Orissa High Court: Retention By Banks Beyond Lawful Entitlement Constitutes Unreasonable Interference With Proprietary Rights Of Customer

The Orissa High Court held that the retention by banks beyond lawful entitlement, in the absence of any continuing legitimate charge or pending requirement, constitutes an unreasonable interference with proprietary rights of the customer.

The Court held thus in a Writ Petition filed by a company challenging the demand raised by the Bank towards foreclosure charges in respect of Item Loan Account and Cash Credit Account.

A Single Bench of Justice Sanjeeb K. Panigrahi observed, “Banks hold original title deeds and securities as custodians for the purpose of credit security. At the point of full repayment and formal closure/takeover, banking practice and legal principle require immediate release and return of original documents to the borrower. The retention beyond lawful entitlement, in the absence of any continuing legitimate charge or pending requirement, constitutes an unreasonable interference with proprietary rights of the customer.”

The Bench added that Article 300-A of the Constitution and the Doctrine of Legitimate Expectation enjoin that citizens should not be deprived of property saved by lawful authority and procedure.

Advocate Meru Sagar Samantaray appeared on behalf of the Petitioner, while Advocate Tuna Sahu appeared on behalf of the Opposite Parties.

Facts of the Case

The Petitioner was an MSME (Micro, Small, and Medium Enterprise), which submitted an application before the Respondent-Indian Bank, seeking sanction of a term loan of Rs. 1.80 crores under the MSME Scheme. The said loan was sanctioned under the applicable MSME lending guidelines, subject to creation of a valid mortgage over the Petitioner’s immovable property and furnishing of other collateral securities. Upon completion of the requisite documentation and security formalities, the sanctioned amount was duly disbursed in favour of the Petitioner. In terms of the loan agreement, the Petitioner regularly serviced the loan by making timely payments towards both principal and interest. However, following the sanction of the loan, the Petitioner allegedly encountered persistent harassment at the hands of the Bank. It was alleged that the Bank compelled the Petitioner to procure an SBI Life Personal Insurance policy valued at Rs. 1.53 lakh per annum. When the Managing Director of the Petitioner declined to accede to this demand, the Bank allegedly proceeded to dishonour cheques issued by the Petitioner towards repayment of instalments during the year 2023 and also obstructed the Petitioner’s NEFT transactions.

In May 2023, the Petitioner’s poultry unit suffered extensive and severe damage owing to a Kala Baisakhi storm. On seeking initiation of the requisite insurance claim process, no effective steps were taken by the Bank or its insurance partner. This inordinate delay in processing the insurance claim caused grave financial strain and operational hardship to the Petitioner’s enterprise. Subsequently, the Petitioner approached the HDFC Bank, for takeover of its existing loan facilities from the Respondent Bank. Despite the complete liquidation of dues and formal takeover of the loan accounts by HDFC Bank, the Respondent Bank raised a demand for foreclosure charges at the rate of 4%, ostensibly towards loan closure. On approaching the Ombudsman, it was informed that the mechanism under the RBI Ombudsman Scheme does not provide for personal hearings. Being aggrieved, the Petitioner approached the High Court.

Reasoning

The High Court after hearing the arguments from both sides, noted, “It is a basic tenet of law of contract that contractual terms cannot be read to defeat or circumvent statutory or regulatory mandates. Parties may contract within the ambit of law, but they cannot contract out of mandatory regulatory prescriptions. It is equally settled that a bank while entitled to protect its commercial interests must act within the regulatory framework and in consonance with principles of fairness and reasonableness.”

The Court emphasised that the Banks, when acting as facilitators of insurance cover ancillary to credit facilities, owe duties of good faith and fair dealing towards borrowers.

“Undue pressure on borrowers to purchase particular insurance products, and failure to process insurance claims with reasonable expedition, especially where delay causes demonstrable loss, are inconsistent with the Bank’s regulatory and ethical obligations”, it added.

The Court remarked that the Petitioner’s evidence of alleged coercion to procure an SBI Life Personal Insurance policy and of delay in processing the insurance claim and compelling the Petitioner to undertake reconstruction expenditure constitute matters of serious concern.

“While this Court must be cautious in substituting its evaluation for that of specialized insurance assessors, where delay is shown to be unreasonable and caused by the Bank’s omission and where such delay results in hardship, the Court may direct remedial measures, including compulsion to co-operate with insurers and to expedite assessment and settlement”, it said.

Conclusion

The Court observed that the Petitioner has produced evidence of payment of the sums necessary for takeover and has repeatedly requested return of documents which the Bank has refused or neglected to return.

“No credible justification is shown for continuing retention. That conduct is found to be arbitrary and violative of the Petitioner’s proprietorial rights. … In view of the foregoing analysis and upon an anxious consideration of the material facts and circumstances of the case, this Court is of the considered opinion that the Petitioner is entitled to waiver of the foreclosure charges sought to be levied on the outstanding loan amount on the date of its repayment”, it concluded.

Accordingly, the High Court allowed the Writ Petition and directed the Opposite Parties to forthwith release the Petitioner’s property documents along with all other allied documents without insisting on payment of such charges.

Cause Title- Maa Tarini Poultries Pvt. Ltd. v. Indian Bank, Main Branch, Berhampur & Ors. (Case Number: W.P.(C) No.23022 of 2025)

Appearance:

Petitioner: Advocates Meru Sagar Samantaray and Debasish Samal.

Opposite Parties: Advocates Tuna Sahu and R. Roy.

Click here to read/download the Judgment