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

Facts

The petitioners, M/s Jyothi Laundry and M/s Garments Powder Laundry, represented by their partner Sri Bangaru Shyam, filed writ petitions challenging the unilateral action of the Indian Overseas Bank (Respondent No. 2) in foreclosing their accounts. The bank issued demand notices dated August 21, 2021, demanding repayment of outstanding amounts of Rs. 44,46,412/- and Rs. 45,01,777/- respectively, along with interest. The petitioners alleged that the bank failed to consider their representations, including a reply dated August 27, 2021, and that the foreclosure was illegal and violative of RBI circulars and constitutional provisions. The bank contended that the petitioners failed to adhere to loan conditions, including submitting required documents like GST returns and audited balance sheets, and that the loan amount was diverted. The bank also alleged that the petitioner was non-existent and machines were not available as per submitted invoices, leading to the account being classified as NPA under fraud.

Held

The Court dismissed both writ petitions. The Court found that the petitioner had failed to make a case, particularly regarding the alleged violation of the RBI circular dated May 5, 2021, and the bank's circular dated May 21, 2021, for restructuring loans to MSME units. The reasoning was based on the specific allegations made by Respondent No. 2. According to the bank, as of October 14, 2021, the petitioner was non-existent, machines were missing, and the entire loan amount was diverted for other purposes, leading to the account being classified as NPA under fraud. Furthermore, the petitioner had not submitted crucial documents like machinery invoices, delivery challans, installation certificates, GST returns, and audited balance sheets. Consequently, the Court concluded that the petitioner was not entitled to restructuring of its account and that the writ petitions were devoid of merits. The Court held that the bank's actions were justified based on the petitioner's non-compliance and the findings during inspection.

Key Issues

1. Whether the unilateral action of Respondent No. 2 in foreclosing the accounts of the petitioners by way of demand notice dated August 21, 2021, without considering the petitioners' representations, is illegal, unjust, and violative of the circular issued by Respondent No. 1 dated May 5, 2021, and Articles 14, 300-A, and 21 of the Constitution of India? Petitioner's Arguments: The petitioners argued that the bank's action was arbitrary and illegal, violating principles of natural justice and RBI circulars concerning MSME loan restructuring. They contended that their representations were not considered, and there was no diversion of funds. They also claimed that the classification of their accounts as NPA was contrary to RBI guidelines for MSME units. Respondent No. 2's Arguments: The bank argued that the petitioners failed to comply with the terms of the sanction advice, including submitting required documents and making payments. They asserted their right to amend or withdraw credit limits at their discretion. The bank also claimed that during inspection, the petitioner was found to be non-existent, machines were missing, and the loan amount was diverted, leading to the account being classified as NPA under fraud. They further argued that the petitioners did not meet the eligibility criteria for restructuring as per the bank's circular dated May 21, 2021, which aligned with RBI circulars.