This article is written by Raslin Saluja, from KIIT School of Law, Bhubaneswar. This article analyses the court’s decision to cover private banks under the writ jurisdiction.
Article 12 of the Indian Constitution includes the bodies as covered under the definition of the State according to the Constitution. The State is defined as the Government of India, the Parliament as well as the legislature and Government of the States along with local and other authorities as per the Constitution. In the present case of M/s Pearson Drums & Barrels Pvt. Ltd. v. The General Manager, Consumer Education & Protection Cell of Reserve Bank of India and others (2021), the Court has even widened the interpretation by including private banks under the ambit of the writ jurisdiction.
Facts of the case
- The petitioner in the case is M/s Pearson Drums & Barrels Pvt. Ltd which is a company under the Micro, Small and Medium Enterprises Act, 2006 and is engaged in the business of manufacture and supply of M.S. Barrels to the Oil Sector and various other sectors.
- The IndusInd Bank (a private bank, respondent no.4) had granted a credit facility (loan) worth Rs.25.05 crore to the petitioner subject to the final sanction of the credit committee. A processing fee of 0.60 per cent of the total sanction amount along with the appropriate rates and taxes were to be paid by the petitioner for availing the financial assistance.
- By way of an email dated 29.09.2015, the petitioner was asked to deposit Rs.14,27,850 as processing fees including service tax. It also stated that if for any reason the sanction did not go through from the Bank’s end, then the amount shall be refunded. Pursuant to this, the petitioner paid the amount.
- Subsequently, on 06.11.2015, a fresh sanction of credit was issued by respondent no. 4 in the favor of the petitioner. The petitioner was asked to return to the bank the duplicate copy of the sanction communication along with annexures with required signatures of the authorized signatory and the guarantors to represent the acceptance of terms and conditions within 30 days of the letter, otherwise, it would be presumed that the petitioner is not interested in the continuation of the services. However, an additional condition was included in the fresh sanction that processing fees would be non-refundable post-acceptance of the sanction letter and in the event of the applicant being unable to comply with the sanction conditions or refusing to take disbursal, on which event the amount paid as processing fees shall be forfeited.
- The petitioner communicated to the Bank on 16.11.2015 seeking a refund of the processing fees of Rs.14,27,850/- against delay and non-receipt of final sanction letter. The petitioner refused to accept the sanction and sought a refund of the processing fees on several occasions. The petitioner stated the grounds for doing so, one of which was an inordinate delay of 50 days between interactive sanction dated 24.09.2015 and the sanction dated 06.11.2015 which, according to the petitioner, had jeopardized the petitioner’s financial planning and almost defeated the purpose of switching over from the petitioner’s present banker, that is, the State Bank of India. Further, there were many deviations between the interactive sanction dated 24 September and the final sanction dated 16 November.
- However, the petitioner was informed through an email dated 05.04.2016, that the processing fee was non-refundable as per terms of the sanction. There was also a representation by the Managing Director and the CEO of respondent no 4 to the bank on 25.07.2016 reiterating the grounds for not accepting the fresh sanction. This was followed by a complaint by the petitioner on 03.11.2016 who was given a notice for hearing by a Sub-Committee of the State Level Inter-Institutional Committee (SLIIC), promoted by the Reserve Bank of India (RBI) to hold meetings periodically to address problems of MSMEs, mostly finance-related issues. SLIIC suggested having a cap on the actual expenditure extent of 25 percent of the same and the balance 75 per cent of the processing fee should be refunded to the petitioner-company.
- The petitioner then approached RBI with a similar complaint. RBI intimated through an email on 25.11.2016 that processing fees were non-refundable as per the terms and conditions of the sanction letter of the concerned Bank. However, respondent no.2 Assistant General Managers of the Consumer Education & Protection Cell of Reserve Bank of India (CEPC) called a meeting (suo moto) on 13.01.2017 with the petitioner and respondent no.4 and took a contrary view.
- Respondent no. 2 intimated respondent no.4 via email on 25.01.2017 that the petitioner complaint related to refund of processing fee for a loan facility wherein there were lapses by both the parties and urged respondent no.4 to take urgent action. This was followed by several reminders from the petitioner to act on the decision of SLIIC.
- Finally, respondent no.4 intimated to the petitioner via an email dated 12.05.2017 that GM, CEPC, RBI Kolkata had suggested in the meeting held on 13.01.2017 that the dispute be settled with respondent no.4 waiving 50 per cent of the processing fees collected from the petitioner.
