Banks can’t assume the role of adjudicating authority to freeze accounts, rules High Court

A bank, being a custodian of funds, cannot assume the role of an adjudicating authority and freeze accounts merely based on inter se disputes between rival factions, more so when the very locus of complainants to raise such dispute is under challenge, the high court has said. 

Justice Sachin Shankar Magadum said this while directing a bank to defreeze 8 savings accounts and 5 fixed deposit accounts of Sri Venkataramana Vidyavardhaka Sangha, an educational society based in Bantwal, Dakshina Kannada. 

The society said Canara Bank debit-froze its accounts after certain individuals, who claimed to be members of the society, filed a complaint alleging irregularities. 

The issue as to whether the complainants are lawful members and whether they could have set the law in motion is itself sub judice and yet to be adjudicated by the deputy registrar of cooperative societies. 

Justice Magadum said ordinarily, debit-freezing accounts can be justified only when it is backed by authority of law, either at the instance of an investigating agency in connection with a cognizable offence or pursuant to an order passed by a competent court of law. 

“Such freezing, which has the effect of paralysing the functioning of an educational institution, could have been justified only upon a lawful directive emanating from a competent authority exercising statutory powers, and not on the basis of unverified allegations in an intra-society dispute. Hence, the debit-freezing action, being dehors the statutory framework and in disregard of judicial directions governing the field, is unsustainable and liable to be interfered with,” the judge said.

The court said that the bank’s action was clearly arbitrary and amounted to an overreach without any lawful sanction.

“The power to freeze or attach bank accounts is a drastic measure, which has serious civil consequences, particularly when exercised against an educational society, whose functioning necessarily involves continuous financial transactions for salaries, maintenance and academic activities. Such coercive action cannot be resorted to in a casual or mechanical manner,” it said. 

However, the court clarified that the society shall operate the accounts strictly subject to outcome of the enquiry proceedings pending before the deputy registrar and that the enquiry proceedings shall be binding on the parties.