Banks Must Restrict Account Freeze To Amount Specified In Freezing Direction: Karnataka High Court

Banks cannot freeze an entire account when investigating agencies have directed freezing only up to a specified amount, the Karnataka High Court has held.

The court observed that any restriction on the operation of a bank account must remain proportionate to the purpose sought to be achieved.

Justice Suraj Govindaraj delivered the ruling while allowing a petition filed by a customer of IndusInd Bank. The account holder challenged the freezing of his account following communications from investigating agencies.

“The freezing of a bank account directly impacts the account holder's ability to utilise legitimately available funds and has civil and financial consequences. Any restriction imposed on the operation of a bank account must therefore be proportionate to the purpose sought to be achieved and must not exceed the limits prescribed by the competent authority issuing the direction.”, the court observed.

The account holder approached the High Court contending that the Cyber Crime Police Station at Mehsana, Gujarat, had sought freezing of his account only to the extent of ₹15,000. He argued that the Bank nevertheless froze the entire account. As a result, he was unable to access funds beyond the amount covered by the freezing direction.

Counsel appearing for the Bank submitted that a second communication had been received from Barrackpore Police Station in West Bengal. That communication sought freezing of the account to the extent of ₹10,000. The Bank contended that it froze the entire account because there was a possibility that additional freezing directions could be received from other investigating agencies.

The Court did not accept that contention.

“The apprehension expressed by respondent No.1 that additional freezing directions may be received in future cannot furnish a legal basis for freezing funds beyond the amount covered by the existing directions. Administrative convenience or anticipatory action cannot substitute a valid legal mandate.”,the court noted.

The court noted that the two communications together covered only ₹25,000. It held that the Bank could not enlarge the scope of the freezing directions on its own.

The court observed that a bank performs a limited and ministerial function while acting on communications issued by an investigating agency. It acts as a custodian of the account and is required to implement directions lawfully issued by competent authorities.

“The bank is neither the investigating authority nor the adjudicatory authority. Its obligation is confined to faithfully implementing the directions lawfully issued by the competent authority. In the process of implementing such directions, the bank cannot assume unto itself powers which have not been conferred upon it by law, nor can it enlarge the scope of the directions received on the basis of its own assumptions, apprehensions or administrative considerations.”, it observed.

The Court also observed that amounts lying in a customer's account remain the property of the account holder. Such funds are subject only to lawful restrictions imposed by competent authorities.

“Amounts lying in a customer's account remain the property of the account holder, subject only to such lawful restrictions as may be imposed by competent authorities.”, it noted.

Making broader observations on the implementation of freezing directions, the Court held that banks should ordinarily earmark or place a lien only over the amount specified in the freezing direction. They should permit operation of the remaining balance unless the direction itself requires complete freezing of the account or there is a statutory mandate to the contrary.

“This Court is therefore of the considered view that whenever a freezing direction specifies a particular amount, the bank concerned ought ordinarily to earmark or place a lien upon funds to the extent of the amount specified and permit operation of the remaining balance in the account, unless the direction itself requires complete freezing of the account or there exists any statutory mandate to the contrary.”, the court ruled.

Allowing the petition, the Court directed IndusInd Bank to restrict the freeze on the account to ₹25,000. It permitted the account holder to operate on the balance amount lying to the credit of the account.

The Court also clarified that the Bank would be at liberty to act upon any further communication, direction or order received from a competent authority, strictly in accordance with its terms.

For Petitioner: Advocates Navyashree H.L and Yashaswi Prasad K

For Respondents: Advocate B.M Kushalappa