M/S.Vijayakrishna Spices Private Limited vs. Canara Bank Limited

Facts

M/s. Vijayakrishna Spices Private Limited (Petitioner) filed a writ petition against Canara Bank Limited (Respondent No. 1) and others. The Petitioner, a long-standing customer of Canara Bank, sought a declaration that the bank's deduction of Rs. 3,93,30,900/- as foreclosure penal charges was illegal and unconstitutional. The Petitioner also sought a refund of this amount with interest. The Petitioner contended that the deduction was made without prior notice, violating RBI guidelines and statutory provisions. The Petitioner had approached the State Bank of India for a higher working capital limit, leading to the pre-closure of the facility with Canara Bank on March 24, 2026. The Respondent Bank argued that the pre-payment penalty was a consistent term in previous sanction letters, dating back to 2018, and was accepted by the Petitioner. The Petitioner had also previously approached the RBI Ombudsman regarding similar issues, with complaints being disposed of.

Held

The High Court held that the writ petition raises issues arising out of contractual obligations and disputed questions of fact, for which the appropriate remedy lies before a competent civil court or arbitral forum. The Court noted that the Petitioner had already invoked the jurisdiction of the RBI Ombudsman, and their complaints had been disposed of by orders dated 28.04.2025 and 05.08.2025. Crucially, the Petitioner had not sought to set aside the Ombudsman's order dated 28.04.2025 in the present writ proceedings. The Court found that the Ombudsman functions under a scheme providing an alternate grievance redressal mechanism and that the Petitioner's complaint was examined in accordance with the scheme, with a reasoned order passed. The Court also observed that the contention regarding violation of RBI circulars involved examination of contractual disclosures and banking guidelines, requiring factual adjudication not suitable for writ proceedings. Therefore, the Court was not inclined to exercise jurisdiction under Article 226 of the Constitution. The writ petition was dismissed, leaving it open to the petitioner to avail remedies before a competent forum.

Key Issues

1. Whether the deduction of foreclosure penal charges by the 1st respondent from the petitioner's account is illegal and unconstitutional, violating principles of natural justice and RBI guidelines, particularly concerning prior notice and disclosure of terms, as stipulated under the Indian Contract Act, 1872, Banking Regulation Act, 1949, and Reserve Bank of India Act, 1934? Petitioner's Arguments: The Petitioner argued that the deduction without prior notice violated principles of natural justice and the Wednesbury principle. They contended that the 2% penalty was not specified in the January 2024 guidelines and its imposition based on later guidelines was retrospective. They relied on Section 29 of the Indian Contract Act, 1872, for void contractual clauses, and cited High Court of Telangana and Supreme Court decisions on natural justice in contractual matters. They also argued that the bank failed to disclose the true nature of the penalty, inducing them to enter the agreement, and cited a Supreme Court judgment on disclosure of important terms. Furthermore, they argued that RBI Circular dated 18.08.2023 and Master Direction dated 03.03.2016, requiring clear disclosure of penal charges, were violated, and that a subsequent RBI Circular dated 29.04.2024 was clarificatory and operated retrospectively. Respondent's Arguments: The Respondent Bank contended that the pre-payment penalty was a consistent condition in all previous sanction letters since 2018, including the one dated 05.01.2024, which the Petitioner had accepted. They asserted that the Petitioner had enjoyed credit facilities for over two decades, and the penalty clause was always part of the loan terms, making the allegation of non-disclosure false. They also pointed out that the Petitioner had already approached the RBI Ombudsman twice, and these complaints were disposed of. The bank argued that the dispute involved examination of contractual terms, interpretation of sanction memoranda, banking practices, and factual issues, which are not suitable for adjudication under Article 226. They also highlighted the arbitration clause in the Common Hypothecation Agreement.