The Bombay High Court has set aside the Enforcement Directorate’s freezing and retention proceedings against Coda Payments Indiaholding that the Adjudicating Authority failed to record the mandatory statutory finding under Section 8(2) of the Prevention of Money Laundering Act, 2002 (PMLA), as to whether the properties in question were actually involved in money laundering.
The Bench of Justice A. S. Gadkari and Justice Kamal Khata has observed that an appellate authority cannot subsequently cure such a foundational defect by supplying a finding which the original Adjudicating Authority was statutorily required to record.
Background of the Case
Coda Payments India Pvt. Ltd. is a company incorporated under the Companies Act and provides technology-enabled services relating to the monetisation and sale of digital content. It operates through brands including ‘Codashop’ and ‘Codapay’ and has arrangements with various payment channels and payment aggregators.
According to the company, its platform enables digital-content publishers and gaming companies to receive payments through recognised payment channels. Transactions were processed through payment aggregators including Paytm, MobiKwik, Freecharge and LazyPay, with authentication being carried out by the relevant payment channel.
The company’s Indian operations commenced around 2018 and it is a wholly owned subsidiary of Coda Payments Pte. Ltd., Singapore.
The Enforcement Directorate, however, alleged that the Indian company was functioning as a conduit for collecting money from Indian users and remitting the money outside India. The proceedings originated from an ECIR registered on December 28, 2021, which was based on ten FIRs registered at different police stations. The FIRs principally alleged offences under Sections 420 and 120-B of the IPC and related to alleged unauthorised deductions from users of online gaming platforms, particularly users of the game ‘Garena Free Fire’.
ED Searches Premises and Freezes Bank Accounts and Merchant IDs
On September 23, 2022, the ED conducted search operations at premises connected with Coda Payments and its Director. During the searches, physical records and a MacBook Pro digital device were seized, along with documents relating to bank accounts and payment aggregators.
On the same day, orders under Section 17(1A) of the PMLA were issued freezing the company’s bank accounts as well as merchant IDs maintained with payment aggregators and payment gateways.
The freezing extended to five identified bank accounts and merchant IDs with several payment aggregators. The High Court noted that the action was not confined to any particular identified amount arising from a specific transaction.
Subsequently, on September 27, 2022, orders under Sections 20(1) and 21(1) of the PMLA were passed for retention of the seized properties and records.
The ED thereafter filed Original Application No. 750 of 2022 before the Adjudicating Authority seeking continuation of the freezing of the bank accounts and payment aggregator accounts and retention of the seized material.
The Adjudicating Authority allowed the application on March 15, 2023 and confirmed continuation of the freezing and retention.
Coda Payments challenged that order before the Appellate Tribunal under Section 26 of the PMLA. However, the Appellate Tribunal dismissed the appeal on March 6, 2025, leading to the Bombay High Court proceedings.
Company Challenges Freezing of Entire Payment Infrastructure
Before the High Court, Coda Payments argued that Section 8(2) of the PMLA required the Adjudicating Authority to independently determine whether the properties in question were involved in money laundering.
The company contended that the Adjudicating Authority had merely observed that the material placed before it was sufficient to justify continuation of freezing and retention for purposes of adjudication, instead of recording the statutory finding contemplated under Section 8(2).
The company also challenged the Appellate Tribunal’s reliance upon figures of approximately ₹2,850 crore allegedly collected by the company and approximately ₹2,320 crore allegedly remitted outside India.
According to the company, substantial business turnover or foreign remittances could not, by themselves, justify treating the company’s entire banking and payment infrastructure as property involved in money laundering.
The company further submitted that it was merely an intermediary/payment service provider and that transactions were authenticated through OTPs and UPI PINs. It argued that it neither created nor operated the gaming platforms.
It also contended that the ED had failed to produce independent forensic material showing that Coda Payments’ system itself caused unauthorised deductions or bypassed the authentication mechanism.
Nine of Ten FIRs Had Been Closed
Another significant submission before the High Court concerned the subsequent status of the criminal cases.
By the time the appeal was heard, nine of the ten FIRs forming the basis of the ECIR had been closed or settled following withdrawal of complaints by the first informants.
The remaining FIR involved approximately ₹85,650. The company therefore argued that freezing assets valued at approximately ₹100 crore was disproportionate, particularly when the total amount involved in the ten FIRs was stated to be around ₹25 lakh.
The ED opposed the appeal and submitted that the proceedings were concerned with preservation of property and records so that the investigation and subsequent adjudication under the PMLA were not frustrated.
According to the ED, the investigation had revealed ten FIRs alleging cheating and unauthorised deductions and had also revealed the company’s involvement in the payment collection mechanism and transmission of funds outside India through group entities.
The ED maintained that the investigation related to a wider alleged criminal activity and that the approximately ₹2,850 crore represented revenue collected during the relevant period, of which approximately ₹2,320 crore was transmitted outside India.
It further argued that the amount frozen could not be mechanically compared with the amounts mentioned in individual FIRs because the investigation concerned the broader trail of alleged proceeds of crime and potentially other victims and transactions.
Bombay High Court Finds Adjudicating Authority Failed to Follow Section 6 Mandate
The High Court first examined the constitution and jurisdiction of the PMLA Adjudicating Authority.
The Court referred to Section 6(2), which provides that an Adjudicating Authority consists of a Chairperson and two other Members, with the statutory framework permitting the jurisdiction to be exercised through Benches in the manner prescribed by the Act.
