Shareholders Not Owners: Calcutta HC Quashes PMLA Attachment on Company's Assets [Read Order]

The Calcutta High Court has partially allowed a writ petition challenging a provisional attachment order passed by the Enforcement Directorate (ED) under the Prevention of Money Laundering Act (PMLA), reiterating the established legal principle that a company's assets are distinct from those of its shareholders.

The division bench of Justice Sabyasachi Bhattacharyya was hearing a petition filed by Shree Hanuman Cotton Mills Ltd. and its directors against an order that provisionally attached a 25.39-acre plot of land belonging to the company.

The petitioner no. 1 is a company which granted lease in respect of a land to the petitioner no. 2 and petitioner no. 3 is the director of both the said companies. The petitioner no. 4, the son of the petitioner no. 3, is a director of the petitioner no. 2-company, whereas the petitioner no. 3, Ramesh has a brother by the name of Mahesh, who and whose family members, being the added respondents herein, are the accused persons in the PMLA and connected criminal proceedings.

Since it is settled law that the shareholders of a company are not the owners of the company in which they hold shares and/or the assets of the company, it is evident, by borrowing the logic as recorded in the interim order dated September 26, 2022 passed in this matter, that the show cause notice dated May 5, 2022 issued by the Adjudicating Authority and the provisional attachment order dated March 31, 2022 were bad in law inasmuch as the land belonging to the petitioner no. 1company as mentioned therein is concerned.

Even if the added respondents, who are the accused persons in the PMLA proceeding, are shareholders in respect of the petitioner no. 1-company, their rights are confined to the earnings from such shares and associated voting rights and do not extend to the company itself or its assets.

The ED had argued that since the accused persons in a PMLA case (the brother and his family of one of the company's directors) were shareholders in the company, the assets were liable for attachment as potential 'proceeds of crime'.

The court, however, firmly rejected this premise. It held that the ED's justification was flawed because it is settled law that shareholders are not the owners of the company's assets. Their rights are limited to dividends and voting rights, not the company's property. Therefore, the provisional attachment of the company's land was "bad in law."

Accordingly, the court set aside the attachment order and the connected show cause notice, but only to the extent of the 25.39-acre land belonging to the company. It clarified that the attachment order concerning the 1793 shares held by the accused persons and their personal office room would remain in force.

The court also directed the petitioners to inform the ED immediately if the company undergoes any liquidation process. The court made it clear that its observations would not affect the outcome of the criminal proceedings against the accused persons.

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