Money & Banking

Bank can freeze account into which it mistakenly credited money: High Court

S. Murlidharan | Updated on October 24, 2012

When a bank inadvertently omits to upload the stop payment instruction issued by its account holder and the cheque is thus credited to the account of the payee despite such instruction, the bank is well within its rights to freeze the account of the payee till he returns the money with interest.

This was the view taken by the Andhra Pradesh High Court in Ganesh Cotton Traders, Guntur, v. The General Manager, UCO Bank, Kolkata & Others. One Lakshmi Ganesh Textiles (P) Ltd had issued a cheque in favour of the petitioner for some Rs 24 lakh for which a stop payment advice was issued to the bank due to dispute in quality and quantity of goods purchased from it. It was a post-dated cheque and the stop payment advice was received and acknowledged by the bank well before the date mentioned on the cheque. It was therefore clearly the bank’s fault that it did not upload the stop payment instruction to the system as a result of which the cheque was cleared on presentation by the petitioner’s bank. Nearly half of the amount thus credited was used by the petitioner in the course of his business. It was at this point that the respondent bank wrote to the petitioner’s bank and got the account of the petitioner frozen.

The AP High Court sustained this action of the respondent bank on the ground that on issue of stop payment instruction, the money did not belong to the payee in the first place in terms of section 72 of the Indian Contract Act, the negligence of the bank notwithstanding. It went on to hold that a person into whose account a wrong credit is made is duty bound to return it along with interest.

( The author is a New Delhi-based chartered accountant)

Published on October 24, 2012

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