Karnataka High Court Grants Partial Relief to WinZo Subsidiary in PMLA Account Freeze Case

Introduction

In a significant ruling balancing investigative powers with operational necessities, the Karnataka High Court has directed the Directorate of Enforcement (ED) to verify and permit the operation of frozen bank accounts belonging to ZO Pvt. Ltd., a subsidiary of gaming company WinZo Private Limited, for the purpose of disbursing employee salaries. The decision, delivered by Justice B M Shyam Prasad on February 2, 2026, in Writ Petition No. 962/2026, addresses the petitioner's challenge to a search, seizure, and freezing order under Section 17(1A) of the Prevention of Money Laundering Act (PMLA), 2002. While declining to quash the freezing order at this stage, the court emphasized the need to safeguard employee rights during ongoing enforcement proceedings, allowing limited access to funds for January, February, and March 2026, subject to the Adjudicating Authority's final determination. This ruling underscores the judiciary's role in mitigating the harsh impacts of PMLA investigations on legitimate businesses, particularly in permissible sectors like non-real money gaming.

The case stems from ED's actions amid allegations of involvement in real money games, deemed impermissible under Indian law, with frozen assets estimated between Rs. 193 crores and Rs. 230 crores. The petitioner's plea highlights the frozen accounts' role in daily operations, including salaries for employees engaged in legal business segments. This development comes as PMLA enforcement intensifies against online gaming firms, raising broader questions about procedural fairness and economic disruptions caused by asset freezes.

Case Background

ZO Pvt. Ltd., incorporated under the Companies Act, 2013, and headquartered in New Delhi, operates as a subsidiary of WinZo Private Limited, a prominent player in the online gaming industry. The company focuses on micro-drama content generation and non-real money games, activities the court noted as permissible under law. The dispute arose from ED's investigation under ECIR/BGZO/25/2025, targeting alleged money laundering linked to real money gaming operations.

On December 30, 2025, ED conducted a search and seizure at the offices of M/s FinAdvantage Consulting Pvt. Ltd., ZO Pvt. Ltd.'s outsourced accounting firm in Bengaluru. During these proceedings, ED issued an order under Section 17(1A) of the PMLA, freezing the petitioner's bank accounts, mutual fund investments, and fixed deposits. The freezing was justified as a practical measure to prevent dissipation of proceeds of crime, given the impracticability of physical seizure. The petitioner, represented by Senior Advocate Sajan Poovayya, immediately contested the actions, arguing they were illegal and disproportionate.

The events leading to the litigation trace back to an unsecured loan of Rs. 231 crores extended by the holding company to the petitioner prior to the search, a transaction ED was allegedly aware of. This loan formed part of the basis for the freezing, but the petitioner claimed it could not justify the order under Section 17(1A), suggesting instead invocation of Section 5 for attachment. On January 19, 2026, the High Court heard preliminary arguments on the limited issue of account operation for salaries and statutory dues. The court permitted the petitioner to submit employee details to ED, but when no action followed, the matter escalated to a full hearing.

Key legal questions before the court included:

(1) Whether the search, seizure, and freezing order were lawful under PMLA provisions, particularly given ED's prior knowledge of the loan;

(2) The scope of judicial intervention under Articles 226 and 227 of the Constitution in reviewing ED's subjective satisfaction; and

(3) The permissibility of limited account operation for employee salaries during the freezing period, which extends up to 180 days under Section 20 of the PMLA, with potential continuation by the Adjudicating Authority under Section 8.

The timeline is concise but intense: Search on December 30, 2025; freezing order same day; continuance order on January 22, 2026; and the High Court's order on February 2, 2026, disposing of the petition while granting interim relief.

