The Delhi High Court has clarified that an interim order directing the use of proceeds of crime, frozen under the Prevention of Money Laundering Act, to discharge the liabilities of a third-party company is ultra vires. By setting aside the Appellate Tribunal’s order dated 31 July 2026, the Court reinforced the principle that frozen assets cannot be repurposed without explicit statutory authority.
Background & Facts
The Dispute
The Deputy Director, Directorate of Enforcement (appellant) filed a Miscellaneous Appeal under Section 42 of the Prevention of Money Laundering Act, 2002 challenging an interim order passed by the Appellate Tribunal (under SAFEMA, New Delhi). The order, dated 31 July 2026, permitted the respondent, M/s ZO Pvt. Ltd, to use the frozen proceeds of crime to pay salaries and statutory dues of another entity, M/s Winzo Games Private Limited, which the appellant alleged to be the primary accused.
Key Facts
- 31.07.2026: Appellate Tribunal issued interim order allowing respondent to submit a list of employees with outstanding salaries for FY 2025-26 and to have the bank release frozen funds for payment.
- The interim order required:
- Respondent to submit employee salary details within one week.
- Verification by the respondent within one week of submission.
- Bank to disburse verified amounts within three working days.
- The appellant contended that the frozen proceeds belong to the Enforcement Directorate and cannot be diverted to satisfy liabilities of Winzo Games.
- The respondent argued that the Tribunal had balanced equity, noting that Winzo Games had granted a loan to ZO Pvt. Ltd and the funds would be used for legitimate salary and statutory dues.
- The appellant cited a Supreme Court decision dated 15.05.2026 (SLP (C) No.12671/2026) that set aside a similar Karnataka High Court direction, emphasizing that such interim relief must not prejudice the enforcement of money-laundering provisions.
Procedural History
- 14.08.2026: Delhi High Court delivered the judgment.
- 31.07.2026: Appellate Tribunal (SAFEMA) passed the interim order in favour of the respondent.
- 15.05.2026: Supreme Court set aside the Karnataka High Court direction in Directorate of Enforcement v. M/s ZO Private Limited.
- The appeal was filed under Section 42 PMLA challenging the Tribunal’s order.
Parties' Positions
- Appellant (Deputy Director, Directorate of Enforcement): Asserted that the Tribunal erred in law by allowing the proceeds of crime to be used for a third party’s liabilities and relied on the Supreme Court’s 15 May 2026 decision.
- Respondent (M/s ZO Pvt. Ltd): Maintained that the interim order was a balanced equity measure, that the loan from Winzo Games justified the use of frozen funds, and that no prejudice would be caused to the Enforcement Directorate.
Relief Sought
- The appellant sought the setting aside of the interim order dated 31 July 2026 and a direction that the Appellate Tribunal decide the appeal on its merits within a reasonable time.
- No specific monetary relief was claimed; the focus was on procedural propriety and preservation of frozen assets.
The Legal Issue
What is the correct legal position of an interim order under Section 42 of the PMLA that permits the utilisation of proceeds of crime, frozen by the Enforcement Directorate, to satisfy the liabilities of a third-party company?
Arguments Presented
For the Appellant
- The appellant relied on the Supreme Court’s judgment of 15 May 2026, which held that frozen proceeds of crime cannot be diverted to discharge liabilities of entities other than the accused.
- Cited the principle that the Enforcement Directorate’s power to freeze assets under the PMLA is exclusive and cannot be overridden by a tribunal’s interim direction.
- Emphasised that the Tribunal’s reliance on a Karnataka High Court order (Writ Petition No.962/2026) was misplaced because that order had been set aside by the Supreme Court.
For the Respondent
- Argued that the interim order was an equitable measure to prevent hardship to employees of Winzo Games, a company that had extended a loan to ZO Pvt. Ltd.
- Contended that the Tribunal’s direction was consistent with the balance of interests and did not prejudice the Enforcement Directorate’s investigation.
- Submitted that the loan arrangement provided a legitimate basis for the use of the frozen funds.
The Court's Analysis
The Court began by examining the statutory framework of Section 42 of the PMLA, which empowers a Special Court or Appellate Tribunal to grant interim relief but does not confer authority to repurpose frozen proceeds of crime for third-party liabilities. The Court noted that the primary purpose of asset freezing under the PMLA is to prevent the dissipation of proceeds that may be subject to confiscation.
"The proceeds of crime, once frozen, remain subject to the jurisdiction of the Enforcement Directorate and cannot be diverted to satisfy the debts of a separate corporate entity without explicit statutory sanction."
The Court then turned to the Supreme Court’s 15 May 2026 decision, which unequivocally held that any direction allowing the use of frozen assets to discharge liabilities of a third party is ultra vires. The Court distinguished the Karnataka High Court order cited by the respondent, observing that it had been expressly overruled by the Supreme Court and therefore could not be a basis for the Tribunal’s interim relief.
In assessing the respondent’s equity argument, the Court acknowledged the hardship faced by employees but stressed that such considerations must be balanced against the statutory mandate to preserve frozen assets. The Court held that the appropriate remedy, if any, would be a separate application to the Enforcement Directorate for release of funds, not an ad-hoc tribunal direction that contravenes the PMLA.
Consequently, the Court concluded that the Appellate Tribunal had erred in law by allowing the proceeds of crime to be used for the payment of salaries and statutory dues of Winzo Games Private Limited. The Court emphasized that the Tribunal’s discretion under Section 42 must be exercised within the confines of the statute and cannot override Supreme Court precedent.
The Verdict
The appeal is allowed. The Court set aside the interim order dated 31 July 2026, directing the Appellate Tribunal to decide the appeal filed by the respondent as expeditiously as possible, preferably within two months from 14 August 2026. No order as to costs was made.
What This Means For Similar Cases
Interim Relief Must Align With PMLA
- Practitioners must ensure that any interim relief sought under Section 42 PMLA does not attempt to repurpose frozen proceeds for third-party liabilities.
- Applications for release of frozen assets should be made directly to the Enforcement Directorate, not through tribunal-issued interim orders.
Supreme Court Precedent Is Controlling
- The Supreme Court’s 15 May 2026 decision is binding on all lower courts and tribunals; reliance on overturned High Court orders will not be tolerated.
- Counsel should cite the Supreme Court judgment when opposing any direction that contravenes the statutory prohibition on diversion of frozen assets.
Equity Considerations Require Separate Relief
- While employee hardship is a legitimate concern, courts will require a distinct procedural route (e.g., a separate application for interim relief) rather than allowing a tribunal to modify the effect of a freezing order.
- Lawyers should advise clients to seek protective orders that do not interfere with the Enforcement Directorate’s asset preservation powers.
Timelines for Tribunal Decisions
- The High Court’s directive for the Appellate Tribunal to decide within two months underscores the judiciary’s expectation of prompt adjudication in PMLA matters.
- Parties should be prepared with complete documentation to facilitate swift disposal of appeals.
