Unilateral Freezing of Bank Accounts Held Arbitrary and Unlawful: Allahabad HC

The Allahabad High Court (Lucknow Bench), in M/s S.A. Enterprises v. Reserve Bank of India & Ors. (WRIT-C No. 1866 of 2026), has held that banks cannot unilaterally act as investigative agencies or freeze customer accounts without authority of law or directions from a competent authority. The Court directed the immediate de-freezing of the petitioner’s account and imposed costs of ₹50,000 on Indian Overseas Bank.

The petitioner, a sole proprietor engaged in the lawful business of sale and purchase of machinery related to fisheries and allied works, maintained a current account with Indian Overseas Bank. On 16 January 2026, an amount of ₹23 lakhs was credited to the account through RTGS, following which ₹5 lakhs was withdrawn. However, on 20 January 2026, the bank froze the account without issuing any written notice or providing reasons. Despite repeated requests and a legal notice, the account remained frozen, prompting the petitioner to approach the Court.

The petitioner relied on the judgment in Khalsa Medical Store v. Reserve Bank of India (Writ-C No. 12211 of 2025), wherein the Allahabad High Court had clarified that, under Section 106 of the Bharatiya Nagarik Suraksha Sanhita, 2023, bank accounts cannot be frozen on mere suspicion and such action must be supported by a valid complaint or FIR. It was further held that, at best, a lien may be marked on a specific amount, and not a blanket freeze on the entire account.

The bank contended that the petitioner had declared an annual income of ₹5.76 lakhs, whereas a significantly higher amount of ₹23 lakhs was credited into the account, giving rise to suspicion. It relied upon Section 12(2) of the Prevention of Money Laundering Act, 2002 (“PMLA”) to justify its action.

Rejecting this contention, the Court held that there is no provision of law that authorizes a bank to unilaterally investigate transactions or freeze accounts on mere suspicion. It clarified that Section 12 of the PMLA merely imposes record-keeping obligations on reporting entities and does not empower banks to freeze accounts. The Court further observed that freezing of accounts is contemplated under Section 17 of the PMLA, and that too only by a competent authority upon satisfaction of the statutory twin conditions of (i) possession of information, and (ii) formation of a reason to believe.

The Court also found that the bank had effectively undertaken a self-driven investigation into the source of funds, including acting upon an informal communication from another bank, without any statutory backing. It noted that there was no police complaint, FIR, judicial order, or any material substantiating the allegation of suspicious transaction. Importantly, the Court observed that the account of the remitter (from whom the funds originated) continued to remain operational, thereby undermining the very basis of suspicion.

Reliance was also placed on the Reserve Bank of India’s Master Circular dated 2 July 2012 on KYC/AML/CFT obligations, particularly Paragraph 2.16(2), which expressly provides that banks should not restrict account operations merely because a Suspicious Transaction Report (STR) has been generated.

The Court reiterated that any freezing of bank accounts must be based on directions issued by competent authorities such as investigating agencies, in accordance with law (for instance, under Section 102 of the Code of Criminal Procedure, 1973), and subject to judicial oversight. It also relied on OPTO Circuits (India) Ltd. v. Axis Bank & Ors. (2021) 6 SCC 707, wherein the Supreme Court held that freezing of bank accounts cannot be undertaken casually or arbitrarily.

Further, the Court clarified that a bank may act independently only in limited circumstances, such as where it has a lawful lien over the account (for instance, under Section 171 of the Indian Contract Act, 1872). In the absence of such legally recognised grounds, any restriction on account operations would be impermissible.

The Court held that arbitrary freezing of bank accounts infringes fundamental rights under Articles 19(1)(g) and 21 of the Constitution of India, as it directly impacts the right to carry on business and the right to livelihood.

Accordingly, the writ petition was allowed, and the bank was directed to immediately de-freeze the petitioner’s account. The Court further emphasized that banks may act only upon valid legal directions from competent authorities, and any unilateral freezing of accounts, absent statutory backing, is arbitrary, violative of constitutional rights, and unsustainable in law.