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2024 Supreme(Online)(MEGH) 567
HIGH COURT OF MEGHALAYA
Mr. Justice H. S. Thangkhiew, J
M/s Marbaniang Projects Private Limited – Appellant
Versus
Punjab National Bank and 3 Ors. – Respondent
WP(C) 178 / 2022
Mr. K. Paul, Sr. Adv. with Ms. B. