‘Banks Cannot Act As Investigating Agencies’: Allahabad High Court Slams Arbitrary Account Freeze

The Allahabad High Court has directed Indian Overseas Bank to immediately de-freeze the bank account of a Lucknow-based firm, holding that banks cannot assume the role of investigative agencies or freeze accounts in the absence of any legal authority, complaint, or criminal proceedings.

The bench of Justice Shekhar B. Saraf and Justice Abdhesh Kumar Chaudhary was dealing with a writ petition filed by M/s S.A. Enterprises, a sole proprietorship engaged in fisheries-related machinery business, whose account was frozen without prior notice or explanation.

The dispute arose after ₹23 lakh was credited into the petitioner’s account on January 16, 2026 through RTGS by a customer. On the same day, ₹5 lakh was withdrawn. Four days later, when the petitioner attempted another withdrawal, bank officials orally informed him that the account had been frozen. No written order, notice, or reason was ever communicated.

Despite repeated visits, messages, and a formal legal notice, the bank failed to provide any justification or relief, prompting the petitioner to approach the high court.

In its defence, the bank argued that the transaction appeared suspicious, primarily because the petitioner had declared an annual income of ₹5.76 lakh at the time of opening the account. It also relied on an email from Bank of Maharashtra, which had flagged alleged irregularities in the account of the person who transferred the funds and requested that the amount be withheld.

The court, however, found the bank’s justification wholly untenable. It noted that there was no FIR, no complaint, no investigation, and no order from any competent authority directing the freezing of the account. Significantly, even the account of the alleged originator of funds remained operational, undermining the bank’s claim of suspicion.

Rejecting the reliance on the Prevention of Money Laundering Act, court clarified that Section 12 merely imposes record-keeping obligations on banks and does not authorise freezing of accounts. Even provisions relating to enhanced due diligence do not permit blanket freezing, court held.

The bench also referred to RBI guidelines, which explicitly state that banks should not restrict account operations merely because a Suspicious Transaction Report has been filed. It observed that allowing banks to freeze accounts based on subjective suspicion would create a “havoc-like situation” and destabilise the financial system.

Court further emphasised that freezing of bank accounts directly impacts the right to livelihood and business, protected under Articles 19(1)(g) and 21 of the Constitution. It held that such action, when taken without due process, is arbitrary and violative of fundamental rights.

Critically, court observed that a bank acts as a trustee of depositors’ money and cannot “metamorphose into an investigating agency.” It stressed that any restriction on account operations must be backed by lawful authority, such as orders from police, enforcement agencies, or courts.

Finding the bank’s conduct not only illegal but also mala fide, court rejected the request to impose conditional restrictions on withdrawals. It held that in the absence of any legal proceedings or allegations against the petitioner, there was no justification to curtail access to funds.

Allowing the petition, court directed Indian Overseas Bank to de-freeze the account forthwith and permit full operation in accordance with RBI guidelines.

In addition, court imposed costs of ₹50,000 on the bank, to be paid to the petitioner within four weeks, noting that such arbitrary freezing paralyses business operations and causes financial and reputational damage.

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Case Title: M/S S. A. Enterprises Thru. Its Proprietor Rameshvar Singh And Another Vs. Reserve Bank Of India Thru. Its Governor Mumbai And 2 Others

Judgment Date: April 29, 2026

Bench: Justice Shekhar B. Saraf and Justice Abdhesh Kumar Chaudhary