No order or FIR, but bank freezes account over Rs 23 lakh deposit: Allahabad High Court slaps Rs 50k costs

Justices Shekhar B Saraf and Abdhesh Kumar Chaudhary said there is no legal provision empowering a bank to freeze an account merely because a transaction appears suspicious.

“The bank is not in any manner empowered or entitled to initiate an action against its customers without there being any cogent material on record that has been provided to the bank from formal entities such as the Reserve Bank of India, Central Bureau of Investigation, Enforcement Directorate, police authorities amongst others,” the Allahabad High Court said in its order dated April 29.

Account frozen

• The petitioner claimed to be the sole proprietor of a company engaged in the sale and purchase of machinery relating to fisheries and allied works.
• The petitioner alleged that during the business activities of the firm, an amount of Rs 23 lakh came to be transferred through RTGS for the purchase of machinery. On the same day, the petitioner withdrew an amount of Rs 5 lakh from the said bank account.
• Subsequently, when he attempted to withdraw more from the bank account of his firm, he was informed orally by the bank that his account was frozen.
• The petitioner contended that the account was frozen without notice, without any complaint, First Information Report (FIR), or order from a competent authority, and despite repeated requests, the bank failed to de-freeze it, disrupting business operations and causing financial loss.
• The bank sought to justify the freeze by citing ‘suspicious transactions,’ pointing to the fact that the petitioner had declared an annual income of Rs 5.76 lakh while opening the account, whereas Rs 23 lakh had been credited into it, of which Rs 5 lakh was withdrawn the same day.
• It was argued before the Allahabad High Court that the bank decided to freeze the account, considering ‘fraudulent and suspicious activities’ in the account of the petitioner and in order to save the said money as a precautionary measure.

Court rejects bank’s defence

Rejecting the bank’s defence, the Allahabad High Court said it found no legal provision empowering a bank to freeze an account merely because a transaction appears suspicious to it. “This Court also does not find any guidelines/notification/circular/SOP etc, of any Bank which specifically bars crediting of more amount than the annual income mentioned in the account opening form of the Bank,” it said.

The bench held that there was nothing unusual about the credit of Rs 23 lakh into the petitioner’s account within 15 days from the opening of the current account or having withdrawn Rs 5 lakh on the same day, in the absence of any complaint of fraudulent activity from any quarter.

‘Vexatious’

The Allahabad High Court remarked that if the bank is construed to have the power to freeze any bank account, rather than a particular specified transaction, a havoc-like situation would be created. It added that the entire financial system would come crumbling down for the simple reasons that besides the other investigative agencies and the courts, the bank would also have the power to freeze accounts at its whims and discretion.

It observed that without a lawful order, complaint, or lien, the bank had no authority to deny the petitioner access to his own funds.

“The facts on record indicates that there is neither any complaint nor FIR against the petitioner. In fact, the present freezing of bank account appears to be vexatious and actuated with mala fides. Under these circumstances, this Court deems it appropriate to allow the prayer of the petitioners seeking de-freezing of their bank account,” the Allahabad High Court noted.

The court directed the bank concerned to de-freeze the petitioner’s bank account and noted that indiscriminate freezing has the inevitable effect of paralysing the day-to-day business operations of the petitioner, resulting in loss of commercial goodwill and financial consequences.

Therefore, the Allahabad High Court directed the bank to pay Rs 50,000 compensation to the petitioner.