Banks not probe agencies, can't freeze accounts arbitrarily: Allahabad HC

The Lucknow bench of the Allahabad High Court on Friday expressed displeasure over what it termed a growing tendency of banks to arbitrarily freeze accounts, observing that a bank acts as a trustee and not an investigative agency.

A division bench of Justice Shekhar B Saraf and Justice Avadhesh Kumar Chaudhary imposed a cost of ₹50,000 on Indian Overseas Bank for freezing a customer's account without valid justification, directing that the amount be paid to the account holder within four weeks.

The order came while allowing a petition filed by M/s SA Enterprises, a company which deals in fishery machinery.

In its plea, the company stated it had received ₹23 lakh in its bank account through RTGS on January 16, 2026. The bank froze the account citing suspicion as the firm had declared an annual income of ₹5.76 lakh at the time of opening the account.

In its defence, the bank argued that the transaction appeared suspicious and the action was taken under provisions of the Prevention of Money Laundering Act.

The court, however, noted that the account was not frozen due to any cybercrime trigger but because the bank had assumed the role of an investigating agency.

It held that banks cannot determine the source of funds on their own unless there is a formal directive from agencies such as the police, the Enforcement Directorate or the Central Bureau of Investigation.

The bench observed that the increasing trend of freezing bank accounts without adequate grounds is a matter of concern, adding that such arbitrary actions disrupt business operations and adversely affect the commercial reputation and financial stability of account holders.