Arguments Presented

The petitioner mounted a multi-pronged attack on ED's actions. Primarily, ZO Pvt. Ltd. sought declarations that the search and seizure at FinAdvantage Consulting were illegal and void, as recorded in the panchanama dated December 30, 2025. They argued that all consequent actions, including the freezing order under Section 17(1A), should be quashed. Central to their case was the assertion that ED was fully aware of the Rs. 231 crore unsecured loan from WinZo much before the search, rendering the freezing baseless under Section 17(1A). The petitioner contended this transaction, if suspicious, warranted proceedings under Section 5 for provisional attachment, not an immediate freeze during search. They emphasized that no new material was gathered during the search to justify the order, challenging the officer's subjective satisfaction as lacking permissible grounds.

On the operational front, the petitioner highlighted the severe impact of the freeze: inability to pay salaries and contractual dues to employees, estimated at Rs. 8-11 crores monthly. They noted that employees handle legal aspects of the business, such as non-real money games and content creation, predating the investigation. Invoking Article 226, they urged the court to permit limited account operation, citing the holding company's prior resolution to delegate day-to-day operations to the subsidiary. Senior Counsel Poovayya relied on a Delhi High Court precedent in M/s Art Housing Finance [India] Limited v. Directorate of Enforcement , where similar relief was granted even under Section 5 attachments, arguing ED's consistent practice of allowing salary payments.

The respondent, Directorate of Enforcement, represented by Standing Counsel Madhu N Rao, defended the actions vigorously. ED asserted that the authorized officer, under Section 17(1) of the PMLA, could record reasons for search and seizure, and during proceedings, based on gathered information—including pre-search data—direct a freeze under Section 17(1A) to prevent asset dissipation. They stressed this was the only practical recourse, as physical seizure was infeasible. ED argued the petitioner's challenge essentially sought merits review of the officer's subjective satisfaction, impermissible in writ jurisdiction under Article 226, as such matters are fact-intensive and deferred to the Adjudicating Authority.

Regarding salary requests, ED had not acted on submitted employee lists, viewing it as an invitation for judicial merits determination. They contested the frozen amount at Rs. 193 crores and implied the loan proceeds were tainted, justifying the freeze. ED also noted the January 22, 2026, continuance order under Section 20, unchallenged by the petitioner, which extended freezing until at least March 31, 2026, unless further extended.

Both sides clashed on factual points: the petitioner claimed no new search-day evidence supported the freeze, while ED maintained proceedings revealed sufficient grounds. Legally, the debate centered on PMLA's scheme—initial freezes needing Adjudicating Authority confirmation—and the limits of high court intervention pre-adjudication.

Legal Analysis

Justice Shyam Prasad's reasoning meticulously navigated the PMLA's framework, declining broad intervention while carving out space for humanitarian relief. The court first examined the freezing mechanism under Section 17(1A), which allows provisional freezes when seizure is impracticable, served on the person concerned, and prohibiting dealings without prior permission. It noted that such initial orders must lead to Section 17(4) applications to the Adjudicating Authority for confirmation, and continuances under Section 20 (up to 180 days) require recorded reasons for belief in the need for retention pending adjudication.

The judge observed that the petitioner's core grievance—that no permissible material under Section 17(1A) justified the freeze, given ED's prior loan knowledge—raised factual questions best resolved by the Adjudicating Authority. He clarified: pre-search information could form the basis if amplified during proceedings, but whether further evidence emerged is a "question of fact" for adjudication on continuance beyond 180 days. Thus, the court refrained from quashing the order or reviewing subjective satisfaction, as writ jurisdiction under Article 226 is not for merits appeals but extraordinary remedies against patent illegality.

On salary disbursal, the analysis turned pragmatic. Recognizing the petitioner's engagement in "business which is permissible in law," the court invoked Section 17(1A)'s proviso allowing prior permission for operations. It distinguished initial freezes (subject to officer approval) from attachments under Section 5, noting ED's practice of permitting salaries even in the latter, as per the Delhi High Court precedent. This case, M/s Art Housing Finance , was relevant for illustrating ED's compliance with similar judicial directions, reinforcing that prohibitions are not absolute but conditional.

