The Supreme Court on Friday (July 31) dismissed the Enforcement Directorate's plea against the Delhi High Court's decision which held that an order of freezing of a bank account under Section 17(1A) of the Prevention of Money Laundering Act, 2000 cannot be passed solely on "suspicion" rather a "reasons to believe," must be necessitated before passing an order of freezing.

A bench of Justice Dipankar Datta and Justice Sheel Nagu refused to interference with the Delhi High Court's interpretation that although Section 17(1A) PMLA does not explicitly use the words 'reason to believe' for freezing orders, the provision cannot be read in isolation from Section 17(1), which requires 'reasons to believe' for search and seizure, thereby necessitating the same standard for freezing orders.

“Although Section 17(1A) does not expressly use the phrase “reason to believe”, it cannot be read in isolation from Section 17(1). The operation of Section 17(1A) is intrinsically linked to the practicability of effecting a seizure under Section 17(1), and such seizure can only be undertaken upon the formation of a “reason to believe”. Since the act of freezing is merely an alternative to seizure, it cannot logically be subjected to a lower or different standard of satisfaction than that applicable to the act of seizure itself.”, the High Court observation, being approved by the Supreme Court.

The case arose from the freezing of two bank accounts held by Respondent-Poonam Malik, the wife of Ranjit Malik, who was allegedly associated with Gagan Dhawan, an accused in an alleged Sterling Biotech Limited bank fraud case involving over Rs. 5,000 crores. Neither the Respondent nor her husband was named in the FIR or ECIR.

The ED's freezing order stated:

"Whereas, it is suspected that amount involved in money laundering are lying in the above mentioned bank account... Now, therefore, it is directed that any debit operation from the above said bank account not be allowed until further orders from this office."

The Adjudicating Authority confirmed the freezing. The Appellate Tribunal set aside the freezing, leading to the ED's appeal before the Delhi High Court.

Dismissing the ED's appeal, the High Court observed:

“…it stands conclusively established that the freezing orders dated 05.09.2018 issued by the ED regarding the Respondent's bank accounts cannot be sustained in law, as they have been passed without compliance with the mandatory requirements of the statute and in disregard of the procedural safeguards provided therein.”

Further, the High Court held that the unreasoned freezing order was in violation of Article 300-A of the Constitution.

“It must also be borne in mind that the freezing of a bank account in violation of statutory requirements has far-reaching consequences. Such action directly impinges upon the constitutional right to property guaranteed under Article 300A of the Constitution of India, which mandates that no person shall be deprived of property except in accordance with the authority of law. Any violation of this constitutional safeguard strikes at the very root of the legitimacy of the impugned action and cannot be countenanced.”, the High Court observed.

Cause Title: Directorate of Enforcement v. Poonam Malik

Mr. Anil Kaushik, A.S.G. Mr. Annam Venkatesh, Adv. Mr. S.subramaniam, Adv. Ms. Priyanka Terdal, Adv. Mr. Diwakar Sharma, Adv. Mr. Arvind Kumar Sharma, AOR appeared for ED.

Click here to read the order