Banks Cannot Freeze Entire Accounts For Negligible Cyber-Crime Amounts: MP High Court

The High Court of Madhya Pradesh has cracked down on the disproportionate freezing of bank accounts in cybercrime investigations, ruling that entire accounts containing legitimate funds cannot be held hostage over suspected transactions involving negligible amounts. In a significant win for account holders' constitutional rights, the Court mandated that banks and law enforcement must strictly adhere to the doctrine of proportionality and the recently issued Standard Operating Procedure (SOP) to prevent unnecessary disruption of lawful business activities.

Justice Sandeep N. Bhatt heard the writ petition filed under Article 226 of the Constitution of India, where the petitioner sought a Mandamus to unfreeze a bank account held with Kotak Mahindra Bank. The petitioner contended that the bank account was frozen without due process, mirroring similar grievances addressed by the Court in previous instances of cyber-fraud investigations.

Key Takeaways

Doctrine of Proportionality Mandatory

Investigating agencies must only freeze amounts specifically linked to the suspected crime rather than the entire account, ensuring that the restraint is reasonable and fair.

Strict Timelines for Grievances

Under the new SOP, banks must upload grievances within seven days, and Investigating Officers must pass a reasoned decision within fifteen days, ensuring a time-bound resolution.

Judicial Oversight over Seizures

Investigating Officers are legally obligated under Section 102 of Cr.P.C. to inform the concerned Magistrate regarding the freezing of any bank account "forthwith" to allow for effective judicial scrutiny.

Right to Property and Business Protected

Freezing orders must balance the state's power to investigate with the citizen's rights under Article 19(1)(g) of the Constitution of India and Article 300-A of the Constitution of India, preventing mechanical or routine shutdowns of legitimate funds.

Courts Observations and Directions

The Court noted that freezing an entire account containing significant legitimate funds for a small suspicious transaction constitutes a violation of constitutional protections. Relying on the precedent set in Archana Vs. The State of Madhya Pradesh and Others, the Court emphasized that banks act as the primary facilitator and cannot evade responsibility by merely directing customers to the police.

The Court, in its reasoning, observed: "Freezing of a bank account is an extraordinary measure and cannot be resorted to mechanically or as a matter of routine. The Investigating Agency shall distinguish between the alleged proceeds of crime and legitimate funds lying in the account and shall ensure that only such restraint as is necessary for the purposes of investigation is imposed."

The Court has following directions:

"let the disputed amount i.e. Rs. 9,200/- shall be kept in FD and if any other complaint is received by the Bank regarding the some other entry, then it is open for the bank to take appropriate action in accordance with law by keeping in mind the SOP issued by the Government as discussed in the case of Archana Vs. The State of Madhya Pradesh and Others. The disputed amount shall be allowed to be liquidated only after the orders are passed by the competent Judicial Magistrate within three months’ time as it is expected from the Police agency to proceed in accordance with law under the relevant provisions of the BNSS or any other law on which it is relying upon, failing which the amount so kept in FD may also be allowed to be withdrawn by the petitioner under intimation to the Police agency. In the present case also, the bank account of the petitioner shall be unfrozen and petitioner be permitted to operate the account."

Ratio

The power of police authorities to prohibit the operation of bank accounts during an investigation under Section 102 of Cr.P.C. or BNSS must be exercised reasonably and proportionately. A lien or debit freeze should ordinarily be restricted to the specific suspected proceeds of crime, and the freezing of an entire account is permissible only in exceptional circumstances supported by written reasons, ensuring that legitimate financial transactions are not unnecessarily impeded.

Background

The dispute arose when the petitioner's bank account was frozen by Kotak Mahindra Bank following intimations from cyber-crime cells. The petitioner argued that the case was squarely covered by Malcolm Murayis & Ors. Vs. State Bank of India and Others, where the court allowed petitioners to operate accounts while keeping the disputed amounts in fixed deposits. The Court further referred to Archana Vs. The State of Madhya Pradesh and Others, which incorporated the Ministry of Home Affairs' Standard Operating Procedure dated 10.04.2026. This SOP was designed to provide a structured grievance redressal mechanism for account holders affected by the National Cybercrime Reporting Portal (NCRP) holds.

The Court observed that in this specific case, the disputed transaction was a mere fraction of the account's total balance. By applying the principles of proportionality, the Court directed the unfreezing of the account while securing the specific disputed amount in a fixed deposit, thereby facilitating the continuation of the petitioner's business activities.

Case Details:
Case No.: WRIT PETITION No. 38545 of 2026
Neutral Citation: 2026:MPHC-IND:30251
Case Title: MAHENDRA SINGH NEGI Versus KOTAK MAHINDRA BANK LTD AND OTHERS
Appearances:
For the Petitioner(s): Shri Aniket Mehta advocate

Source: 2026 CaseBase(MP) 36536