M/S Jyothi Laundry vs. Union Of INDIA, And Another

Facts

The petitioners, M/s. Jyothi Laundry and M/s. Garments Powder Laundry, represented by their proprietor Mr. Bangaru Shyam, filed two writ petitions challenging the unilateral action of respondent No. 2 bank in foreclosing their accounts. The bank had issued a demand notice dated August 21, 2021, demanding repayment of Rs. 44,46,412/- and Rs. 45,01,777/- respectively, along with interest. The petitioners alleged the bank's action was illegal and arbitrary, citing the bank's failure to consider their representations, including a reply dated August 27, 2021, requesting an extension and loan restructuring under RBI circulars for MSME units. The bank, however, contended that the petitioners failed to adhere to loan terms, including submitting required documents like tax invoices, delivery challans, installation certificates, and stock statements, and had not paid installments. The bank also alleged diversion of funds and non-existence of the unit during inspection.

Held

The Court held that the petitioners failed to make out a case for challenging the bank's action. The Court noted that the bank had issued a circular dated May 21, 2021, which was in line with the RBI's circular dated May 5, 2021, regarding the eligibility criteria for restructuring advances to MSME units. According to the bank, the petitioners did not meet these eligibility criteria. Specifically, the Court highlighted the bank's findings that as of the inspection date (October 14, 2021), the petitioner was non-existent, the machinery was not available as per the submitted invoices, and the loan amount was diverted for purposes unrelated to the business. Consequently, the petitioner's account was classified as NPA under the fraud category. Furthermore, the petitioners had failed to submit crucial documents like machinery invoices, installation certificates, lease deeds, and GST returns. Therefore, the Court concluded that the petitioners were not entitled to loan restructuring and dismissed the writ petitions as devoid of merits.

Key Issues

1. Whether the action of respondent No. 2 bank in foreclosing the accounts of the petitioners by issuing a demand notice dated August 21, 2021, without considering their representations dated August 27, 2021, and other relevant RBI circulars, is illegal and arbitrary, violating principles of natural justice? Petitioner's arguments: The petitioners argued that the bank's action was unilateral and illegal, failing to consider their representations and the RBI circulars concerning loan restructuring for MSME units, especially in light of the COVID-19 pandemic's impact on their business operations. They contended that the declaration of their accounts as NPA was contrary to RBI guidelines. Respondent No. 2 bank's arguments: The bank argued that the petitioners failed to comply with the terms and conditions of the sanction advice, including submitting required documents and making payments. They asserted their right to recall the credit limits at their discretion. The bank also presented findings from an inspection indicating the petitioner's non-existence, lack of machinery, and diversion of loan funds, leading to the classification of the account under the fraud category. The bank also questioned the validity of the sub-lease agreement submitted by the petitioner.