High Court Penalises Bank for Unlawful Freezing of Account

The petitioner, being the sole proprietor involved in business in respect of machinery, had opened a current account with the Indian Overseas Bank. In the month of January 2026, an amount of Rs. 23 lakhs was credited to his account by way of RTGS, whereof Rs. 5 lakhs was withdrawn by him on the very date. Within a few days thereafter, his account was frozen by the bank without giving any notice either in writing or orally and without any reason.

After several rounds of meetings and messages sent along with a legal notice, his account could not be unfrozen, which resulted in his approaching the High Court. The bank justified the freezing of his account on the plea of “suspected transaction” as there was a discrepancy between the income declared and the credited amount and also relied upon provisions of the Prevention of Money Laundering Act, 2002 (PMLA).

Issue Before Court: If a bank can arbitrarily freeze an account, based only on its own suspicions, without any complaints, FIR, or order of a competent authority, using sections of PMLA?

HC Decided: The writ petition was granted by the High Court, and the behaviour of the bank was heavily criticised by it. The Court declared that the freezing of the account was absolutely arbitrary and illegal, with no legal backing. It was made clear that banks are not empowered to conduct investigations. Neither can they behave like investigators or authorities, for that matter. Any mere suspicion or inquiry conducted by the bank itself, without receiving any formal complaint, FIR, or a competent authority’s order, cannot be a reason for the freezing of a bank account. Relying on section 12(2) of the PMLA was completely unjustified. Further, the Court also observed that even under the stricter norms of due diligence, the banks can at best prevent the particular transaction and not freeze the entire account.

The freezing of accounts can be done only under the statutory powers vested by law, like the orders of investigating authorities or the orders of the court. Significantly, the Court pointed out that the arbitrariness involved in freezing of accounts would violate the basic human rights of the individual, like the right to livelihood guaranteed under Article 21 and the right to carry on business under Article 19(1)(g). As no complaint, no FIR, and no reason had been given to freeze the account, the court ordered its de-freezing without delay and ordered a cost of Rs.50,000 in favour of the petitioner against the bank.

To Read Full Judgment, Download PDF Given Below.