The Karnataka High Court recently invalidated a State Bank of India endorsement that halted a loan disbursement to a partnership firm, after part had been released. Despite the bank's opposition, Justice Dixit emphasized that a bank categorized as a State entity under Article 12 of the Constitution cannot function as a private lender. Instead, its actions must be guided by principles of reason and justice. He noted that these essential principles were notably lacking in the contested endorsement or notice.
Brief Facts:
The company was officially registered in 2010 as a partnership entity. Following the retirement of the second party involved (P Siva Priya) from the company, it underwent a restructuring process in July 2021. During this restructuring, to fill the vacancy left by the departing partner, her husband (M Chandrashekhar), who is the second petitioner, was brought into the partnership.
During its operation, the company received approval for a loan of Rs. 40 crore from BI (Bank Institution). Subsequently, a sum of Rs. 3 crore was disbursed to the company.
However, at a later point in time, the process was halted. This halt occurred due to an allegation of fraud made by the aforementioned second party (P Siva Priya) against her husband. As a result of this allegation, the bank decided to suspend the further disbursement of funds. This decision was executed through the means of the disputed endorsement.
Contentions of the Respondents:
The bank objected to the request by asserting that the second petitioner deceived his spouse in order to make her retire from the Firm. It was emphasized that fraud taints and renders invalid any situation or action. In line with this argument, there is an ongoing civil lawsuit pertaining to this matter. Hence, it was asserted that the bank's challenged course of action should not be criticized.
Furthermore, it was put forth that the cessation of disbursing the approved loan is a matter related to administrative decisions and doesn't warrant an extensive review through a Writ Court. Additionally, it was pointed out that the petitioner has an alternative avenue for resolution, which involves seeking recourse from the Banking Ombudsman.
Observations of the Court:
Initially, the Court rejected the argument suggesting that the bank's decision to cease the disbursement of the approved loan is an administrative matter. It underlined the complexity of the banking domain, which is governed by numerous laws and regulations established by relevant authorities. The RBI, functioning as both a guardian of the nation's financial and economic aspects and the central banking institution, is endowed with the power to issue binding instructions, particularly to Public Sector Banks. Hence, the Court asserted that this is not merely a case of a private loan. The Court clarified that its role is to evaluate the legal harm and the potential for legal remedy. It stated that these aspects are evident, and the Court, bound by the principles of justice and the law, cannot dismiss a wronged litigant by invoking certain theoretical concepts.
Furthermore, the Court acknowledged that a portion of the sanctioned loan had already been disbursed to the petitioner, based on which the petitioner had undertaken a substantial construction venture. Therefore, the Court pointed out that abruptly revoking the approval would not align well with the principles of public law.
The Court also highlighted the existence of a pending civil lawsuit involving alleged fraud committed by the second petitioner against the second respondent. The Court noted that there is no assertion that all other partners were complicit in this alleged fraud alongside the second petitioner. Given this admitted scenario, the Court held that the bank's decision to halt the release of the sanctioned loan amount midway is unjustifiable, especially since a portion of the funds had already been allocated to the Firm for the ongoing construction endeavor.
The decision of the Court:
The Karnataka High Court ruled in favor of the petition and instructed the bank to carry out the Loan Sanction Arrangement as intended.
Case Title: M/s Legal Property & ANR And Chief Manager, State Bank of India & ANR
Coram: Hon’ble Justice Krishna S. Dixit
Case no.: WRIT PETITION NO. 11203 OF 2023 (GM-RES)
Advocate for the Petitioner: Senior Advocate K N Phaneendra a/w Advocate Leela P
Advocate for the Respondent: Sandeep K for Advocate Jai Prakash Rao
Read Judgment @LatestLaws.com
Picture Source :
