Introduction:

In Proview Constructions Limited v. Union of India and 3 Others [WRIT – C No. – 28679 of 2024], the Allahabad High Court ruled that a writ petition is maintainable against a scheduled private bank under Article 226 of the Constitution if the bank unilaterally prohibits a person or company from withdrawing their money in violation of its licensing conditions under the Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949. The case was heard by a Division Bench comprising Justice Ashwani Kumar Mishra and Justice Arun Kumar Singh Deshwal, who dealt with Kotak Mahindra Bank’s decision to freeze the account of a company at the request of the director’s wife amid a matrimonial dispute. The Court held that a private bank cannot assume an adjudicatory role in personal disputes of account holders and that freezing accounts arbitrarily violates public interest and banking regulations. The Court further stated that banks are trustees of deposited money and must return it to depositors unless legally restrained. Observing that the bank’s actions were unauthorized, the Court ruled in favor of the petitioner and directed the immediate defreezing of the accounts.

Arguments of Both Sides:

The petitioner, Proview Constructions Limited, was represented by advocates Anil Kumar Mehrotra, Anuj Kumar, and Srijan Mehrotra. The company’s director, Rajeev Kumar Arora, held 41.14% shares and was embroiled in a matrimonial dispute. His estranged wife filed a criminal complaint and subsequently approached Kotak Mahindra Bank, requesting it to freeze the petitioner company’s account, allegedly to prevent misuse of funds during the dispute. The bank complied with the request and froze the company’s account, citing internal disputes. The petitioner contended that this unilateral action was unlawful, as no court or legal authority had issued any order to freeze the account. The petitioner argued that by preventing withdrawal, the bank was violating its statutory obligation to allow depositors access to their money. The petitioner relied on Federal Bank Ltd. v. Sagar Thomas and S. Shobha v. Muthoot Finance Ltd., arguing that private financial institutions performing public functions are subject to writ jurisdiction. The petitioner sought immediate defreezing of the account and a direction for the bank to allow withdrawals as per normal banking operations.

On the other hand, the respondent bank, represented by advocates Sushant Chandra and Gaurav Dwivedi, defended its actions, arguing that Kotak Mahindra Bank, as a private entity, had the contractual authority to refuse withdrawals under its banking agreements. The bank contended that since the company’s affairs were under dispute, it exercised its discretion to prevent any possible financial misuse. The bank further argued that writ petitions against private banks are generally not maintainable unless there is a clear violation of statutory provisions, which was not the case here. The bank cited its right to manage accounts responsibly in the interest of financial security and public confidence. However, it failed to provide any legal justification or statutory provision allowing it to unilaterally freeze an account without judicial intervention.

Court’s Judgment:

The Allahabad High Court, after examining the case in light of banking regulations, ruled in favor of the petitioner. It held that private banks, particularly scheduled banks like Kotak Mahindra, function under the regulatory framework of the RBI and must adhere to licensing conditions, including the obligation to allow depositors access to their funds. The Court observed that Section 22(3) of the Banking Regulation Act mandates that banks must be capable of paying depositors as their claims accrue, ensuring the public’s faith in banking institutions. The Court rejected the bank’s argument of contractual discretion, stating that a scheduled bank cannot function like an autonomous moneylender and arbitrarily withhold funds. It emphasized that such actions undermine public trust in the banking system and violate fundamental banking principles. The Court noted that Kotak Mahindra Bank had frozen the petitioner’s account without any legal directive and that no law allowed the bank to intervene in a matrimonial dispute between the director and his wife. The Court relied on precedents, including Federal Bank Ltd. v. Sagar Thomas and S. Shobha v. Muthoot Finance Ltd., to affirm that private institutions performing public functions are subject to writ jurisdiction. The Court held that prohibiting a person from withdrawing money from their own bank account, without a valid legal order, violates both statutory obligations and public interest. The Court firmly stated that Kotak Mahindra Bank had no authority to unilaterally freeze the account based solely on a matrimonial dispute, as such actions fall outside the purview of a bank’s functions. It further clarified that banks must act as neutral custodians of deposited funds and cannot take sides in personal disputes of account holders. The Court underscored that while banks have the responsibility to ensure the safety and security of accounts, this cannot extend to withholding funds without explicit legal backing. The Court also emphasized that the Reserve Bank of India has the power under Section 22(4) of the Banking Regulation Act to cancel the license of a bank that fails to adhere to its regulatory obligations, reinforcing the fact that compliance with banking laws is mandatory.

The Court ruled that Kotak Mahindra Bank’s actions were an overreach of its authority and amounted to an unjustified interference in a personal dispute. It held that by freezing the account without legal grounds, the bank had violated the petitioner’s rights and disrupted legitimate business operations. The Court stressed that even though Kotak Mahindra Bank is a private entity, it performs public functions by managing public deposits, and hence, it is subject to writ jurisdiction when it breaches fundamental banking principles. It reiterated that banks cannot arbitrarily deny withdrawals without a court order or legal provision expressly permitting such an action.

Accordingly, the Court allowed the writ petition and directed Kotak Mahindra Bank to immediately defreeze the petitioner company’s account. It also observed that the bank must ensure that depositors’ confidence in banking institutions is not eroded by arbitrary actions. The ruling set an important precedent by reaffirming that private banks operating under RBI regulations must strictly adhere to banking laws and cannot engage in actions that undermine public trust. The judgment also reinforced that private entities performing public functions can be subject to judicial review under Article 226 of the Constitution when their actions infringe upon fundamental rights or statutory obligations.