Bank Account Frozen? Here’s How the Law Protects You from Unjust Actions

Authors – Navodaya Singh Rajpurohit and Rithik Dhariwal

 

1. Introduction

In today’s fast-paced digital economy, financial transactions are conducted seamlessly across borders and platforms, offering convenience and efficiency. However, this ease of access has also led to an increase in fraud and financial crimes. A particularly distressing scenario arises when an innocent individual’s or businesses bank account is frozen due to suspected third-party transaction fraud. This often happens when a fraudster deceives a victim, receives funds fraudulently, and then channels those funds through another person’s account by paying for goods, services, or other transactions. Fraudsters commonly use this tactic to disguise the origin of the money, creating a complex trail that entangles innocent parties in legal and financial complications.

For the affected parties, this can mean restricted access to their funds, significant disruptions to their livelihood, and the prospect of a lengthy legal battle to establish their innocence.

Fortunately, the legal system provides several avenues for victims to seek redress. This article examines the legal recourse available in such situations, outlining procedural safeguards, relevant laws, and practical steps that can help individuals challenge freezing orders and restore financial normalcy.

2. Legal Provisions Governing the Freezing of Bank Accounts

In India, several legal provisions empower authorities to freeze bank accounts suspected of being involved in cybercrimes, ensuring that illegal activities are swiftly investigated and curtailed. These provisions not only apply to individuals directly involved in cybercrimes but also extend to third parties who may have facilitated or unknowingly become part of criminal transactions. Under the Information Technology Act, 2000 (IT Act), Section 66 addresses various cybercrimes such as hacking, phishing, and identity theft[1]. When a bank account is suspected of being involved in such illegal activities, authorities can request its freezing as part of the investigation process to prevent further unlawful transactions. Further, under Prevention of Money Laundering Act, 2002 (PMLA) Section 17(1)(iv)[2] allows concerned authority to freeze the accounts suspected for facilitating money laundering and can be invoked when the funds involved are derived from cybercrimes.

The Bharatiya Nyaya Sanhita, 2023 (BNS), under Section 318(4)[3], addresses fraudulent financial activities by penalizing individuals who cheat and dishonestly induce others to transfer property or manipulate valuable securities. This provision provides a framework for freezing accounts involved in such fraudulent activities, ensuring that those responsible cannot further exploit financial systems while investigations are ongoing.

The Bharatiya Nagarik Suraksha Sanhita, 2023 (B.N.S.S.), under Section 106[4], empowers police authorities to seize property, including bank accounts, if they suspect such assets are linked to criminal activity. This provision is akin to the earlier Section 102 of the Code of Criminal Procedure, 1973 (CrPC), which allowed police officers to seize any property they believed was connected to an offence. This provision is particularly significant in cybercrime investigations, enabling law enforcement agencies to secure financial evidence and prevent further illegal activities.

In the Italian Marines case (M.T. Enrica Lexie v. Doramma)[5], the Supreme Court examined the scope of property seizure under Section 102 of the CrPC. The Court clarified that property subject to seizure includes:

(a) items that are stolen or reasonably suspected to be stolen, and
(b) property directly associated with a crime.

These conditions were further interpreted in State of Maharashtra v. Tapas D. Neogy[6], where the Court emphasized two mandatory requirements for the applicability of Section 102:

1.  There must be a “property”; and

2. There must be a suspicion linking the “specific property” to the commission of an offence.

To exercise the power under Section 102 of the CrPC for freezing a bank account, the investigating authority must reasonably suspect the account’s involvement in the commission of a crime. This requires establishing a clear and specific nexus between the account and the alleged offence based on substantive material evidence.[7]. The property must not only be closely linked to the alleged crime, but the officer must also have reasonable grounds to believe that such a connection exists, supported by evidence that establishes a reasonable suspicion of the property’s involvement in criminal activity[8].

The High Court of Bombay, in Gulam Sarvar vs. State of Maharashtra and Ors[9]., emphasized this principle, stating:

“Making of an allegation simplicitor; for the purposes of Section 102 of Cr.P.C., is not sufficient and it must be shown that the allegation is founded on such a material as to at least create a reasonable suspicion about the amount in the account having some connection or possibility of having some connection with the commission of crime.”

The Court noted that prima facie evidence must indicate that entries in the bank account are linked to the commission, result, or proceeds of a crime. These judicial observations ensure that the power to freeze bank accounts is exercised judiciously, with proper safeguards against misuse. In Vinod Kumar Ramachandran Valluvar vs. State of Maharashtra[10], the court addressed the applicability of Section 106 of the BNSS, 2023. The court held that this section cannot be invoked unless the discovery of property by an investigating authority leads to a reasonable suspicion of an offence having been committed. This principle equally applies to deposits in a bank account. A bank account cannot be frozen merely on the grounds that deposits made in it were traced to a connected crime. If the discovery of the account does not generate a reasonable suspicion of the commission of a crime, the seizure or freezing of the account would not be permissible under the law.

