A bank, being a custodian of funds, cannot assume the role of an adjudicating authority and proceed to freeze accounts of an educational society merely on the basis of internal disputes between rival factions of the society, said the High Court Karnataka.

“Ordinarily, debit freezing of accounts can be justified only when it is backed by authority of law, either at the instance of an investigating agency in connection with a cognisable offence or pursuant to an order passed by a competent court of law,” the court observed.

In the present case, the court pointed out that eight savings bank accounts and five fixed deposit accounts of Sri Venkataramana Swamy Vidyavardhaka Sangha, Bantwal, in Dakshina Kannada district, were frozen. It was done merely on the basis of a complaint given by a rival faction of the association when the entitlement of the complainants belonging to rival faction to raise any dispute on fund management itself was under legal challenge, the court pointed.

Justice Sachin Shankar Magadum passed the order on the petition filed by the sangha, which is an educational society running schools and colleges in Bantwal. The petitioner had questioned the action of Canara Bank’s Bantwal branch in debit freezing all its accounts based on the complaint lodged by some persons, who claim to be members of the society, alleging mismanagement of its affairs.

‘Wholly untenable’

Pointing out that issue of complainants’ locus as members of the petitioner–sangha is itself pending before the Registrar of Societies, the court said that “the action of the bank in acting upon unilateral complaints and debit freezing the accounts of educational institutions is wholly untenable”.

“The power to freeze or attach bank accounts is a drastic measure, which has serious civil consequences, particularly when exercised against educational institutions, whose functioning necessarily involves continuous financial transactions for salaries, maintenance, and academic activities. Such coercive action cannot be resorted to in a casual or mechanical manner, and contrary to statutory framework,” the court observed.

Lack of jurisdiction

The action of the bank from a patent lack of jurisdiction amounts to an overreach and results in paralysing the functioning of the petitioner–sangha without any lawful sanction, the court said. It directed the bank to defreeze the accounts and allow the petitioner-sangha to operate the accounts subject to inquiry pending before the Registrar of Societies.