High Court of Karnataka Upholds Right to Pay Salaries Despite PMLA Account Freeze: Section 17(1A) Examined - 2026-03-09

Balancing Enforcement and Employees: A Landmark Ruling on PMLA Freezes

In a significant judgment delivered on March 9, 2026, the High Court of Karnataka has provided clarity on the limits of administrative discretion versus humanitarian concern under the Prevention of Money Laundering Act (PMLA). The division bench, comprising Justice Anuj Sivaraman and Justice Vijaykumar A. Patil, refused to set aside a lower court order that allowed a company under an investigative freeze to continue paying employee salaries.

The Conflict: Financial Investigation vs. Operational Survival

The dispute arose after the Directorate of Enforcement (ED) froze the bank accounts of Zo Pvt Ltd under Section 17(1A) of the PMLA. The ED alleged that Zo Pvt Ltd, a subsidiary of Winzo Games Private Limited, had been used to dissipate "proceeds of crime" linked to ongoing gaming fraud investigations.

While the ED sought a total moratorium on all transactions, a learned Single Judge had previously granted Zo Pvt Ltd conditional relief, permitting the disbursal of salaries for January 2026. The ED appealed this order, arguing that any funds in the account were tainted and that, as a matter of law, the High Court should not have interfered with the investigatory powers by granting interim financial relief.

Arguments from Both Sides

The Directorate of Enforcement contended that the PMLA set out a strict compliance procedure and that the High Court should not have bypassed statutory safeguards. Relying on the recent Supreme Court judgment in Mangal Rajendra Kamthe v. Tahsildar, Purandhar , the ED argued that once a party is relegated to the Adjudicating Authority, they cannot seek interim relief from a Constitutional Court.

Conversely, Zo Pvt Ltd maintained that the "proceeds of crime" definition could not be applied sweepingly to all funds, particularly when the company’s survival and the livelihoods of 220 employees were at stake. They emphasized that the Adjudicating Authority under the PMLA lacks the statutory power to grant interim directions for salary payments, effectively leaving the employees in a precarious position.

The Court’s Reasoning: Addressing the Statutory Gap

The High Court’s decision turned on a practical interpretation of the PMLA’s scope. The Court observed that the statutory mechanism provides for adjudication, but noted a critical vacuum: the Adjudicating Authority is powerless to order partial defreezing for immediate liabilities like salaries.

Justice Sivaraman, delivering the verdict, noted that because the Adjudicating Authority could not address the humanitarian aspect of the dispute, the Writ Court's discretion was not only justified but necessary. The bench distinguished the current case from the Mangal Rajendra Kamthe precedent, noting that the latter involved authorities who actually possessed the power to grant the requested relief.

Key Observations

The judgment clarifies the reach of the PMLA:

• "The exercise of discretion by the learned Single Judge while relegating the respondent to its statutory remedy cannot be said to be perverse or unwarranted."
• "Since the issue of payment of salaries from the frozen accounts could not have been considered by the Adjudicating Authority, we are of the opinion that the exercise of discretion by the learned Single Judge cannot be said to be incorrect."
• "The procedure contemplated under Section 17 of PMLA... safeguards the rights of the persons who would be proceeded against under the Act by ensuring fairness in procedure."

A Sustainable Precedent

The High Court’s refusal to interfere with the salary payment order ensures that companies under the PMLA scanner are not immediately crippled, provided they can prove the operational necessity of those funds. This decision reinforces the principle that while state agencies have broad powers to stop financial flows linked to crimes, such powers must be exercised without stripping an entity of its fundamental ability to exist and meet baseline societal obligations during the period of adjudication.