3. Legal Remedies for Frozen Bank Accounts

• Representation before the Investigating Agency

The first step in addressing a frozen bank account is to submit a formal representation to the concerned authority, such as the police, cybercrime cell, or any other investigating agency. This includes seeking clarity on the reasons for freezing the account and providing evidence to validate the legitimate origin and intended use of the funds. Under Section 106(3) B.N.S.S.[11] (earlier section 102(3) of CrPC), authorities have the discretion to release seized property, including frozen accounts, if it is determined that retaining such property is no longer necessary for the investigation. However, this release is typically conditional upon the individual executing a bond, undertaking to produce the property before the Court whenever required. In Mrs. B. Kavitha vs. The Inspector of Police[12], the Madras High Court held that the petitioner’s bank accounts were frozen by the authorities based on a complaint, even though no FIR had been filed and proper legal procedures were not followed. The Court emphasized that freezing bank accounts should only occur in rare cases, with strict compliance to the procedural requirements under Section 102 of the Cr.P.C. being mandatory. The Court found that the authorities’ actions, taken hastily and without notice to the petitioner or submission of a report to the Magistrate, were a misuse of power and a violation of the petitioner’s rights. Consequently, the Court ordered the accounts to be unfrozen and imposed a penalty on the authorities to ensure such mistakes are not repeated in the future.

• Relief before the Magistrate

In the event of a frozen bank account, the concerned party can seek relief by approaching the Magistrate under Section 497 or Section 503 of B.N.S.S. These provisions allow for the release of seized property, including bank accounts, to the rightful owner. According to Section 497 of B.N.S.S.[13], the Magistrate may order the temporary custody or disposal of property pending the conclusion of an investigation, inquiry, or trial. Section 503 of B.N.S.S.[14] specifically empowers the Magistrate to deliver the seized property to the person entitled to it, under appropriate conditions. Courts have often allowed the de-freezing of bank accounts, with the condition that the concerned party executes a bond for the amount frozen, agreeing to produce it before the Court if required. In such cases, the party must demonstrate the legitimate origin of the funds and their connection to the alleged crime, ensuring compliance with legal processes while safeguarding their rights.

• Challenge before the High Court

A Writ Petition under Article 226 of the Constitution of India can be filed to enforce a writ of mandamus, challenging actions that infringe upon fundamental rights guaranteed under Articles 21, 19(1)(g), and 14. Article 21[15] ensures the right to life and personal liberty, encompassing the protection of an individual’s livelihood. Asset freezes, such as the seizure of bank accounts, that hinder a person’s ability to earn a living or disrupt financial stability can be challenged under this provision. Similarly, Article 19(1)(g)[16] safeguards the right to carry on any trade, business, or profession, prohibiting unreasonable restrictions. If asset freezes obstruct business operations, they may be contested as violations of this fundamental right. Additionally, Article 14[17] guarantees equality before the law, mandating that actions be non-discriminatory and fair. Arbitrary or unjustified asset freezes may breach this principle and can be challenged accordingly.

While Writ Petitions under Article 226[18] offer a remedy, courts may decline to grant relief in certain circumstances. For instance, if there are alternative remedies available, such as those provided under Section 497 and Section 503 of B.N.S.S. (earlier Sections 451 and 457 of the CrPC) for the return or disposal of seized property, the court may direct the petitioner to exhaust those options before seeking Writ jurisdiction. In the case of South Indian Chamber of Commerce and Industries Members Welfare Charitable Society and Ors. vs. M.C. Alex and Ors[19]., the Hon’ble  Kerala High Court held that Writ jurisdiction under Article 226 could be invoked even when an alternate remedy under Section 457 of the CrPC exists, especially when a glaring illegality by the seizing officer is alleged. The Court emphasized that when fundamental rights are at stake, the High Court can entertain petitions despite the availability of alternate remedies. Additionally, Section 482 of the CrPC allows the High Court to exercise its inherent powers to de-freeze bank accounts in appropriate cases. In Mohammed Saifullah vs Reserve Bank of India[20], the Hon’ble Madras High Court held that an investigating agency cannot freeze the entire bank account of a person implicated in financial fraud without first quantifying the amount directly linked to the alleged fraud. The Court observed that such a blanket freeze would constitute a violation of the fundamental rights to trade and business, as well as the right to livelihood. While recognizing the statutory powers granted to investigating agencies under Section 106 of the BNSS, 2023, the Hon’ble Court emphasized that these powers must be exercised judiciously and with responsibility.

