Writ Court Cannot Examine Transactions Between Bank & Borrower As They Are Essentially Contractual In Nature: Karnataka High Court

A single judge bench of Justice Krishna S Dixit thus dismissed a petition filed by M/S Nitesh Residency Hotels Pvt Ltd challenging recall of all credit facilities extended to it by the Yes Bank. The firm had also challenged the NPA notice issued to it under the SARFAESI Act, disclosing outstanding liabilities aggregating to Rs. 358,39,49,064.

The bench agreed with the submission made by Senior Advocate Dhyan Chinnappa appearing for the bank that it being a private lending agency apparently does not fit into the term 'other authorities' within the meaning of Article 12 of the Constitution. The Court concurred that merely because a bank's business is regulated by the RBI norms does not ipso facto establish a pervasive control by the RBI or the Central Government.

Also Read: Yes Bank Is A Private Entity, Not Amenable To Writ Jurisdiction: Gujarat High Court

The response of the Bank to arguably detrimental acts of its borrower, made in the course of its commercial dealings cannot be approximated to an order of a statutory authority, justifying the invocation of remedy at the hands of Writ Court. The bench observed,

"The principles on which a Bank's response to its customers have to be examined lie in the realm of private law as contra distinguished from judicial review ordinarily undertaken under Articles 226 & 227."

Further it said, "Credit facilities have been recalled at once reveals that the transaction has the overtones of commercial elements; despite vociferous submissions made on behalf of the petitioner, sufficient public law elements warranting invocation of writ jurisdiction are not demonstrated."

It then held,

"In matters like this, a Writ Court cannot undertake examination of the same, as if it is an administrative action amenable to judicial review. The transactions between a banker and the borrower are essentially contractual in nature."

Then the court opined,

"When the preliminary issue as to maintainability of the Writ Petition is raised, what needs to be examined is not invariably the status of answering respondent as 'State' or its 'instrumentality' but the 'essential nature' of its action called in question. Since the enactment of the Constitution, our system has moved from the formality of 'status' of an entity to the substance of its 'function', while adjudging the claim for writ remedies."

It then observed,

"In other words, even if the respondent Bank answers the description of 'other authorities' under article 12, that per se may not justify invocation of constitutional jurisdiction. Conversely, even if the respondent does not answer the said description, its action may still be susceptible to judicial review should it be animated by sufficient public law elements."

The court also rejected the reliance placed by the petitioner on Central Government's Guidelines Emergency Credit Line Guarantee Scheme (hereinafter 'ECLGS').

The bench also made remarks on the conduct of the petitioner who had not disclosed to the Bank in March 2016 about the pendency of arbitration proceedings founded on the termination of lease vide notice dated 11.12.2014. He had furnished the very same lease deed by way of security for the repayment of this huge loan aggregating to 323 crore rupees, when the said lease was already terminated.

The bench said, 

"There was a duty owed by the petitioner to the respondent-Bank to disclose about the notice of termination of lease when it had first applied for a huge loan furnishing the said lease deed as one of the securities for repayment; it also owed the duty to disclose this when it was availing the said additional credit facility when already there was an arbitral award. However clandestinely withheld that crucial information from the bank."

Holding that the bank was justified in the action taken against the borrower the bench said,

"Petitioner is not a peasant or a petty farmer who has availed some frugal loans for mitigating the hardships of life. It is an incorporated company purporting to be worth crores of rupees. Its Managing Director & other Directors have participated in contracting the loans in hundreds of crores of rupees. A customer owes to the Bank a duty to disclose all facts and circumstances that would in the ordinary course of business figure in the decision making process as to the intended loan transaction. This duty becomes more pronounced when such transactions involve huge loans & liabilities."

It added, "A perusal of the petition papers leaves no manner of doubt as to clandestine failure on the part of the borrower in discharging this duty, to say the least. 'Thou art weighed in the balance and found wanting' aptly applies to the case of petitioner. That being the position, the lender Bank is more than justified."

Finally it held, "The petitioner seeks to call in question the Notice issued u/s 13(2) of the SARFAESI Act, 2002. There is an alternate and more efficacious relief availing to the borrower/notice for doing this, by invoking remedial provisions of the Act. Writ remedy is not the panacea for all such arguable legal injuries."

Case Title: M/S NITESH RESIDENCY HOTELS PVT.LTD v. UNION OF INDIA & Others

Case NO: WRIT PETITION NO.2004 OF 2022

Citation: 2022 LiveLaw (Kar) 318

Date of Order: 8TH DAY OF AUGUST, 2022

Appearance: Senior Advocate K SUMAN,for Advocate SIDDHARTH SUMAN for petitioner; ASG H SHANTHI BHUSHAN, for R1; Senior Advocate DHYAN CHINNAPPA, a/w Advocate RITHIKA RAVIKUMAR, for R3

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