HEADSTAR GLOBAL PVT. LIMITED V. STATE OF KERALA & ORS 2025:KER:39285:

DATE: 02/06/2025

COURT: High Court of Kerala

BENCH: Justice VG Arun

FACTS:

The petitioner, a private limited company engaged in the export and import of food grains, pulses, and sugar, approached the court challenging an order (Annexure D) that rejected its plea to unfreeze its bank account. The dispute originated from a transaction between M/s. Apple Middle East General Trading LLC, a UAE-based company (3rd respondent), and Spezia Organic Condiments Pvt. Ltd. The 3rd respondent had placed an order for the export of 378 metric tons of sugar from Kochi to the UAE, and as an advance payment, remitted Rs.49.53 lakhs to the bank account of Spezia Organic Condiments Pvt. Ltd. Despite assurances, the consignment was never dispatched. Subsequent inquiries revealed that due to a change in government policy, sugar exports from India were not possible, a fact concealed from the 3rd respondent at the time of commitment. The directors of Spezia Organic Condiments Pvt. Ltd. failed to refund the advance, raising suspicion of fraudulent intent from the outset.

Following a complaint by the 3rd respondent, Crime No. 732 of 2024 was registered at Kalamassery Police Station under Sections 406 and 420 read with Section 34 of the IPC. Investigations revealed that Rs.46,50,525 from the 3rd respondent’s advance was transferred to M/s. Headstar Trading LLP, and subsequently, ₹52,44,750 was transferred to the account of the petitioner, M/s. Headstar Global Pvt. Ltd. Based on this, the police issued Annexure B notice, directing the bank to debit-freeze the petitioner’s account. The petitioner’s application before the jurisdictional Magistrate to lift the freeze was rejected by Annexure D. The petitioner argued that the freeze was unlawful, as there was no direct allegation of criminal activity against it and the transactions were part of normal business operations. However, the 3rd respondent submitted that the transfers were orchestrated to conceal the fraudulent diversion of funds, noting that one Mr. Sreekumar C.S., Manager at Spezia Organic Condiments is also a Director in both Headstar Trading LLP and the petitioner company.

ISSUES:

The key issue in this case was whether the police could lawfully direct a debit freeze on the petitioner’s bank account based solely on the transfer of funds allegedly linked to the proceeds of crime, without obtaining prior approval from the Magistrate. The distinction between "seizure" under Section 106 of the Bharatiya Nagarik Suraksha Sanhita (BNSS), which pertains to securing evidence and may be executed by a police officer, and "attachment" under Section 107, which relates to securing proceeds of crime and requires a Magistrate’s order, was central to the dispute. The petitioner contended that the police bypassed the mandated procedure under Section 107, thereby rendering the debit freeze illegal. The court agreed, holding that any attachment or freezing of accounts on the ground of suspected proceeds of crime must be carried out in accordance with Section 107, and not through unilateral police action.

JUDGEMENT WITH REASONING:

The Kerala High Court allowed the criminal miscellaneous petition, quashed the impugned order, and directed the lifting of the debit freeze on the petitioner’s bank account. The Court held that the police had no authority to freeze the account without first securing an order from the jurisdictional Magistrate under Section 107 of the Bharatiya Nagarik Suraksha Sanhita (BNSS). However, it permitted the investigating officer to approach the Magistrate for appropriate relief under the prescribed procedure, if deemed necessary.

The Court drew a clear distinction between the powers of seizure and attachment under Sections 106 and 107 of the BNSS. It noted that while Section 106 permits a police officer to seize property as part of an investigation and submit an ex post facto report to the Magistrate, Section 107 governs attachment, forfeiture, and restoration of property that constitutes proceeds of crime. Attachment under Section 107 can only be carried out upon the order of a Magistrate and involves a structured process including issuance of a show-cause notice, consideration of explanations from concerned parties, and, if warranted, an order of attachment. The Court emphasized that the underlying purpose of seizure is to preserve evidence, while attachment seeks to secure illicit gains from disposal and preserve them for potential restitution.

In the present case, the only justification provided for the debit freeze was the transfer of funds from the accused to the petitioner via intermediary entities, whose directors were allegedly associated. Even if such transfers raise suspicion, the Court observed that mere proximity or relationship between the entities' directors is insufficient to bypass due process. The appropriate legal recourse would have been to invoke Section 107, allowing the Magistrate to assess whether the funds are indeed proceeds of crime and decide on attachment accordingly. Highlighting that Section 107 effectively remedies earlier gaps under the Code of Criminal Procedure (CrPC), the Court concluded that police officers must now strictly adhere to this procedure for freezing or attaching property believed to be linked to criminal activity.

ANALYSIS:

The Kerala High Court underscored the legal distinction between “seizure” and “attachment” as prescribed under the Bharatiya Nagarik Suraksha Sanhita (BNSS). It observed that Section 106 allows police officers to seize property believed to be involved in a crime, primarily to preserve evidence, with an obligation to report such seizure to the Magistrate post-facto. In contrast, Section 107 governs the attachment of property suspected to be proceeds of crime and vests exclusive authority in the jurisdictional Magistrate to pass such orders. This procedure mandates the police officer to approach the Magistrate with a request for attachment, following which the Magistrate may issue a show-cause notice to the concerned party, and after due consideration, order attachment or even direct interim attachment if delay could frustrate justice. The Court noted that this structured safeguard is crucial because attachment affects the proprietary rights of individuals, and thus cannot be done arbitrarily or unilaterally by the police.

Applying this legal framework to the facts of the case, the Court found that the debit freeze imposed on the petitioner’s account was based solely on the flow of funds from the accused to the petitioner via two intermediary entities, with some commonality in directorships. While this may arouse suspicion of money laundering or diversion of funds, the Court held that such circumstantial association alone cannot justify bypassing the statutory safeguards under Section 107. There was no direct allegation or evidence presented to show that the petitioner itself was involved in the commission of the underlying offence. Consequently, any action to freeze its account should have been taken through the Magistrate’s direction under Section 107, ensuring that principles of natural justice and due process were respected. By ignoring this process, the police acted beyond their powers, prompting the Court to strike down the debit freeze while still allowing the investigative authorities to seek proper recourse through judicial channels if they believed the funds to be tainted.