By this writ petition the petitioner seeks to quash the order dated 10th September, 2014, the proceedings registered as ECIR No.KLZO/02/2014 and the direction contained in the letter dated 19th September, 2014.
The case of the petitioner is that the notice dated 19th June, 2014 issued by the adjudicating authority under the 2002 Act was challenged. By order dated 22nd July, 2014 the writ petition was dismissed. In appeal from the said order the Division Bench passed an order on 28th July, 2014 thereby granting liberty to the appellant to raise all objections including the applicability of the 2002 Act before the concerned authority. The adjudicating authority was also directed to decide the preliminary objection raised regarding applicability of the 2002 Act and the steps taken by the Directorate of Enforcement under Section 17(1) of the 2002 Act before deciding any other issue. The adjudicating authority without considering the objection raised in respect of the applicability of the Act passed an order on 10th September, 2014 which has been challenged in this writ petition.
A show cause notice was issued to the petitioner for issuance of debentures contrary to the SEBI guidelines. A reply was given thereto. The statement of object and reasons so also preamble and purpose of the 2002 Act renders the Act inapplicable to the petitioner. The purpose of the 2002 Act is to prevent money laundering which is the result of proceeds of crime related to drug transactions.
Section 2(p) of the 2002 Act defines 'money laundering' and Section 3 defines the 'offence of money laundering'. Section 2(u) defines 'proceeds of crime' and Section 2(y) defines 'scheduled offence'. The schedule under which action is alleged to have been taken against the petitioner is Part-A Paragraph 11 which contemplates violation of Sections 12A and 24 of the SEBI Act. A complaint case was filed by SEBI against the writ petitioner only under Section 24 of the SEBI Act and not under Section 12A. This was also clarified by SEBI in its letter dated 26th June, 2013. Before the adjudicating authority a written submission was filed wherein the point of applicability of the 2002 Act was specifically taken. The adjudicating authority without deciding the issue of applicability of the 2002 Act has passed the order dated 10th September, 2014. This, therefore, renders the order dated 10th September, 2014 bad, as without deciding the preliminary objection raised as directed by the order dated 28th July, 2014, the adjudicating authority could not have passed the order on merits. After passing of the said order dated 10th September, 2014 a request was made by the Enforcement Directorate to freeze the bank accounts of the petitioner. This request is nothing but a mandate to the banks to prohibit withdrawal. The said direction can either be passed under Section 5 of the 2002 Act or Section 17 of the 2002 Act, but the said has not been passed thereunder. Section 5 permits provisional attachment of the property involved in money laundering upon the officer having reason to believe which reason must be recorded in writing that the person is involved in proceeds of crime. Section 17 also permits search and seizure provided the officer has reasons to believe which reasons must also be recorded in writing. Therefore, the statute has given protection to the writ petitioner which has not been followed. The request made is de hors the provisions of the 2002 Act and is not under ECIR/KLZO/02/2014 but independent thereof and of which proceeding the petitioner has no notice. Therefore, the order dated 10th September, 2014 be set aside and the letter dated 19th September, 2014 be quashed.
In opposing the said application Counsel for the Directorate submits that several FIRs were filed and in respect of four charge-sheet has been issued. In issuing the request dated 19th September, 2014 the Directorate has not exercised powers under Section 17(1) of the 2002 Act. The said letter of 19th September, 2014 is a request to the banks to not allow withdrawal from the account of the writ petitioner. The said request to freeze is based on the complaint filed by SEBI which is based on FIRs registered and complaints filed with SEBI. Although provisional attachment can be made under Section 5 of the 2002 Act but the said Section has not been invoked. Under Section 54 of the 2002 Act, the Directorate is empowered to make request for freezing of account. Section 68 of the Act has validated defective notices. The preamble of the 2002 Act categorically states that the enactment is to prevent money laundering and to provide for confiscation of property derived therefrom and for matters connected or incidental thereto. The request to freeze is an incident of money laundering and a precautionary measure adopted to prevent depletion of assets by the writ petitioner, as appears from the balance sheet of the petitioner. In fact, in the case of Subrata Chattoraj versus Union of India and Ors., in an affidavit filed by the State of Odisha it has been categorically stated that M/s. Rose Valley Hotel & Entertainment Ltd. expressed its willingness to pay back the investors. It was also categorically stated by the Supreme Court in the said decision that attachment or recovery process was not to be hampered even in the event of transfer of investigation and it was with these directives that investigation was transferred to the Central Bureau of Investigation.
Reliance is also placed on (2003) 6 SCC 545. Section 2(na) of the 2002 Act has defined 'investigation' to include all proceedings under the Act by the authority for collection of evidence. Section 54 of the 2002 Act enables the Directorate to take assistance of the officers and one of the officers mentioned is under Clause (j) which includes a banking company. Therefore, in view of the preamble, Section 54 and Section 68 so also the balance sheet and conduct of the petitioner the request made by the letter dated 19th September, 2014 is justified.
Reliance is also placed on AIR 1980 SC 953. As there was no freezing order in the Sahara case, the depositors have been deprived of their money till date. Therefore, this application merits no order and be dismissed.
