Supreme Court: Banks Are Not Liable For Illegal Activities Done By Borrower in Mortgaged Premises

Supreme Court: Banks Are Not Liable For Illegal Activities Done By Borrower in Mortgaged Premises

The Supreme Court set aside an order issued by the National Green Tribunal (NGT), Delhi, asserting that a bank cannot be held accountable for the illicit activities conducted by the borrower on the mortgaged premises. The division bench, comprising Justices Sanjiv Khanna and Dipankar Datta, deemed this stance not only unacceptable but also legally untenable.

In the present case, Punjab National Bank granted a loan to a borrower, with a property, being pledged as collateral to ensure recovery. Subsequently, the Chanakya Place Residents Welfare Association filed an application, raising concerns about multiple factories operating in the vicinity without the necessary environmental clearances. The association, in connection with this matter, also requested the closure of such units operating illegally.

The Green Tribunal issued several directives, one of which states:

"(a) The units engaged in illegal activities and causing pollution, such as unauthorized workshops conducting servicing, repairs, denting, painting, junk dealing, etc., in contravention of the law, shall be immediately halted. A report detailing the actions taken shall be submitted to this Tribunal within one month."

Following this, the mortgaged premises were sealed. In response, the bank filed a miscellaneous application, arguing that the premises had been auctioned to another purchaser who had committed not to engage in any illegal activities. Consequently, the bank requested the premises be unsealed.

However, the Tribunal rejected the plea, citing that the loan was sanctioned to facilitate illegal commercial activities in the Chanakya Place area of New Delhi. The bank extended the loan without conducting a proper inquiry into whether the activity being undertaken by the borrower was permissible within the area and premises where it was conducted. This resulted in the bank providing financial assistance to a person engaged in commercial or industrial activities within residential premises, which was legally impermissible.

Building on this, the Tribunal additionally remarked that the bank, through its loan provision, effectively incentivized the individual to engage in unlawful activities. The Tribunal asserted that the bank, by providing a loan without proper inquiry into the legality of the commercial activity, was not only encouraging but also abetting the illegal activities on the premises. The conclusion suggests that the bank should face consequences for its involvement in supporting such unlawful actions.

The bank approached the Supreme Court against this backdrop.

The court observed that the auction purchaser must provide an undertaking to conduct business and commercial activities in accordance with the law. Despite this requirement, the court allowed the appeal and granted permission for the bank to transfer the property. Additionally, the court noted that the bank was authorized to remove any seals present on the property.

The Court directed the purchaser to furnish this undertaking to the Registrar of the Tribunal within six weeks. It was emphasized that the purchaser must adhere to this undertaking.

Before concluding, the Court cautioned the National Green Tribunal to acknowledge its decision and refrain from issuing similar orders holding banks or financial institutions responsible without providing specific reasons justifying such findings in individual cases.