Private Banks Cannot Unilaterally Freeze Accounts Without Legal Authority: Allahabad High Court Quashes Kotak Mahindra Bank’s Action Against Proview Constructions Ltd.

A Scheduled Bank Is a Custodian of Depositors' Funds, Not an Arbitrator of Private Disputes – Allahabad High Court has ruled that a private scheduled bank cannot unilaterally freeze a depositor’s account based on private disputes without any legal mandate. Quashing Kotak Mahindra Bank’s action of freezing the corporate account of Proview Constructions Limited, the Court held that such interference in financial transactions without judicial or statutory authority violates banking regulations and depositors’ rights.

Delivering the judgment in Proview Constructions Limited v. Union of India & Others, a division bench comprising Justice Ashwani Kumar Mishra and Justice Arun Kumar Singh Deshwal observed, "A private bank may not be a state instrumentality, but when it engages in activities affecting the public, such as accepting deposits and facilitating withdrawals, it performs a public function and is subject to judicial review under Article 226."

By allowing the writ petition under Article 226 of the Constitution, the Court reaffirmed that banks must comply with due process and cannot arbitrarily block access to depositors' funds.

Kotak Mahindra Bank Freezes Corporate Account Over Director’s Matrimonial Dispute

The dispute arose when Kotak Mahindra Bank froze the corporate account of Proview Constructions Limited based on a request from the estranged wife of one of its directors, Rajeev Kumar Arora. The wife, who held only 0.75% shares in the company, cited an ongoing matrimonial dispute and a criminal complaint against her husband as grounds for freezing the company’s funds.

The bank, without any court order or regulatory directive, froze the company’s account containing ₹10.57 crores, citing the matrimonial dispute as justification. Despite no injunction being granted in the civil suit filed by the wife, the bank refused to process withdrawals and advised the company to resolve its internal dispute.

Aggrieved by this action, Proview Constructions Limited approached the High Court, arguing that its financial operations had come to a standstill, salaries remained unpaid, and the bank’s action violated its constitutional and statutory rights.

"A Bank Cannot Assume the Role of an Adjudicator in Private Disputes"

The Court ruled that Kotak Mahindra Bank had no legal basis to freeze the company’s account in the absence of a court order, government directive, or banking regulation authorizing such action. Justice Arun Kumar Singh Deshwal, rejecting the bank’s defense, stated, "A private matrimonial dispute does not empower a bank to restrict a corporate entity’s access to its own funds. A bank is a trustee of public deposits and cannot function as an adjudicatory body in private conflicts."

The Court further held that Kotak Mahindra Bank, being a scheduled bank, is bound by the Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949, which impose strict obligations to safeguard depositors' funds and allow withdrawals unless legally prohibited.

Function Test Determines Maintainability of Writ Against Private Banks

Addressing the bank’s objection that writ jurisdiction does not extend to private entities, the High Court relied on the Supreme Court’s ruling in S. Shobha v. Muthoot Finance Ltd., 2025 INSC 117, which held that a writ under Article 226 is maintainable if a private entity performs a public function. The judgment clarified, "If a private body discharges a public function, such as banking, the court can intervene when there is a violation of depositor rights."

The High Court also cited Federal Bank Ltd. v. Sagar Thomas, (2003) 10 SCC 733, which recognized that private banks, despite their commercial nature, are subject to regulatory oversight and must comply with public law obligations.

Applying these principles, the Court ruled, "Kotak Mahindra Bank, by freezing an account without legal authorization, violated its statutory duty and acted arbitrarily, making it subject to writ jurisdiction."

Freezing Order Quashed, Bank Directed to Restore Account Operations

The High Court, quashing Kotak Mahindra Bank’s order dated 28.05.2024, directed that the petitioner company be allowed to operate its current account without restrictions unless a competent legal authority imposes a lawful freeze.

Justice Ashwani Kumar Mishra, concurring with the ruling, stated, "A scheduled bank must act within the legal framework and cannot unilaterally obstruct a depositor’s right to access its funds. Such actions undermine public confidence in the banking system and violate depositor rights."

The Allahabad High Court’s ruling in Proview Constructions Limited v. Union of India & Others establishes that:

• Private scheduled banks cannot arbitrarily freeze depositors' accounts without judicial or regulatory authorization.

• A bank’s obligation to allow withdrawals is a public function, making it amenable to writ jurisdiction under Article 226.

• Matrimonial or shareholder disputes do not justify unilateral banking restrictions without a legal mandate.

By upholding the depositor’s right to access its funds, the High Court has reinforced legal protections against unauthorized banking actions, ensuring that corporates and individuals are not left at the mercy of arbitrary decisions by financial institutions.

Date of decision: 13/02/2025