RBI, an instrumentality of State; private banks to come under purview of Art. 226 under certain circumstances: Calcutta High Court

When MSMEs are funded by private banks, their functions gather a wider ambit since it involves discharging of public duties which enable them to come under the purview of Art. 226. A bench comprising of Justice Sabyasachi Bhattacharyya has re-affirmed RBI as an agent of the state and also widened the ambit of private bank functions in the recently concluded case of M/s Pearson Drums & Barrels Pvt. Ltd. Vs. The General Manager, Consumer Education & Protection Cell of Reserve Bank of India and other [WPA No. 21710 of 2017] which involves the issue of MSME credit facilitation through private banks and the refund of processing fees in the event of a contract breach.

The petitioner company (an MSME) entered into an agreement with the respondent private bank for a sanction of credit facility of Rs. 25.05 crore; 0.60 percent of which was to be paid as a processing fee to the bank. The fresh sanction took place on November 6, 2015, which also included the additional conditions that in the event of the applicant’s non-compliance with the sanction conditions or refusal to take disbursal, the initial amount paid as processing fees would stand forfeited. However due to an inordinate delay of 50 days between the processing of credit to the petitioner sabotaged the latter’s financial plans, the petitioner sought the refund of the processing fee. Subsequent meetings took place between the parties before the State Level Inter-Institutional Committee (SLIIC) and the RBI which failed to ameliorate the situations, following which the petitioner filed a writ petition before the high court.

The Court made it clear that the petitioner not only claimed a refund of the processing fees in full but also challenged the communication with RBI which refuted the petitioner’s claim for a refund from the respondent which forms the basis of the present writ petition. The Court observed RBI to be an instrumentality of the State. R.D. Shetty vs International Airport Authority [ 1979 AIR 1628, 1979 SCR (3)1014] was one of the cases to lay down the instrumentality or agency test which was later confirmed in the following year’s judgment of Ajay Hasia vs Khalid Mujib Sehravardi . The test laid down was 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.

What stood out to be distinct in the judgement is the Court’s treatment of assistance provided by private banks to the MSMEs. The learned counsel for the respondent had placed reliance on Federal Bank Limited Vs. Sagar Thomas and others [2003) 10 SCC 733] to contend that a writ petition under Article 226 of the Constitution is not maintainable against private banks. The Court rather took on a liberal interpretation and stated, “[…] the functions discharged by the respondent no.4-Bank are of a public nature and, as such, pertain to the discharge of public duties…although such grievance forms the cause of action of the petitioner, but also has a wider connotation insofar as the liabilities of banks in respect of a refund of processing fees are concerned.”

The Court also took note of the differences of terms between the initial “in-principle” sanction and the fresh sanction dated November 6, 2015, and pointed that the bank had changed the pre-meditated conditions agreed upon between the petitioner and the respondent

In the present case, the reason was that the Bank sought a novation of the in-principle sanction agreement by issuance of a fresh sanction on deviated terms.
Thus, the decision of the respondent no.4 and that of the Consumer Education & Protection Cell of the Reserve Bank of India to refuse the petitioner’s claim for refund of entire processing fees has to be set aside

Accordingly, the Court directed the respondent to refund the petitioner the whole of the processing fee with an additional interest rate of 6% till the date of payment.

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