In reply Counsel for the writ petitioner submits that Section 54 of the 2002 Act is not to apply. For the enforcement of the 2002 Act there must be a proceeding which is to be preceded by a reason to be recorded in writing. In the instant case there is no reason recorded in writing and the request is nothing but a mandate de hors the ECIR. The reasoning must be either of the authority or the bank and if it is based on SEBI complaint, then the said request emanates from the ECIR which also finds mention in the letter dated 19th September, 2014.
In the ECIR the property suspected to be proceeds of crime is not mentioned as the said is to be ascertained upon investigation. Therefore, proceedings will have to be initiated and unless the said is initiated the provisions of the 2002 Act will not apply. The request is a mandate without statutory backing and through submission the scope of investigation is sought to be extended. The only proceeding which exists today, is the ECIR and by issuance of letter dated 19th September, 2014, the Directorate is fishing for evidence. Proceeds of crime is to be identified and without identifying the same no action will lie. Sections 5 and 17 of the 2002 Act are the only provisions of the statute which empowers attachment and seizure. As the request is not under the ECIR, therefore, is bad, as the petitioner is not aware of any other proceeding on the basis of which the request has been made, Section 54(j) will not apply in the absence of any notification. As there is no further ECIR, no further search or seizure can be undertaken. The decision in the Saradha case will not apply to the facts of this case as in the said decision the transfer of pending investigation to CBI was under consideration and not the 2002 Act. Although in the affidavit filed by the State of Odisha it was mentioned that the petitioner had expressed its willingness to pay the investors but the said will not apply to the issues raised in this writ petition. The Directorate need not protect the interest of the investors, as it is for SEBI to do so. It is only under Section 4 of the 2002 Act that the offence of money laundering will have penal consequences. The freezing issue raised by the petitioner has not been answered by the State respondent.
AIR 1980 SC 593 is distinguishable as it was a case under the Customs Act and not under the 2002 Act, therefore, will not to apply in the facts of this case.
Having considered the submission of the parties W.P. 20892 (W) of 2014 was filed challenging ECIR No.KLZO/02/2014, OA 16 of 2014 and show cause notice dated 19th June, 2014, on the ground that the 2002 Act was not applicable to the petitioner and, therefore, the proceeding be quashed. The Trial Court dismissed the writ petition and on appeal liberty was granted to the writ petitioner to raise all objections before the adjudicating authority including the applicability of the 2002 Act. The said was to be decided as a preliminary issue along with steps taken by the Directorate under Section 17(1) of the 2002 Act before deciding any other issue. The adjudicating authority after considering the submission of the parties passed the order dated 10th September, 2014. On a reading of the said order it is apparently clear that the applicability of the 2002 Act has not been addressed and no finding given in respect thereof. This, therefore, is contrary to the order dated 28th July, 2014 passed by the Appeal Court in AST 345 of 2014 with ASTA 246 of 2014. As the merits of the case has been considered, and a finding given in respect thereof, this, therefore, renders the order dated 10th September, 2014 bad and liable to be set aside.
Accordingly, the order dated 10th September, 2014 is set aside and the adjudicating authority directed to consider the issue regarding applicability of the Act and the preliminary objections raised before deciding any other issue as directed by order dated 28th July, 2014. The next issue that needs to be considered is the correctness of the letter dated 19th September, 2014. While the petitioner contends that the request is a mandate but, from a reading of the said letter the Directorate has requested the concerned banks to prohibit withdrawal or freeze the petitioner’s accounts. The reason for such request has also been stated in the said letter, namely, on going investigation under the 2002 Act and to prevent siphoning of funds by the writ petitioner.
It is true that the provisions of Section 5 or Section 17 of the 2002 Act has not been invoked by the Directorate but to say that the Directorate while conducting investigation is powerless to request freezing of account especially when in the course of investigation it is evident from the balance sheets that sums are being depleted, then the request made cannot be faulted. More so, in the light of the decision reported in (2003) 6 SCC 545 wherein it has been categorically stated that while exercising discretion under Article 226 of the Constitution of India the High Court may not strike down an illegal order although it will be lawful to do so. One instance of denying such relief is where quashing of an illegal order would revive another illegal one.
In the instant case to quash th
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e letter dated 19th September, 2014 will give rise to a situation likely to do injustice to the debenture holders, therefore, no interference is called for with the letter dated 19th September, 2014. At this stage to form any opinion on the applicability of the 2002 Act would amount to usurping the power of the adjudicating authority. Needless to mention that investigation will continue and in the event the same is completed before a decision is taken by the adjudicating authority, let no effect be given to the order to be passed till the decision of the adjudicating authority. The object of the 2002 Act is to prevent money laundering and confiscation of property derived from such money laundering or proceeds of crime. It is only in furtherance of the object of the 2002 Act that the letter dated 19th September, 2014 has been issued so that mischief if any is suppressed and the object of the legislature advanced. In view of the aforesaid this writ petition is disposed off. As no affidavit-in-opposition has been filed the allegations contained in the petition is not admitted. Urgent xerox certified copy of this order, if applied for, be given to the Counsel for the parties, subject to compliance with all requisite formalities.