Transactions between banker, borrower essentially contractual in nature: HC

The court noted that petitioner had not disclosed to the bank in March 2016 about the pendency of arbitration proceedings on the termination of a lease of the property

The High Court of Karnataka has said that the transactions between a banker and the borrower are essentially contractual in nature. The court observed that in given facts and circumstances when the banks take decisions to abruptly recall credit facilities, as dictated by prudence, it is not for the courts to sit in appeal over their wisdom.

Justice Krishna S Dixit observed this while declining to entertain the petition filed by Nitesh Residency Hotels Limited challenging various letters issued by Yes Bank in 2021, recalling all credit facilities issued from 2016 till 2020. The bank had taken the decision on the grounds of default of Rs 358.4 crore. The bank had also classified the debt as Non-Performing Asset (NPA).

The court noted that the petitioner had not disclosed to the bank in March 2016 about the pendency of arbitration proceedings on the termination of a lease of the property. The petitioner had furnished the very same lease deed by way of security for the repayment of the loan. Subsequently, the lease deed was terminated and the same was upheld by an award on November 7, 2020.

The bench further noticed that even after suffering an arbitral award of enormous liability, the petitioner had secured an additional credit facility for Rs 100 crore on December 3, 2020, under the Emergency Credit Loan Guarantee Scheme (ECLG) during Covid-19.

“Petitioner is not a peasant or a petty farmer who has availed some frugal loans for mitigating the hardships of life. It is an incorporated company purported to be worth crores of rupees. Its Managing Director & other Directors have participated in contracting the loans in hundreds of crores of rupees. A customer owes to the Bank a duty to disclose all facts and circumstances that would in the ordinary course of the business figure in the decision-making process as to the intended loan transaction. This duty becomes more pronounced when such transactions involve huge loans & liabilities. A perusal of the petition papers leaves no manner of doubt as to clandestine failure on the part of the borrower in discharging this duty, to say the least. ‘Thou art weighed in the balance and found wanting’ aptly applies to the case of the petitioner,” the court said.