• Are You a Victim of Bank Account Freezing? Here’s What You Can Do:

If you are a victim of bank account freezing and are experiencing harassment or mental distress due to improper actions by investigating authorities, there are legal protections available to you. Under Article 21 of the Constitution of India, every individual has the right to life and personal liberty, which includes protection against actions that adversely affect mental well-being or livelihood. Authorities must follow due process when freezing accounts, as stipulated under Section 106 of the BNSS, 2023. Any arbitrary or unjustified freezing of accounts without adequate evidence or proper procedures can be challenged as an abuse of power. The Hon’ble High Court of Delhi, in Muktaben M. Mashru vs. State of NCT of Delhi and Ors.[21], observed:

“…the reporting of the freezing of bank accounts is ‘mandatory.’ Failure to do so, apart from other conditions, will vitiate the freezing of the bank account, which should be ‘forthwith’ reported to the concerned Magistrate. Non-compliance with this mandatory requirement goes to the root of the matter. If there is any violation in following the procedures under Section 102 of the Cr.P.C., the freezing of the bank accounts cannot be legally sustained.”

In Mrs. B. Kavitha v. The Inspector of Police (supra), the Madras High Court held that improper account freezing without adherence to procedural safeguards constitutes misuse of power and can lead to penalties against the officials involved.

4. Conclusion

The judicial pronouncements highlight the stance that the bank accounts of individuals, entities, or businesses may be frozen even if the account holder is not involved in the alleged crime. However, the legitimacy of such actions is dependent on adherence to certain procedural safeguards and the principle of reasonableness. It is an incongruous position to take that an account holder, having entered into a bona fide and genuine transaction with another party, should be penalized for no fault of their own by having their bank accounts frozen.

In many business transactions, as well as in everyday dealings, it is often impractical for an individual to verify or trace the source of the other party’s income before engaging in each transaction. Therefore, it seems grossly unfair to subject these businesses or individuals to severe measures, such as the freezing of bank accounts. Sometimes, such freezing not only disrupts the regular flow of business but also causes significant harassment and mental distress to the affected parties, especially when the order for freezing bank account is given by investigating agency or police in completely different city or state from that of the affected party.

Consequently, it is critical for the judiciary to issue clear and stringent guidelines to the relevant authorities, particularly in investigations that involve the bank accounts of third parties. While the Hon’ble Madras High Court rightly emphasized that the freezing of third-party accounts should only occur in “rare cases” and must be carried out with the “utmost restraint,” this approach has yet to be fully adopted by investigating authorities, including law enforcement. In a recent judgment, Hon’ble Madras High Court also held that the investigating agency cannot freeze the entire bank account of a person involved in a financial fraud without first quantifying the amount directly linked to the alleged frauddue to a third party’s involvement.

 

Disclaimer – The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

 

[1] Section 66, Information Technology Act, 2000: If any person, dishonestly or fraudulently, does any act referred to in Section 43, they shall be punishable with imprisonment for a term which may extend to three years, or with a fine which may extend to five lakh rupees, or with both.

[2] Prevention of Money Laundering Act, 2002, Section 17, Search and Seizure:
(1) Where [the Director or any other officer not below the rank of Deputy Director authorized by him for the purposes of this section,] on the basis of information in his possession, has reason to believe (the reason for such belief to be recorded in writing) that any person—
(I) has committed any act which constitutes money-laundering, or
(ii) is in possession of any proceeds of crime involved in money-laundering, or
(iii) is in possession of any records relating to money-laundering, [or]
[(iv) is in possession of any property related to crime,]
then, subject to the rules made in this behalf, he may authorize any officer subordinate to him to—
(a) enter and search any building, place, vessel, vehicle or aircraft where he has reason to suspect that such records or proceeds of crime are kept;
(b) break open the lock of any door, box, locker, safe, almirah or other receptacle for exercising the powers conferred by clause (a) where the keys thereof are not available;
(c) seize any record or property found as a result of such search;
(d) place marks of identification on such record or [property, if required or] make or cause to be made extracts or copies therefrom;
(e) make a note or an inventory of such record or property;
(f) examine on oath any person, who is found to be in possession or control of any record or property, in respect of all matters relevant for the purposes of any investigation under this Act:

[3] Section 318(4), Bhartiya Nyaya Sanhita, 2023: A person who deceives someone by cheating and then dishonestly persuades them to give up property to someone else, create, alter, or destroy a valuable security in whole or in part, or create anything that is sealed or signed and has the potential to be turned into a valuable security, faces up to seven years in prison of any kind as well as a fine.

[4] Section 106. Power of police officer to seize certain property, (1) Any police officer may seize any property which may be alleged or suspected to have been stolen, or which may be found under circumstances which create suspicion of the commission of any offence.

