Madras High Court reopens settled principles of Automatic Quashing of PMLA Proceedings

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Shifting Paradigms in PMLA Jurisprudence: Madras High Court reopens settled principles of Automatic Quashing of PMLA Proceedings
Blog Dispute Resolution Blog
Cyril Amarchand Mangaldas logo
India November 26 2024
The Prevention of Money Laundering Act, 2002 (“PMLA”), is a comprehensive law, dealing with aspects of money-laundering, attachment of proceeds of crime, adjudication, and confiscation thereof. The “proceeds of crime” is the fulcrum of the offence of money-laundering under the PMLA and all actions taken by the Enforcement Directorate (“ED”) under the PMLA invariably revolve around it. Accordingly, the definition of proceeds of crime under Section 2(1)(u) of the PMLA is of immense relevance. In terms of Section 2(1)(u) of the PMLA, “any property derived or obtained… by any person as a result of criminal activity relating to a scheduled offence…” is regarded as proceeds of crime. As held by the Hon’ble Supreme Court in Vijay Madanlal Choudhary & Ors. v. Union of India & Ors.[1] (“Vijay Madanlal”), the expression “derived or obtained” is indicative of a criminal activity, relating to a scheduled offence, already accomplished. The commission of a scheduled offense, whether registered with the jurisdictional police or under review by a competent forum through a complaint, constitutes the legal basis for any investigation conducted under the PMLA.

Before Vijay Madanlal, the interplay between the offence of money-laundering under the PMLA and the scheduled offences led to conflicting judgements. Different High Courts had diverging views on whether an order of discharge, acquittal or quashing of FIR would lead to closure of investigation under the PMLA. For instance, the Hon’ble High Court of Bombay in Babulal Verma v. Enforcement Directorate held that the offence of money laundering is independent of the scheduled offence, and “even if the Investigating Agency investigating a Scheduled Offence has filed closure report in it and the Court of competent jurisdiction has accepted it, it will not wipe out or cease to continue the investigation of ED in the offence of money-laundering being investigated by it”[2]. In contrast, the Hon’ble High Court of Delhi in Prakash Industries v. Directorate of Enforcement[3](“Prakash Industries”) and Directorate of Enforcement v. Gagandeep Singh[4] emphasised on the inextricable link between the two, stating that there ought to be apre-requisite relation between the commission of scheduled offences under the PMLA and the subsequent offence of money laundering. A similar view was also adopted by the Hon’ble High Court of Allahabad in Sushil Kumar Katiyar v. Union of India[5],wherein it was observed that after the acquittal of a person from a scheduled offence, a trial for the offence of money-laundering under PMLA would not survive. In contrast, the Hon’ble High Court of Karnataka in K. Sowbhagya v. Union of India[6]opined that the definition of “proceeds of crime” could extend to property used in the commission of either the offence itself or any scheduled offence, emphasising that money laundering could be treated as a standalone offence, independent of the predicate offences, if warranted. Similarly, the Hon’ble High Court of Madras in VGN Developers P. Ltd. v. The Deputy Director, Directorate of Enforcement[7] observed that PMLA has self-contained procedures to prevent the act of money laundering, thereby, allowing any offence registered under it to exist independent of the predicate offence.

Upon an analysis of the provisions of the PMLA, the Hon’ble Supreme Court in Vijay Madanlal set to rest the controversy and held that if a person named in any criminal activity, relating to a scheduled offence, is “finally absolved” by a Court of competent jurisdiction, owing to “discharge, acquittal or because of quashing of the criminal case (scheduled offence against his/her)”, there can be no action related to money-laundering against such person or person claiming through him in relation to the property linked to the “stated scheduled offence”.

However, a recent judgment of the Hon’ble High Court of Madras in Vijayraj Surana v. The Directorate of Enforcement[8] (“Vijayraj Surana”) has raised important questions, against this backdrop. In Vijayraj Surana, the Hon’ble High Court of Madras, among other things, has held that mere quashing of an FIR on “technical grounds” or “procedural irregularities” does not absolve the accused under the PMLA proceedings and in turn, cannot collapse the predicate offence in the PMLA proceedings. This interpretation challenges the conventional understanding of the PMLA’s reliance on scheduled offences, which allows the ED to operate under the PMLA.

Brief facts of the case

The Petitioner was the promoter and director of three companies (“Borrower Entities”), which had obtained loans from various financial institutions. These funds were allegedly misappropriated through fraudulent accounting practices, including by creation of fictitious entries and diversion of funds to related entities. Based on the aforesaid allegations, on November 1, 2019, a Regular Case (“RC”) was registered by the Central Bureau of Investigation (“CBI”) under the relevant provisions of the Indian Penal Code, 1860, and the Prevention of Corruption Act, 1988, which are scheduled offences under the PMLA. Further, prior to the filing of the RC, on March 28, 2019, the Serious Fraud Investigation (“SFIO”) had filed a complaint (“SFIO’s Complaint”) under Section 447 of the Companies Act, 2013 (“Companies Act”), which is a scheduled offence under the PMLA, against the Borrower Entities, with the Special Court, Chennai.

