Karnataka HC Permits Salary Payments from Bank Accounts Frozen under PMLA Section 17(1A) Pending Investigation - 2026-02-02

Balancing Enforcement and Employment: Karnataka HC Grants Relief to Frozen Accounts

In a significant order addressing the intersection of financial investigations and corporate operational continuity, the High Court of Karnataka has provided limited relief to ZO Pvt. Ltd., whose bank accounts were frozen by the Directorate of Enforcement (ED) under the Prevention of Money Laundering Act (PMLA). While the Court stopped short of quashing the freezing order, it directed the ED to facilitate payments of employee salaries and statutory dues to ensure the livelihood of workers is not jeopardized by the ongoing legal probe.

The Context: A Freeze on Operations

The dispute arose following a search and seizure operation conducted by the ED on December 30, 2025, at the premises of FinAdvantage Consulting (P) Ltd., an outsource accounting firm for the petitioner, ZO Pvt. Ltd. Acting under Section 17(1A) of the PMLA, the investigative agency froze the petitioner's bank accounts, citing concerns over potential dissipations of proceeds of crime. The ED alleged that the petitioner, a subsidiary of M/s Winzo Private Limited, had engaged in "Real Money Games" that were legally impermissible.

Faced with a total freeze of funds exceeding ₹190 crores, the company faced an existential crisis regarding its payroll, unable to pay monthly salaries ranging between ₹8 to ₹11 crores.

Legal Arguments: Jurisdiction vs. Practicality

Senior Counsel Sajan Poovayya, appearing for the petitioner, argued that the ED was fully aware of an unsecured loan of ₹231 crores extended by the Holding Company to the petitioner long before the search. He contended that the freezing order was issued without valid jurisdictional basis and that the company’s business operations regarding "Non-Real Money Games" remained entirely lawful, necessitating the urgent release of funds for employee disbursements.

Conversely, the respondent argued that the freezing order was a necessary exercise of subjective satisfaction by the investigating officer to prevent the laundering of potential proceeds of crime. The ED maintained that the Court should not interfere in the merits of an investigation that is currently within the purview of the Adjudicating Authority.

Key Observations

Justice B M Shyam Prasad’s judgment emphasized the need to balance the rigor of the PMLA with human equity:

• "The order to freeze an account must be when the officer... is of the opinion that it is not practical to seize the property."
• "Whether any further information was gathered during the search is a question of fact which can be examined by the Adjudicating Authority to decide whether the freezing... must continue beyond 180 days."
• "This Court, when it is not in dispute that the petitioner and the Holding Company are engaged in the business which is permissible... is of the view that there must be a direction to the respondent to communicate to the concerned bank for authorization to pay salaries."

A Pragmatic Resolution

The Court declined to intervene in the broader challenge to the freezing order, noting that the petitioner has the right to contest the merits before the Adjudicating Authority. However, invoking its jurisdiction under Article 226 of the Constitution, the Court mandated that the petitioner provide a verified list of employees to the ED. The ED is now required to verify these details and facilitate the unfreezing of sufficient funds specifically to cover salary expenses for January, February, and March 2026.

This ruling underscores the judiciary’s role in ensuring that while investigative agencies hold substantial powers under the PMLA to curb financial crimes, such actions should not result in collateral damage to the livelihood of employees who are peripheral to the alleged criminal activities. For corporate entities, this provides a critical, albeit limited, life-raft during prolonged PMLA investigations.