[5] M.T. Enrica Lexie & Anr. v. Doramma & Ors., MANU/SC/0409/2012.

[6] State of Maharashtra vs. Tapas D. Neogy, (1999) 7 SCC 685.

[7] Ezulix Software Pvt. Ltd. vs. State of Maharashtra and Ors., MANU/MH/1076/2021.

[8] Madhu vs. Sub Inspector of Police, 2020 (5) KHC 35

[9] Gulam Sarvar vs. State of Maharashtra and Ors., 2018 SCC OnLine Bom 164

[10] Vinod Kumar Ramachandran Valluvar vs. State of Maharashtra, MANU/MH/2353/2011.

[11] Section 106 of the Bharatiya Nyaya Sanhita, 2023 (BNSS), (3) Every police officer acting under sub-section (1) shall forthwith report the seizure to the Magistrate having jurisdiction and where the property seized is such that it cannot be conveniently transported to the Court, or where there is difficulty in securing proper accommodation for the custody of such property, or where the continued retention of the property in police custody may not be considered necessary for the purpose of investigation, he may give custody thereof to any person on his executing a bond undertaking to produce the property before the Court as and when required and to give effect to the further orders

[12]B. Kavitha vs. The Inspector of Police, MANU/TN/4197/2019

[13] Section 497 of the Bharatiya Nyaya Sanhita, 2023 (BNSS),  (1) When any property is produced before any Criminal Court or the Magistrate empowered to take cognizance or commit the case for trial during any investigation, inquiry or trial, the Court or the Magistrate may make such order as it thinks fit for the proper custody of such property pending the conclusion of the investigation, inquiry or trial, and, if the property is subject to speedy and natural decay, or if it is otherwise expedient so to do, the Court or the Magistrate may, after recording such evidence as it thinks necessary, order it to be sold or otherwise disposed of.

(2) The Court or the Magistrate shall, within a period of fourteen days from the production of the property referred to in sub-section (1) before it, prepare a statement of such property containing its description in such form and manner as the State Government may, by rules, provide.

(3) The Court or the Magistrate shall cause to be taken the photograph and if necessary, videography on mobile phone or any electronic media, of the property referred to in sub-section (1).

(4) The statement prepared under sub-section (2) and the photograph or the videography taken under sub-section (3) shall be used as evidence in any inquiry, trial or other proceeding under the Sanhita.

(5) The Court or the Magistrate shall, within a period of thirty days after the statement has been prepared under sub-section (2) and the photograph or the videography has been taken under sub-section (3), order the disposal, destruction, confiscation or delivery of the property in the manner specified hereinafter. make footnote don’t change content

[14] Section 503 of the Bhartiya Nyaya Sanhita, 2023 (BNSS), (1) Whenever the seizure of property by any police officer is reported to a Magistrate under the provisions of this Sanhita, and such property is not produced before a Criminal Court during an inquiry or trial, the Magistrate may make such order as he thinks fit respecting the disposal of such property or the delivery of such property to the person entitled to the possession thereof, or if such person cannot be ascertained, respecting the custody and production of such property.

(2) If the person so entitled is known, the Magistrate may order the property to be delivered to him on such conditions (if any) as the Magistrate thinks fit and if such person is unknown, the Magistrate may detain it and shall, in such case, issue a proclamation specifying the articles of which such property consists, and requiring any person who may have a claim thereto, to appear before him and establish his claim within six months from the date of such proclamation.

[15] Article 21 of the Constitution of India, 1950, provides the fundamental right to protection of life and personal liberty. It states that no person shall be deprived of their life or personal liberty except in accordance with the procedure established by law.

[16] Article 19(1)(g) of the Constitution of India, 1950, guarantees to all citizens the right to practice any profession, or to carry on any occupation, trade, or business. This provision ensures that individuals have the freedom to engage in any lawful activity related to their livelihood, subject to reasonable restrictions that may be imposed by the State in the interest of public order, morality, or the general welfare of society.

[17] Article 14 of the Constitution of India, 1950, ensures that the State shall not deny any person equality before the law or the equal protection of the laws within the territory of India

[18] Article 226(1) of the Constitution of India provides that every High Court shall have powers, throughout the territories in relation to which it exercises jurisdiction, to issue to any person or authority, including in appropriate cases, any Government, within those territories, directions, orders, or writs, including writs in the nature of habeas corpus, mandamus, prohibition, quo warranto, and certiorari, or any of them, for the enforcement of any of the rights conferred by Part III of the Constitution and for any other purpose.

[19] South Indian Chamber of Commerce and Industries Members Welfare Charitable Society and Ors. vs. M.C. Alex and Ors., 2020 SCC OnLine Ker 16814.

[20] W.P. No. 25631 of 2024.

[21] 2019 SCC OnLine Del 11509