Based on the RC, the ED recorded an ECIR and initiated proceedings under the PMLA. Additionally, the ED filed a complaint under Sections 44 and 45 of the PMLA with the Special Judge (PMLA).

Vide order dated April 15, 2024, the Hon’ble High Court of Karnataka quashed the RC on the ground that “the SFIO alone has the jurisdiction to try the offences against the petitioners.” The ED challenged the order dated April 15, 2024, passed by the Hon’ble High Court of Karnataka before the Hon’ble Supreme Court.[9] Further, the ED filed a supplementary complaint in which Section 447 of the Companies Act was also mentioned.

In view of the quashing of the RC by the Hon’ble High Court of Karnataka, the Petitioner approached the Hon’ble High Court of Madras for quashing all proceedings initiated against him under the PMLA based on the RC.

Hon’ble High Court of Madras’s Judgment in Vijayraj Surana

The Hon’ble High Court of Madras observed that the Hon’ble High Court of Karnataka’s order dated April 15, 2024, was only in respect of the RC and the proceedings in the SFIO’s Complaint are still pending before the Special Court, Chennai. Accordingly, despite the quashing of the RC, the scheduled offence under Section 447 of the Companies Act would still stand good. Thus, the Hon’ble High Court of Madras held that since the scheduled offence would subsist in the proceedings in the SFIO’s Complaint, the ED would have the required jurisdiction to continue its investigation under the PMLA.

The Hon’ble High Court of Madras observed that the Hon’ble High Court of Karnataka had quashed the RC solely on jurisdictional grounds. Accordingly, the quashing of the RC was not based on the merits of the allegations, but on a procedural determination that the SFIO had exclusive jurisdiction over the matter. The Hon’ble High Court of Madras further observed that the standalone nature of the PMLA, as also emphasised by the Hon’ble Supreme Court in Vijay Madanlal, ensures that the ED can pursue an investigation if there is evidence linking the proceeds of crime to criminal activity relating to or in relation to a scheduled offence. Further, it was emphasised that the quashing of an FIR would not automatically affect the validity of an ECIR, as they serve different purposes within their respective legal frameworks – “proceeds of crime” is the focal point of an ECIR, whereas FIR deals with scheduled offences. Accordingly, the Hon’ble High Court of Madras held that mere quashing of an FIR on “technical grounds” or “procedural irregularities” would not lead to automatic quashing of proceedings under the PMLA, and each case would need to be assessed on its merits to determine whether PMLA proceedings should continue or not.

Creation of an anomaly in the ECIR vis-à-vis FIR jurisprudence

The observations made by the Hon’ble High Court of Madras in Vijayraj Surana may create an anomaly. This divergence raises questions on the ECIR’s autonomy and its tether to the predicate FIR, creating a practical and doctrinal conflict within the PMLA framework. The legal position, post the Full-Bench judgement in Vijay Madanlal,has been that ECIR, being an internal ED document, is inherently dependent on the existence of the predicate offence and cannot function independently.

The Hon’ble Supreme Court has categorically established the distinct and different nature of ECIR and FIR in its judgements, including Vijay Madanlal and Enforcement Directorate v. Nik Nish Retail Ltd.[10]Examining the same distinction, the Hon’ble High Court of Delhi in Rajinder Singh Chada v. Union of India[11] underscored this critical distinction between ECIR and FIR and held that an investigation in an existing ECIR cannot be continued without the existence of a predicate offence. By relying on the judgement in Prakash Industries, the Hon’ble High Court of Delhi noted that while the offence of money laundering is distinct and independent, its existence hinges on the proceeds of crime arising from a scheduled offence. The Hon’ble High Court of Delhi made it clear that if the predicate FIR is quashed, the very foundation of the ECIR collapses. The same principle was also recognised in Enforcement Directorate v. Akhilesh Singh[12]. This interpretation aligns with the legislative intent, ensuring that the PMLA remains a tool to combat proceeds of crime, derived from any criminal activity, rather than functioning as an independent enforcement mechanism.

