Bank Cannot Freeze Customer’s Account Based on Third-Party Dispute: Calcutta High Court Slams Axis Bank

“Axis Bank Had No Locus to Rely on VTL’s Letter Against Its Own Customer; Freeze Action Violated Banking Norms”, In a scathing verdict Division Bench of the Calcutta High Court comprising Justice Sabyasachi Bhattacharyya and Justice Supratim Bhattacharya set aside a controversial order of a Single Judge that had stayed the effect of an earlier direction to defreeze the bank and demat accounts of a private company. The Court held that Axis Bank acted unlawfully in freezing the accounts of its customer August Agents Ltd., based on a communication from Vindhya Telelinks Ltd. (VTL) – a third party shareholder – instead of acting on the company’s own valid corporate resolutions.

Crucially, the Bench ruled that respondents 5 to 7 (erstwhile directors) had no locus standi to seek impleadment or recall of the earlier writ order since their removal had been upheld by the National Company Law Tribunal (NCLT), and no stay had been granted by the National Company Law Appellate Tribunal (NCLAT).

“Freezing Accounts on Instructions of Third Party Is a Breach of Banker’s Duty”: Court on Bank’s Conduct

The dispute arose after Axis Bank froze both bank and demat accounts of August Agents Ltd. in June 2021, citing conflicting communications from rival factions of the company’s management. Notably, one of the two letters cited by the Bank was not from the customer company at all but from VTL, its 100% shareholder.

The Division Bench was unequivocal in its criticism:

“It is unclear as to what prompted the Bank to raise a dispute on the basis of a third-party entity, that is, VTL, as opposed to a letter issued by the customer company itself.” [Para 35]

Adding further:

“The loyalty of the Bank, as the banker, lay not with a nebulous entity called the 'M.P. Birla Group' but specifically to its customer August Agents Ltd.” [Para 33]

The Court noted that VTL itself had later supported the defreezing and had even offered indemnity, which had formed the basis of the original order by the learned Single Judge directing de-freezing.

Removed Directors Had No Standing to Seek Recall or Impleadment

Respondents Krishna Damani, Susil Kumar Daga, and Vinod Kumar Sharma had sought to recall the April 9, 2025 order, claiming that they were necessary parties since the freeze was imposed based on their complaints. The Court outright rejected this argument.

“The removal/non-reappointment of respondent nos. 5 to 7… subsists, thereby denuding them of any locus standi to raise any objection with regard to the affairs of the appellant no.2-company or the operation of its bank accounts.” [Para 39]

The Court further emphasized: “Respondent nos. 5 to 7 cannot piggyback on the APL challenge to claim locus… they have not taken out any challenge to their removal at any point of time.” [Para 43]

Importantly, the Court also found no mention of these individuals in the Axis Bank’s freeze letter, which instead relied solely on the communication from VTL. The Court held: “Such plea [of respondents 5 to 7] is ex-facie a sham… the freeze was undertaken only on VTL’s letter. Respondent nos. 5 to 7… do not have any locus standi whatsoever.” [Para 44]

Freezing Account Without Court Order or Internal Mandate Is Unlawful

Citing settled precedents, the Court reaffirmed the limited grounds on which banks may freeze accounts, namely, under a court order, RBI instruction, or express legal mandate. The Bench referred to Cardiological Society of India v. Sunip Banerjee, and Modello Ventures LLP v. Indian Overseas Bank, stating: “A bank cannot freeze any account of its constituent for any period at all unless obligated to obey any instruction of the Central Bank or any order of court.” [Para 9]

Here, the ROC had already unmarked the “management dispute” status of the company by July 2021, and the MCA had expressly directed such demarking. The Bench held: “There cannot be any further fetter in operation of the account. Even otherwise… the marking has nothing to do with the transactions of the company with its banker.” [Para 38]

Bank’s Interference in Internal Affairs of Company Denounced

The Court took strong exception to Axis Bank’s intervention in company affairs by filing applications before the NCLT and seeking clarification on authorized signatories, even after receiving valid corporate resolutions:

“The Bank has no locus standi to intervene in the internal affairs of the Company… it was the incumbent duty of the Axis Bank to act on the instructions of the appellant no.2-Company itself.” [Para 37]

The Bench went so far as to term the Bank’s clarificatory application: “Prima facie a moonshine, in an unwarranted bid to thwart the operation of the accounts… in apparent act of camaraderie with respondent nos. 5 to 7.” [Para 42]

Single Judge's Interim Order Found Legally Unsustainable

The Court struck down the June 19, 2025 order of the learned Single Judge which had stayed the defreezing and kept the contempt petition in abeyance. The Division Bench noted that no reasons or prima facie findings had been recorded: “Putting the parent order… in suspension without any reasoning… cannot be sustained.” [Para 46]

Worse, the learned Single Judge had allowed impleadment of respondents 5 to 7 even though the writ petition had already been disposed of, something the Bench held to be jurisprudentially impermissible:

“There is no scope of adding parties to a disposed-of writ petition… the Court is no longer in seisin of the matter.” [Para 47]

Appeal Allowed; Original Order to Defreeze Accounts Restored

The Division Bench allowed all three connected appeals, set aside the impugned June 19, 2025 order, and restored the original direction to defreeze the company’s bank and demat accounts. It also directed the learned Single Judge to first decide the recall and clarification applications, if any, before proceeding to hear the contempt plea.

“The findings and observations of this Court shall not… prejudice the rights and contentions of any of the parties in the pending applications before the learned Single Judge.” [Para 52]

However, the Court made it clear that its present observations, though tentative, uphold the clear illegality of freezing corporate accounts based on a shareholder’s letter and without any lawful authority.

Date of Decision: 05 January 2026