M/S Marbaniang Projects Private Limited vs. Punjab National Bank And 3 Ors.

Held

The Court held that the respondent Bank's action of adjusting funds from the Escrow Account towards debt repayment, in violation of the Escrow Agreement's stipulation for prioritizing statutory payments like GST, was a breach of the agreement and rendered the Bank liable. The Court found that the Bank's conduct had resulted in the petitioner's non-compliance with GST requirements, specifically the inability to file GSTR-3B returns, which worsened the petitioner's financial challenges and led to proceedings by GST authorities. The Court also held that the petitioner Company had no control or right to operate the Escrow Account, as evidenced by the Bank's consistent adjustments since 2017 and the Bank's own affidavit confirming its operation of the account and the requirement for the petitioner's mandate for statutory payments. While accepting the petitioner's contentions regarding the Bank's breach, the Court limited the relief granted because the GST authorities were not made parties to the proceedings. The Court directed the respondent Bank to take corrective measures to facilitate the filing of GST returns payable by the petitioner from 2017 onwards, as mandated by law.

Facts

The petitioner, M/s Marbaniang Projects Private Limited, sought financial assistance from Punjab National Bank (PNB) for a hotel-cum-commercial complex. A term loan was sanctioned, and an Escrow Agreement dated 20.02.2015 was executed. This agreement stipulated that all cash flows, including revenue receipts and receivables, were to be routed through a designated Escrow Account. Withdrawals were permitted for taxes and statutory requirements before other dues. The petitioner discovered in November 2020 that GST amounts had not been paid to authorities, as PNB had adjusted the entire funds in the Escrow Account towards its debt repayment since 2017. This led to the petitioner being unable to file GSTR-3B returns, impacting its GST compliance and leading to its classification as an NPA in 2019.

Key Issues

1. Whether the respondent Bank's action of adjusting funds from the Escrow Account towards debt repayment, in violation of the Escrow Agreement's stipulation for prioritizing statutory payments like GST, is illegal and warrants a writ of mandamus. The petitioner argued that the Escrow Agreement explicitly prioritized taxes and statutory payments, and the Bank's unilateral adjustment without intimation constituted a breach, frustrating the agreement and causing non-payment of GST. The petitioner contended that the Bank cannot claim Section 19(8) of the Recovery of Debts and Bankruptcy Act, 1993, as a defense, as it is not seeking monetary relief but correction of wrongful adjustments. The petitioner relied on Employees Provident Fund Commissioner vs. Official Liquidator of Esskay Pharmaceuticals Ltd. for the principle of priority of government dues. The respondent Bank argued that the writ petition is not maintainable as the GST Authority was not made a party and that the Escrow Agreement was part of a commercial arrangement for transparency and accounting of cash flow, not solely for statutory payments. The Bank also contended that its right to set off was within its rights as the loan accounts were classified as NPAs. 2. Whether the petitioner Company had control or the right to operate the Escrow Account. The petitioner argued that the Bank had been adjusting amounts since 2017 and that any statutory payments could only be made by the Bank on the petitioner's standing instructions. The respondent Bank maintained it was within its rights to adjust amounts towards debt repayment and that statutory payments could only be made on the petitioner's mandate and receipt of invoices. The Bank's affidavit stated that the Escrow Account is maintained and operated by the Bank, and statutory payments require standing instructions from the account holder (petitioner) and supporting documents.