launched by the CBI against FLCI, AC Muthiah, Farouk Irani and others for the predicate offences of making the banks believe their records and sanction the loans, the present prosecution of Dilliraj for money laundering, in the opinion of this Court, is misconceived," the Court held.

"Concededly, Dilliraj left the services of FLCI way back in the year 2007 and the salaries drawn by him from 1996 to 2007 can, by no stretch of imagination, be construed as proceeds of crime," The HC bench further reasoned.

The Court was categorical in its observation that the working capital loan amounts that were given by various banks based on the hyped-up financial statements of the company were diverted to 15 shell companies floated by FLCI and into the kitty of Farouk Irani and his family members. When the proceeds of crime had gone into the hands of fictitious companies that were floated for this purpose, there cannot be a further flow of the proceeds of crime into the account of Dilliraj as salaries and perquisites.

The Court also noted that it is not the case of the CBI or the ED that FLCI was throughout engaged in criminal activities nor is it their case that Dilliraj was engaged by FLCI only to fabricate records for their business purpose. For instance, if FLCI had engaged a master forger only for the purpose of forging records for their business purposes, the salary paid to the said master forger would undoubtedly be construed as proceeds of crime and if the master forger projects his salary as untainted money, he can be prosecuted under the PMLA. But, that is not the allegation against Dilliraj in the complaint.

"In view of the above discussion, we are unable to persuade ourselves to agree with the Enforcement Directorate that the salaries and perquisites that were paid to Dilliraj (A.1) while he was in employment with FLCI would amount to proceeds of crime and any property purchased with that would stand tainted. Albeit the presumption under Section 24 of the PML Act, on facts, we hold that the impugned prosecution of Dilliraj (A.1) and his wife Kotieswari (A.2) under the PML Act is misconceived and the same is accordingly quashed," the Court concluded.