1. What is Non-Designated Use?

Escrow agreement says: Use X only for Y.
If you use X for Z = Diversion.

Examples:

• RERA Escrow: Collect 100 Cr from buyers, use 70 Cr for that project construction, 30 Cr for admin. Using it to buy land for other project = diversion
• Payment Aggregator Escrow: Money collected from customers to be settled to merchants within T+1. Using it to pay own GST liability or salaries = diversion
• M&A Escrow: $5M held for indemnity claims. Seller withdraws before claim period over.
• IL&FS escrow: Banks withdrew ~Rs 800 Cr from escrow during moratorium declared by NCLAT - held unauthorized and contrary to moratorium

2. Consequences in Different Laws

A. RERA - Sec 4(2)(l)(D) - 70% Escrow Rule

The segregation of funds into a RERA-specific account enforces financial discipline, prevents diversion of funds, enhances financial transparency, and safeguards timely project completion

Law: Promoter must deposit 70% of amount realized from allottees in separate escrow account, to be used only for cost of land + construction of that project. Withdrawal only on certification by Engineer, Architect, CA - proportionate to completion.

Non-designated use = Revocation of registration + Penalty + Jail.

Case Law 1: Bikram Chatterji vs Union of India, Amrapali Case, Supreme Court 23 July 2019 - LARGEST DIVERSION CASE

In the Amrapali case thousands of homebuyers were left stranded... The forensic audit uncovered systematic diversion of homebuyers' funds and egregious governance failures

The Court noticed that no accounts were prepared w.e.f. 2015-2018 and money withdrawn was diverted during the said period

The money obtained from banks was diverted to unapproved uses such as for the creation of personal assets of Directors, creation of assets in closely held companies by the Directors

Held:

• Registration under RERA cancelled
• All leases cancelled
• Supreme Court said: "Homebuyers' money has been diverted fraudulently, thus, fraud cannot be perpetuated against them"
• NBCC appointed to complete projects
• Directors sent to jail, forensic audit, ED attachment
• Court directed escrow account to be opened in UCO Bank, Supreme Court Branch to protect homebuyers' interests

Case Law 2: Unitech Ltd. - Supertech - Jaypee Cases

The law was framed as a response to builders defalcating on buyers’ money by diverting the funds collected to other projects

Shell companies, multiple subsidiaries, and asset diversion practices, extensively documented in the Amrapali, Unitech, and Supertech cases by the Supreme Court

Unitech collected Rs 14,270 Cr from 29,800 buyers between 2006-14 and diverted. SC ordered 14% interest, attachment of personal assets, management taken over by Govt board.

Principle: Diversion of RERA escrow = Money Laundering under PMLA Sec 3.

B. Payment Aggregator / Payment Gateway Escrow - RBI Guidelines

RBI PA/PG Guidelines: Escrow must be maintained with Scheduled Commercial Bank, settlement to merchants within T+0/T+1, escrow cannot be used for working capital.

Case Law: 1Pay Mobileware Pvt Ltd v. UoI, 2026-VIL-1197-BOM, Bombay HC

Court observed:

escrow funds were held in trust for third-party beneficiaries and did not constitute the petitioner's property

Therefore if aggregator uses escrow to pay own liabilities, it is:

1. Breach of RBI guidelines - license cancellation
2. Breach of trust - Sec 316 BNS
3. Tax dept cannot attach escrow, but if aggregator himself diverts, merchants can sue for breach of fiduciary duty

C. Professional Liability / Attorney Escrow - US + India

US Case: Hawks v. American Escrow, LLC, 2012 WL 966059 (N.D. Ill.)

Escrow agent failed to disburse funds to pay claimants' property taxes and insurance, or return funds. Held exclusion for improper use of funds applied - no insurance coverage for deliberate diversion.

Case: Matter of Wolk, 2026 NY Slip Op 06385 - Appellate Division

bank records and his sworn admissions established that he had depleted disputed settlement funds entrusted to him as escrow agent

Attorney's entitlement to disputed funds does not defeat interim suspension when he spent those funds while obligated to preserve them. Bar suspension + disgorgement.

Indian Equivalent: Alexander O&G LLC v. Nomad Land & Energy - S.D. Texas 2017

AOG's counsel returned escrow funds to its client as owner. Court held: Attorneys acted as escrow agent and could be sued for breach of fiduciary duty by non-client.

In India, BCI Rules: Lawyer keeping client money in escrow and using for own purpose = professional misconduct + Sec 316 BNS.

D. IL&FS / IBC - Escrow During Moratorium

IL&FS signaled its move to file a contempt plea against several banks for supposedly withdrawing around Rs 800 crore from its escrow accounts during moratorium period declared by NCLAT. Such withdrawals were considered unauthorized and contrary to moratorium

Held: Withdrawal from escrow during Sec 14 IBC moratorium = Contempt + Transaction void. NCLAT / SC validated escrow protection.

E. M&A Escrow Diversion

Case: Lodestar Slotted Angles Ltd vs HSBC Oman Bank, 17 Dec 2019, Bombay HC

Rs 2.5 Crores placed in escrow account with M/s Mulla & Mulla to be paid upon fulfillment of obligations

Sellers used advance monies transferred to it by purchaser to pay off mortgages and for personal uses

Court held: Advance monies regarded as irrevocably released only if conditions met. If used before fulfillment = breach + recovery with interest.

3. Civil vs Criminal Liability Chart

4. How to Prove Diversion - Forensic Audit Triggers (As per Amrapali)

Supreme Court mandated:

1. No books of accounts 2015-18
2. Bogus allotments, creation of personal assets of directors
3. Money from banks diverted to closely held companies
4. Failure to deposit in designated escrow