A Banker Who Answers Description Of State Under Article 12 Of Constitution Cannot Act As Private Lender - Karnataka High Court

A Karnataka High Court Bench of Justice Krishna S Dixit has observed that a banker who answers the description of a state under Article 12 of the Constitution cannot act as a private lender.

"...even if the suit succeeds, it cannot prejudice the interest of Petitioner-Firm as such; the Firm being the borrower, an abrupt stoppage of release of sanctioned loan, would jeopardize its interest, because of ongoing construction project that is founded on the loan arrangement in question. A banker who answers description of State under Article 12 of the Constitution cannot act like a private lender; its actions have to be animated with reason & justice, which factors are militantly absent in the impugned endorsement/notice," the Court held.

Further, it was also said when there is a matrix involving an admixture of Public Law elements and Private Law elements, fraud as a ground, has its own limitations & parameters. 

Senior Counsel KN Phaneendra appeared for the petitioners, while Counsel Sandeep K, among others, appeared for the respondents.

In this case, a registered Partnership Firm and one of its partners filed a writ petition to challenge a notice from a bank.

The firm had been established in 2010 and was later reconstituted with the second petitioner as a partner. The bank had granted a loan of Rs. 40 crore with the property as security, but the bank stopped further funds after a complaint from the second petitioner's spouse.

The petitioners claimed that this action was unjust and arbitrary and sought the release of the loan. However, the bank and the second petitioner's lawyer argued that the second petitioner had committed fraud against his spouse, affecting her retirement from the firm, and that the bank's action was justified.

They suggested the writ petition was not the right route, and the petitioners should approach the Banking Ombudsman for resolution. They prayed for the dismissal of the petition.

On hearing the parties and perusing the petition papers, the Court did not find the respondents' arguments compelling. It disagreed with the notion that the bank's actions were purely administrative and held that they carried civil consequences with public law elements.

The Court also stressed the importance of addressing legal injury and providing a remedy in line with the law. In this context, the court noted that the banking transactions were subject to statutory guidelines and regulations, including those issued by the Reserve Bank of India.

Moreover, the Court underscored that the bank, being an instrumentality of the State, should uphold the principles of reason and justice in its actions. It pointed out that even in matters involving loan transactions, the principles of public law had significance.

Considering the broader context of the ongoing construction project, which relied heavily on the sanctioned loan, the Court observed that an abrupt stoppage of funds by the bank could potentially jeopardize the firm's interests. It found that the bank's issuance of the impugned notice against the Firm was not justified.

In its final ruling, a Writ of Certiorari was issued, thereby quashing the impugned Endorsement/Notice issued by the bank. Additionally, the Court issued a Writ of Mandamus directing the bank to honor the Loan Sanction Arrangement involving the Partnership Firm without any further delay. The court specified that the bank could take necessary precautions to secure its interests while releasing the funds.

The Court made it clear that its observations and orders were confined to the writ petition and would not influence the proceedings of the pending civil suit.

It was ordered that costs be borne by the bank.

Cause Title: M/s Legend Property & Anr. vs The Chief Manager, State Bank of India & Anr.

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