Karnataka High Court: Public Banks cannot Act as Private Lender

Karnataka High Court: Public Banks cannot Act as Private Lender

Observes that the State Bank of India acted without reason

The Karnataka High Court has granted relief to Legends Property, a Bengaluru-based partnership construction company. It held that a banker who answers the description of the 'state' under Article 12 of the Constitution of India cannot act like a private moneylender.

The bench of Justice Krishna S Dixit stated, "The bank's actions have to be animated with reason and justice. These factors are absent in the impugned endorsement/notice. Therefore, the same is liable to be invalidated. The bank could not have issued the notice against the firm at the instance of the second respondent.”

The petitioner company, along with a partner M Chandrashekar, had a loan sanction arrangement with the State Bank of India (SBI). They challenged the 6 May 2023 notice issued by the bank.

As per the SBI, it received a letter dated 24 March 2023 from Shivapriya, wife of Chandrashekar. She stated having filed a declaration suit against her retirement from the partnership and release of her share worth over Rs.3 crores, on grounds of fraud and forgery.

The bank explained that its legal advisors suggested refraining from disbursing further loans to the petitioner firm until a resolution was met.

On the other hand, the petitioners argued that in the declaration suit filed by Shivapriya, other partners were not a party. Thus, being a nationalized bank, SBI could not have resorted to stopping loan disbursement solely on the strength of her suit.

But SBI contended that its action of halting the disbursement of the loan could not be faulted since Shivapriya claimed she was retired from the partnership fraudulently.

However, the judge noted that the issues in the declaration were yet to be framed and the trial would take its course.