The ruling delineates key PMLA concepts: subjective satisfaction must be based on material, but its sufficiency is post-facto reviewable; freezes aim to preserve assets, not paralyze businesses; and employee welfare trumps blanket restrictions where businesses are lawful. No other precedents were cited, but the analysis implicitly draws from PMLA's balance between stringent enforcement and constitutional rights under Article 21 (right to livelihood). Allegations involved real money games as predicate offenses, but the court focused on procedural compliance rather than merits, avoiding speculation on guilt.

This approach ensures PMLA's rigor without undue hardship, potentially influencing how courts handle interim relief in economic offense cases.

Key Observations

The judgment features several pivotal excerpts underscoring the court's balanced approach:

• On the scope of judicial review: "The petitioner's case hinges not just against the subjective satisfaction that could be, but also on the specific assertion that there was no material permissible under Section 17[1A] of the Act to record the subjective satisfaction. The petitioner contends that the decision to freeze the account is based on the information which is furnished even before the date of search, but whether any further information was gathered during the search is a question of fact which can be examined by the Adjudicating Authority..."

• Emphasizing employee protection: "This Court, when it is not in dispute that the petitioner and the Holding Company are engaged in the business which is permissible in law and they are seeking permission to use the account frozen for payment of salary, is of the view that there must be a direction to the respondent to communicate to the concerned bank for authorization to pay salaries to the employees after due verification..."

• On PMLA's operational flexibility: "When there is an initiation of initial freezing under Section 17[1A] of the Act, the prohibition on the operation of the account is subject to prior permission of the Authorized Officer. This would mean that in a given case, it would be open to the concerned Officer to permit the operation of the account."

• Regarding continuance and remedies: "The petition stands disposed of with liberty to the petitioner to contest in the proceedings with the Adjudicating Authority against the continuance of the order to freeze its account beyond the period of 180 days."

These observations highlight the judgment's focus on procedural integrity and practical relief, providing clear guidance for similar PMLA disputes.

Court's Decision

The Karnataka High Court disposed of the writ petition on February 2, 2026, without quashing the search, seizure, or freezing order, relegating merits challenges to the Adjudicating Authority. Specifically, the court granted the petitioner liberty to contest the freezing's continuance beyond 180 days in adjudication proceedings under Sections 8 and 20 of the PMLA.

For immediate relief, the operative directions are targeted and time-bound:

• The petitioner must file, within one week, a list of employees and salary details for January 2026 with ED.

• ED is mandated to verify the list within three days and communicate authorization to the concerned bank, enabling salary payments.

• For February and March 2026, the petitioner may submit similar details by the 15th of each month; ED must verify and permit operations accordingly.

These directions apply until March 31, 2026, subject to any Adjudicating Authority decision on extension.

The implications are multifaceted. Practically, this averts immediate financial distress for ZO Pvt. Ltd.'s employees, estimated at hundreds in legal gaming operations, preventing layoffs or dues defaults amid a Rs. 8-11 crore monthly outflow. For the gaming sector, it signals judicial sensitivity to PMLA's collateral damage on ancillary businesses, potentially encouraging similar pleas in ED probes against fintech or online platforms.

Broader effects include reinforcing that PMLA freezes are not punitive but preservative, with courts willing to enforce the "prior permission" proviso for essentials. Future cases may see increased reliance on this precedent for operational relief, prompting ED to streamline verification processes. However, it does not dilute enforcement; the liberty to challenge continuance ensures accountability without halting investigations. In an era of aggressive anti-money laundering actions, this decision promotes a humane application of law, safeguarding livelihoods while upholding investigative needs.

This ruling arrives at a pivotal time for India's gaming industry, post-regulatory clarifications distinguishing skill-based from chance games. By integrating employee welfare into PMLA jurisprudence, the Karnataka High Court sets a template for equitable justice, likely influencing appellate scrutiny and policy discussions on enforcement balance.