SBI cannot act like a private lender: HC

NT Correspondent

Bengaluru: Being an instrumentality of the State, the State Bank of India (SBI) cannot act as a private lender, the High Court has said.

It has set aside an endorsement/notice issued by the SBI to a real estate developer stopping the release of a sanctioned loan.

The bank took this step as one of the directors had filed a case alleging that she was illegally removed from the post.

“The respondent bank being a nationalized entity is an instrumentality of the State and therefore its impugned action being unjust & arbitrary, is liable to be set at naught and a direction be issued for releasing the sanctioned loan,” Justice Krishna S Dixit said in his July 31 judgement.

Ms Legend Property, represented by its partner M Madhava Naidu and M Chandrashekar, another director of the firm had approached the HC with a petition challenging the endorsement/notice issued on May 6, 2023 by the bank.

The firm was established in 2010 as a partnership firm. After the retirement of P Shiva Priya, one of the partners, her husband M Chandrashekar was appointed as a partner.

The SBI had sanctioned Rs.40 crore as loan to the firm for the construction of a property. It had released Rs.3 crore. Shivapriya had in the meantime approached the bank stating that she was coercively and fraudulently removed from the firm. An affidavit she had filed in the Family Court was used to remove her from the firm.

Based on her complaint, the Bank said it was restraining disbursement of the loan till the partners had reached a settlement. The firm and Chandrashekar approached the HC.

The bank’s counsel contended that “the 2nd petitioner (Chandrasheakar) has played fraud & fabrication on his spouse namely the 2nd respondent (Shivapriya) herein and thereby has obtained her retirement from the Firm; fraud vitiates anything & everything; in that connection the subject civil suit is pending; therefore the impugned action of the respondent bank cannot be faltered.”

The HC in its judgement said that “It hardly needs to be stated that such a decision of the bank cannot be termed as purely administrative in character, apparently civil consequences following therefrom. It cannot be denied that the respondentbank is an instrumentality of the State and its business is governed by the statutory guidelines promulgated by the Reserve Bank of India.”

Quashing the endorsement/notice, the HC said, “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. Therefore the same is liable to be invalidated. The bank could not have issued the impugned endorsement/notice as against the Firm at large, at the instance of 2nd respondent.” (WP 11203/2023)