In contrast, the Hon’ble High Court of Madras in Vijayraj Surana has adopted an approach that introduces a fundamental anomaly in this established jurisprudence, by observing that quashing of an FIR based on certain procedural irregularities would not absolve the accused under the PMLA proceedings and in turn cannot collapse the predicate offence in the PMLA proceedings. By holding that an ECIR can survive even when the predicate FIR is quashed, the Hon’ble High Court of Madras has granted ECIR an independent status post its initiation, deviating sharply from the Full-Bench judgement in Vijay Madanlal, where the Hon’ble Supreme Court had emphasised that ECIR’s validity depends on the continued existence of the predicate offence. The rationale in Vijayraj Surana disrupts the legislative balance, effectively allowing money laundering proceedings to persist in a vacuum, untethered from the criminal activity that justifies its initiation. This deviation raises several troubling implications. Firstly, it undermines the PMLA’s legislative foundation, which ties the concept of “proceeds of crime” to scheduled offences. Allowing an ECIR to operate independently risks reducing the PMLA to a speculative investigation tool, contrary to its intended purpose of targeting identifiable criminal activity. Secondly, this anomaly introduces significant practical challenges by permitting the continuation of PMLA proceedings even when the accused has been cleared of predicate offences, leading to prolonged legal battles and increased vulnerability to arbitrary enforcement.

However, a single judge bench of the Hon’ble High Court of Punjab and Haryana in Chetan Gupta v. Directorate of Enforcement and Others[13](“Chetan Gupta”), has continued to uphold the otherwise settled position by recognising that proceedings under the PMLA are inherently subservient and secondary to the principal criminal proceedings, which address the predicate offence, in another recent decision. The predicate offence is the foundation — the wall — upon which the PMLA’s scheduled offences, akin to plaster, are applied. Without this foundation, the plaster cannot stand, and if the wall is demolished, the plaster inevitably falls. Similarly, the ED’s jurisdiction to investigate under the PMLA is contingent upon the existence of a predicate offence, which is sine qua non for any action under the PMLA. If the predicate offence extinguishes by way of a closure report, discharge, acquittal, or quashing of FIR, the foundation crumbles, and with it, the PMLA proceedings also collapse. This analogy encapsulates the inextricable link between the offence of money-laundering and predicate offences, ensuring that proceedings remain firmly grounded in criminal activity, rather than speculative inquiry.

Conclusion

It is relevant to note that the main ground based on which the Hon’ble High Court of Madras in Vijayraj Surana refused to quash the ECIR was that the SFIO’s Complaint under Section 447 of the Companies Act (which is also a scheduled offence under the PMLA) was pending before the Special Court, Chennai. However, the Hon’ble High Court also handed down a specific section in the judgement on deliberations on the principle of automatic quashing of ECIR in cases wherein predicate FIR has been quashed. The Hon’ble High Court has noted that a pattern has emerged whereby “the FIR quashed through minor technical glitches or procedural irregularities” is used as a basis for quashing of ECIR. Accordingly, the Division Bench advocated for a case-to-case assessment to determine whether PMLA proceedings should continue or not and held that mere quashing of an FIR on “technical grounds” or “procedural irregularities” would not lead to automatic quashing of proceedings under the PMLA. Such an approach, however, risks creating a troubling precedent by treating ECIR as independent of the predicate FIR. By allowing proceedings under the PMLA to continue even when the predicate FIR has been quashed, the judgment deviates from established jurisprudence in Vijay Madanlal and other recent decisions. This departure raises practical concerns, particularly regarding the potential misuse of enforcement powers.

Essentially, this case demonstrates the ever-changing jurisprudence in PMLA’s operations —balancing the standalone nature of money laundering as an offence and its dependency on criminality rooted in the predicate offence. The broader jurisprudence reflects an understanding that without a valid predicate offence, the foundation of PMLA proceedings collapses, as illustrated by the analogy of “wall and plaster” in Chetan Gupta. As this segment of law continues to evolve rapidly, it is critical that the controversy, which was set to rest by the Full Bench in Vijay Madanlal (and was, in fact, a glimmer of hope in the entire judgement which otherwise upheld the stringent powers of ED), should not be reopened and revisited or at least the Full Bench of the Supreme Court, hearing review of Vijay Madanlal in Karti P. Chidambaram v. Directorate of Enforcement[14], should consider the evolving pattern as has been noted by the Division Bench of Hon’ble High Court of Madras in Vijayraj Surana and draw this issue to a complete close to avoid emergence of divergent views again on this issue.

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Cyril Amarchand Mangaldas – Nikhil Varshney, Ishu Gupta and Preksha Mehndiratta

Cyril Amarchand Mangaldas (cam) is India’s leading law firm with global reputation of being trusted advisors to its clients. The firm advises a large and diverse set of clients, including domestic and foreign commercial enterprises, financial institutions, private equity funds, venture capital funds, start-ups, government and regulatory bodies. For any further queries, please get in touch at cam.digital@cyrilshroff.com or visit our website at www.cyrilshroff.com.



Filed under
India Litigation White Collar Crime Cyril Amarchand Mangaldas
Topics
Anti-money laundering
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