Writ Petition Maintainable Against Private Bank Acting Outside License Terms: Allahabad HC On Bank Unilaterally Freezing Customer's Account

The Allahabad High Court has held that a writ petition is maintainable against a scheduled private bank under Article 226 of the Constitution of India if it prohibits a person/company from withdrawing their money from the bank which is a violation of the conditions of the license granted to the bank by the Reserve Bank of India.While dealing with Kotak Mahindra Bank's unilateral freezing of a company's account upon a request by the director's wife due to an ongoing matrimonial dispute, the bench of Justice Ashwani Kumar Mishra and Justice Arun Kumar Singh Deshwal held that:“The bank cannot arrogate to itself an adjudicatory role in a matrimonial dispute of account holder. The depositor may lose interest in the banking company if its amount lying in deposit with the scheduled private bank is unauthorizedly withheld. It may lead to the depositor losing interest and confidence in the banking company itself. This would clearly be in derogation of the professed objective of the banking activity itself.”“It is, therefore, necessary that in so far as withdrawal of amount by the depositor from its account is concerned the banking company must adhere to the conditions of licence which are sine-qua-non for its registration. Sub-section (4) of Section 22 also provides that if there is a violation of the conditions of licence the Reserve Bank of India has the authority to cancel licence of the bank itself. In such circumstances, there is a positive legal obligation on the respondent scheduled bank to ensure that the faith of the depositor is not lost in the banking company by its activity. This part of the function of the scheduled private bank, in our considered view, lies in the realm of public function, and a writ would lie to address the wrong,” it added.Notably, the Supreme Court, earlier this year, had held that a writ petition would not be maintainable against NBFC's or Private Company's Banking Business, as it was not a 'Public Function.'Factual BackgroundOne Rajeev Kumar Arora, Director of the petitioner company with 41.14% shares, was involved in a matrimonial dispute with his alleged wife. The alleged wife filed a criminal complaint. She also moved an application before Kotak Mahindra Bank (one of the respondents) to freeze the account of the petitioner company during the pendency of the matrimonial dispute. The Bank froze the accounts of the petitioner company and advised the wife to sort out the internal disputes. The wife also filed a civil suit to prevent the bank from defreezing the accounts. The petitioner approached the High Court under Article 226 of the Constitution of India, praying for the defreezing of the accounts and also praying for a direction to the Bank to allow the petitioner to withdraw from its account. High Court VerdictThe Court observed that banking operations in India are controlled by the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. It was held that Kotak Mahindra Bank is a “scheduled bank” under Section 2(e) of the 1934 Act and is regulated by the Act of 1949. Section 22(3) provides certain conditions which are to be fulfilled for the grant of a license for banking operations by the Reserve Bank of India. Inter alia, these include conditions that the banking company shall be able to pay its present or future depositors in full as their claims accrue. It must serve the public interest and fulfil any other condition that the RBI thinks is necessary for the company to carry on business in India without causing prejudice to public interest. The Court noted that the Bank was claiming full immunity in denying the petitioner permission to withdraw from his bank account based on the agreement signed between them. It was pleaded that Kotak Mahindra Bank, being a private bank, had the right to refuse the withdrawal of money by the petitioner if the company's affairs were doubtful. In Federal Bank Ltd. Vs. Sagar Thomas and others, the primary issue before the Supreme Court was a contractual dispute between a private bank and its employee. The Apex Court held that though a writ against private financial institutions will not lie, however, it carved out exceptions for such writs to be maintainable when there were violations of statutory provisions which such private institutions were bound to comply with. Recently, in S. Shobha Vs. Muthoot Finance Ltd., the Supreme Court has held that the tags 'private' and 'public' do not decide amenability to writ jurisdiction. It is the 'function' test which determines whether writ against the institution. Muthoot Finance Ltd., the company before the Apex Court, is not a scheduled bank under the Act, noted the Court. The Court observed that the petitioner's bank account was unilaterally frozen by the respondent Bank without any order from any authority in law or by the Court in pursuance of the criminal case. Relying on Section 22(3), the Court observed that by accepting deposits from a person (company), the Bank acts as a trustee...

Writ Petition Maintainable Against Private Bank Acting Outside License Terms: Allahabad HC On Bank Unilaterally Freezing Customer's Account

Upasna Agrawal

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Upasna Agrawal

Writ Petition Maintainable Against Private Bank Acting Outside License Terms: Allahabad HC On Bank Unilaterally Freezing Customer's Account

Upasna Agrawal

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Upasna Agrawal

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