The Court observed that the Adjudicating Authority had failed to comply with this mandate and held that it had rendered itself “coram non judice”, meaning a court or authority without jurisdiction to take cognizance of the matter.
The Court particularly noted that the Appellate Tribunal ought to have examined whether the proceedings before a Bench consisting solely of the Chairperson were in accordance with law.
Instead, the specific objection regarding the composition and jurisdiction of the Adjudicating Authority had been disregarded.
The High Court held that such disregard of the statutory mandate rendered the March 15, 2023 order of the Adjudicating Authority a nullity.
Section 8(2) Requires a Specific Finding on Whether Property Is Involved in Money Laundering
The Court then examined the matter independently on merits.
It emphasised that although the PMLA grants extensive powers to the ED, those powers remain subject to statutory safeguards. The fact that the legislation deals with economic offences does not dilute the requirement of complying with the express provisions of the statute.
The Court examined Section 8 of the PMLA, which governs adjudication.
Under Section 8(2), after considering the reply to the notice, hearing the affected person and the Director or authorised officer, and considering the relevant material on record, the Adjudicating Authority is required to record a finding as to whether all or any of the properties specified in the notice are involved in money laundering.
The Court held that this statutory exercise cannot be reduced to a mere formality.
It drew a clear distinction between recording that the material is sufficient to continue retention or freezing for purposes of adjudication and recording the statutory finding that the property is actually involved in money laundering.
According to the Court, these are two different exercises.
Mere Satisfaction for Continuation of Freezing Was Not Enough
The High Court found that although the Adjudicating Authority had referred to the ED’s allegations concerning the gaming platform, alleged unauthorised deductions, corporate structure, foreign remittances and alleged non-cooperation, its conclusion merely stated that the material in the Original Application was sufficient to justify continuation of freezing and retention.
The order did not separately identify the property or properties which, after considering the company’s reply and the material on record, were found to be involved in money laundering.
Nor did it explain the nexus between the frozen funds and the alleged criminal activity.
The Court made an important observation that a bank account belonging to a person under investigation does not, merely because of that fact, become “proceeds of crime”.
Similarly, the Court held that a company’s turnover cannot be treated as proceeds of crime merely because the turnover is substantial.
The authority conducting the Section 8 exercise must apply its mind to the particular property and determine at the requisite prima facie level whether it is involved in money laundering.
Appellate Tribunal Could Not Cure the Original Defect
The High Court also found fault with the approach adopted by the Appellate Tribunal.
The Tribunal itself had recognised that Section 8(2) required the Adjudicating Authority to record a prima facie opinion or finding that the property was involved in money laundering.
However, instead of setting aside the defective order, the Tribunal attempted to treat the material on record as sufficient to cure the omission.
The High Court held that this approach was legally unsustainable.
If the Adjudicating Authority fails to record the mandatory finding under Section 8(2), the Appellate Tribunal cannot itself supply that finding on the basis of the same material. Otherwise, the statutory safeguard contained in Section 8(2) would effectively become optional.
The Court stressed that appellate jurisdiction is intended to examine whether the statutory authority has correctly exercised the jurisdiction vested in it. It cannot ordinarily be converted into an original exercise of the statutory jurisdiction entrusted to the lower authority.
The Tribunal, once it noticed the omission, ought to have set aside the order and required the statutory authority to undertake the exercise mandated by law.
Order Must Stand or Fall on Reasons Recorded by Original Authority
The High Court relied upon the settled principle that a statutory order must ordinarily stand or fall on the reasons contained in the order itself.
Referring to the Constitution Bench judgment in Mohinder Singh Gill & Anr. v. Chief Election Commissioner, New Delhi & Ors., reported in (1978) 1 SCC 405, and the Supreme Court’s decision in 63 Moons Technologies Ltd. v. Union of India, reported in 2019 18 SCC 401, the Court reiterated that an authority cannot subsequently supplement an inadequate statutory order by supplying new foundational reasons.
The Bombay High Court held that the defect in the present case was not merely inadequate expression or insufficient reasoning.
It was the failure of the Adjudicating Authority to discharge the statutory function entrusted to it under Section 8(2) of the PMLA.
Entire Business Turnover Cannot Be Treated as Proceeds of Crime
The Court separately examined the concept of “proceeds of crime” under the PMLA.
It referred to Section 2(1)(u), which defines “proceeds of crime” with reference to property derived or obtained, directly or indirectly, as a result of criminal activity relating to a scheduled offence.
The Court also relied upon the Supreme Court’s judgment in Vijay Madanlal Choudhary & Ors. v. Union of India & Ors., reported in (2023) 12 SCC 1, particularly paragraphs 251 to 253.
The High Court noted that “proceeds of crime” must be construed strictly and that every property recovered or attached in connection with a scheduled offence cannot automatically be treated as proceeds of crime. There must be a link showing that the property was derived or obtained as a result of criminal activity relating to a scheduled offence.
The Court clarified that it was not finally determining whether any particular transaction constituted proceeds of crime. That determination was not the issue before it at this stage.
However, the statutory authorities were required to independently apply their minds to that question at the prima facie stage.
The High Court found that the Appellate Tribunal had instead placed undue reliance upon gross revenue of approximately ₹2,850 crore and alleged remittances of approximately ₹2,320 crore outside India.
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