- However, the petitioner through subsequent communication reiterated its claims disputing the communication of the bank with regard to the meeting on 13.01.2017. Grieved from the inaction, the petitioners thus filed the present writ petition under Article 226 on the Indian Constitution before the Calcutta High Court, asking for a 100 percent refund of the processing fee along with the interest for not accepting the sanction letter dated 6.11.2015 and for setting aside the impugned letter dated 12.06.2017 issued by respondent no.4.
A dispute arose between the petitioner, and the IndusInd Bank with respect to refund of processing fee paid by the former, to the latter, pursuant to a prospective loan facility. The petitioner has claimed a refund of the full processing fee from the Bank (respondent no.4) and challenged the communication dated 12.06,2017 of the Assistant Manager, CEPC, RBI which closed the dispute raised by the petitioner regarding the return of processing fees.
Contentions by the petitioner
- The Petitioner submitted that the Bank had assured that in the case for any reason the sanction did not go through from its end, it would refund the fee. Since there was a deviation in the fresh sanction from the in-principle sanction and, further the fresh sanction was also delayed defeating the purpose for which the petitioner took the credit facilities in the first place, the petitioner refused to accept the fresh sanction.
- That the clause regarding the non-refundability of processing fee found in fresh sanction was inserted later and was not found in the in-principle sanction. Therefore, no question of the applicability of such a clause can arise.
- There was no acceptance given to the fresh sanction therefore no question of post-acceptance non-refundability of the processing fees can arise. However, when the Petitioner sought a refund of the processing fees against delay and non-receipt of final sanction letter, the Bank claimed that the processing fee was non-refundable.
Contentions by the respondent
- They argued that the decision taken by the SLIIC Sub-Committee on 18.11,2016 for refunding 75 per cent of the processing fee was not binding on the Bank. That the framework for revival and rehabilitation of MSMEs by the RBI only contemplated suggestive/advisory decisions of the Sub-Committee, which by virtue of Memo No. 209/SLB/PS-17 dated 08.03.2017 was discontinued. Besides, the suggestion of the Sub-Committee does not hold an equal footing with guidelines or statutory direction that are given by RBI.
- In the present case, it was the petitioner who refused to accept the sanction that was granted by the Bank. The payment for a processing fee to be paid by the petitioner was indicated in the in-principle sanction and email dated 29.09.2015 clearly stipulated requiring the petitioner to pay processing fees, that the same would be refunded only if the sanction did not go through from the Bank’s end.
- The fresh sanction issued on 06.11.2015 also indicated regarding the non-refundable processing fee post-acceptance of the sanction letter and if the applicant was unable to comply with these conditions/ refuses to take disbursal the processing fee will be forfeited. Since herein the petitioner refused to accept the sanction, no liability is cast upon the petitioner to return the processing fees.
- The processing fee was an upfront payment and was utilized by the petitioner for taking necessary steps to process the application for the loan made by the petitioner, getting approval of the relevant credit committee and drawing up and issuing the fresh sanction. Hence, there is no scope for a refund of such fees on the petitioner’s refusal to accept the fresh sanction.
- They also referred to the case of Federal Bank Limited Vs. Sagar Thomas and Others (2003), and argued that a writ petition under Article 226 of the Constitution is not maintainable against private banks.
Judgment and analysis
Scope of Article 12
As regards the first issue, the Court struck down the objection regarding the maintainability of the writ petitioner since the Reserve Bank of India is an instrumentality of the State, it comes squarely within the meaning of “State” as contemplated in Article 12 of the Constitution. This has also been laid down in one of the cases of R.D. Shetty v. International Airport Authority (1979), the instrumentality or agency test which was later confirmed in the following year’s judgment of Ajay Hasia vs Khalid Mujib Sehravardi (1980). The test laid down is as follows:
- Whether the entire share capital is held by the government.
- Whether the corporation enjoys monopoly status conferred by the state.
- Whether the functions of the corporation are governmental functions or functions closely related thereto which are basically the responsibilities of a Welfare State.
- If a department of the government has been transferred to the corporation.
- The volume of financial assistance received from the state.
