Karnataka High Court Refuses To De-Freeze Fintech Inditrade's Bank Accounts Amid ED's Probe Into Alleged Chinese Links

The freezing order is passed on allegations that the petitioner disbursed small loans to small borrowers, through payment gateways while having an agreement with another company which allegedly has links to China.

A single judge bench of 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.”

The Company had challenged the order dated 02-09-2022 passed by the Assistant Director, Directorate of Enforcement directing freezing of the account of the petitioner invoking Section 17(1-A) of the Act and also the show cause notice dated 14-10-2022 in terms of Section 8 of the Act.

The petitioner submitted there is no search conducted in the office of the petitioner and no seizure happens from the office of the petitioner. Merely because the petitioner has used Razorpay or Cashfree which are Payment Gateways to disburse loans to lonees it would not mean that the petitioner is also involved in any of the activity of those Payment Gateways, it was argued.

Further, it was submitted that the orders which direct debit freeze are void ab-initio and they are in complete disregard to the procedural safeguards inasmuch as there are no reasons to believe for directing freeze of the account of the petitioner.

It was also said that freezing of bank account of the petitioner is a draconian act which would entail 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.

ED on the other hand opposed the plea saying what is challenged now is only a show cause notice issued to the petitioner. "It is always open to the petitioner to urge all these grounds before the Adjudicating Authority who has issued the show cause notice. The petition challenging only a notice is premature."

Further, it was argued there is a serious conspiracy that has to be unearthed only by way of investigation.

Firstly, the bench noted that 15 FIR were registered by the Cyber Crime Police Station, Bangalore City for offences punishable under Sections 120B, 384, 419 and 420 of the IPC against numerous entities in connection with their involvement in extortion and harassment to public who have availed small amount of loans through mobile apps being run by several entities.

Based upon the crimes so registered, search and seizure proceedings were initiated against five applications–Razorpay Software Private Limited, Cashfree Payments India Private Limited, Paytm Payment Services Limited and Fast App Technology Private Limited.

During the search and seizure transactions of the lonees with the petitioner company emerged, not only the petitioner, but there were several companies, whose app was used for the aforesaid loan transactions. Based on which the seizure memo was issued.

Noting that the petitioner company had a service agreement with another company named Waterelephant Technologies Private Limited. The agreement was drawn on 17-01-2020, for the purpose of identification of qualified borrowers; opening and operation of a collection account; collection of receivables and certain roles and responsibilities. This agreement came to be terminated on 07-01-2021, by a simple communication invoking termination clause in the agreement. There is no reason indicated as to why the termination comes about all of a sudden.

It said “It is a fact 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. The said Waterelephant company is said to have had several transactions and its Directors are said to be Chinese. The link travels in this manner.”

Referring to Section 17 (1A) of the Act the bench said “It empowers the authorised 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.”

Then it rejected the submission of petitioner that Section 17 of the Act has been completely violated while conducting search and seizure.

It also observed “The original records placed before this Court by the Enforcement Directorate would clearly indicate several reasons directing freezing of the account.”

Further, “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.”

Further it turned down the contention of the company that no chinese citizen is involved in the affairs of the company. It said “The matter is still at the stage of investigation and what is issued is 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.”

Thus it held “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.”

It added “Unless the said notice is without jurisdiction, entertainment of the petition at this juncture is not warranted at the hands of this court.”

It concluded by saying “The petitioner cannot presume or assume that the Adjudicating Authority would not render justice to the case of the petitioner meeting all the contentions that he would raise before the Adjudicating Authority by way of reply to the show cause notice. I do not find any warrant to interfere at this stage, as I do not find any violation of procedure stipulated under Section 17 of the Act.”

Case Title: M/s Inditrade Fincorp Pvt Ltd And Union of India & Others

Case No: WRIT PETITION No.25172 OF 2022

Citation: 2023 LiveLaw (Kar) 87

Date of Order: 16-02-2023

Appearance: Advocate Avi Singh a/w Vivek S for petitioner.

Advocate K.N.Krishna Rao FOR R1.

Advocate Madhukar Deshpande for R-2 TO R-5