Banks Cannot Freeze Entire Account Over Limited Police Directions, Says Karnataka HC

The Karnataka High Court has held that banks cannot freeze the entire amount lying in a bank account on the basis of speculation that further directions for freezing the account may come from investigating agencies at some point in the future.

In a recent judgment, Justice Suraj Govindaraj observed that a bank’s powers to freeze an account must be based on existing legal directions and not on speculative possibilities. The court said that a mere apprehension that further requests may be received cannot justify freezing funds beyond the amount specified by authorities.

The case involved a Bengaluru resident whose account with IndusInd Bank was completely frozen after the bank received communications from two investigating agencies. The Cyber Crime Police in Gujarat sought freezing of Rs 15,000 linked to a disputed transaction, while the Barrackpore Police in West Bengal directed the bank to freeze Rs 10,000.

Although the total disputed amount was Rs 25,000, the bank blocked all transactions in the account, depriving the accountholder from being able to access salary credits and other amounts.

Clarification On Bank’s Role

The bank argued before the Bench that multiple freezing requests had already been received and there was a possibility of more such directions being issued in the future. It submitted that freezing the entire account was a precautionary measure.

The court, however, rejected this argument. It held that a bank performs only an administrative function while implementing freezing directions and is neither an investigating authority nor an adjudicatory body.

A bank’s obligation is limited to carrying out lawful instructions issued by competent authorities; it cannot expand the scope of those directions based on its own assumptions, administrative convenience or concerns about future developments, the Karnataka HC said.

Proportionality Must Be Maintained

The court also stressed that any restriction on the operation of a bank account must be proportionate to the purpose for which it is imposed.

It noted that money deposited in an account remains the property of the accountholder, subject only to lawful restrictions. Freezing an entire account when only a small amount is under investigation could lead to serious financial and civil consequences for customers.

Issuing a general direction to banks, the court said that when a freezing order specifies a particular amount, banks should ordinarily earmark or place a lien only on that amount and allow customers to operate the remaining balance. A complete freeze should be imposed only when specifically directed by authorities or required under law.

The court ultimately directed the bank to limit the freeze to Rs 25,000, corresponding to the amount specified by the investigating agencies.