The Court added that private banks fundamentally function most of the time towards the fulfilment of the public duties and hence cannot escape from being called state actors. They carry out duties of public nature and that the issue raised in the present case rather holds a wider connotation in regard to the liabilities of banks in respect of a refund of processing fee. This brought all the private banks within the purview of the Court’s writ jurisdiction along with the RBI and other bodies, so far as the discharge of public duties is concerned. Further, the Bench refused to apply the principle laid down by the Supreme Court in the Federal Bank Limited case and stated that in the present case, the writ petition is maintainable.
Bank to pay the refund
The Court observed that as per the communication and the in-principle sanction dated 24.09.2015 which contained a clause for charging processing fees with rates and taxes, it cannot be said that the upfront payment was confined to the initial processing charges only. The expression ‘upfront’ can have different connotations, which could be initial payment for the first phase of processing as well as the payment for processing of the entire loan sanction. In the present case, the fees were charged as a percentage of the total sanction facility according to the prima facie presumption, such fees cover the entire charges for loan sanction. This presumption has not been rebutted by the bank.
Within five days from the in-principle sanction on 29.09.2015, the Bank emailed the petitioner requesting the deposit of the processing fees mentioning the Bank would refund the fees if for any reason sanction does not go through from their end. The next communication that followed was on 06.11.2015 which intimated fresh sanction with variations as pointed out by the petitioner while refusing to accept the fresh sanction. Thus, the Court differentiated between the initial “in-principle” sanction and the fresh sanction.
It observed that the in-principle sanction was not finalized in its initial form and a fresh sanction was offered by the Bank, wherein it failed to go through the motions of giving a logical conclusion to the in-principle sanction by a final sanction on the same terms, after the approval of its Credit Committee. This novation of the terms indicates that the fresh sanction was a different proposal from the in-principle sanction.
Since the processing fees was asked immediately after the in-principle sanction and that sanction did not go through from the Bank’s end, that read in association to the phrase “by any reason” preceding the phrase regarding the sanction not going through from the bank’s end, is wide enough to take within its purview a fresh sanction being issued by the Bank on terms different from the in-principle sanction.
The petitioner never accepted the additional clause regarding the processing fees which was introduced in the fresh sanction, by virtue of not accepting the fresh sanction as a whole. Therefore, the clause cannot be binding on the petitioner as far as processing fees are concerned. The relevant provisions would only include those contained in the in-principle sanction and the email dated 29.09.2015 regarding the processing fees. Further, even if it was assumed that the said clause in the fresh sanction would be binding on the petitioner, it clearly states that the processing fees would be non-refundable post acceptance of the sanction letter.
The Court said that this post facto clause has to be read in the context of the fresh sanction which was never accepted by the petitioner and not the previous in-principle sanction. On similar logic, the question of the petitioner being unable to comply with the sanction conditions or refusing to take disbursal did not arise in view of the non-acceptance of the fresh sanction by the petitioner on justified grounds.
The variance in both the sanctions is sufficient ground to conclude that the petitioner is not at fault but it was the Bank that issued varied fresh sanctions seeking novation of the offer for all practical purposes. Thus the clause in the email dated 29.09.2015 is relevant and applicable in the present case as the in-principle sanction did not go through the Bank’s end.
The Court also stated that SLIIC Sub-Committee recommendations are non-binding in nature since they cannot be equated to RBI guidelines that hold statutory force.
Further, the Court set aside the decision of the Bank and the Consumer Education & Protection Cell of the Reserve Bank of India to refuse the petitioner’s claim for refund of entire processing fees since the Bank sought novation of the in-principle sanction by the issuance of the fresh sanction on deviated terms. The Bank while performing its public duty which is within the domain of the State to discharge, acted de hors its own promise on the basis of which the petitioner had acted. and therefore the Bank is stopped from refusing to refund the processing fee.
Thus, the Court directed the Bank to refund the entire processing fee of Rs.14,27,850 to the petitioner within 30 days from the date. In addition to it, the Bank shall also pay the interest at the rate of 6 per cent per annum on the said amount till the date of payment of the refund.
Though in this case, the Calcutta High Court brought the private banks under the ambit of the writ jurisdiction, in another order by the Allahabad High Court in the case of Kailashi Devi vs Branch Manager and Another (2020), it was concluded that private financial institutions carrying out their commercial business, even though pertaining to their public duties, do not come under the definition of State under Article 12 of the Indian Constitution. Thus this creates a contradictory position with respect to the stances taken by both the courts, keeping the issue still hanging.
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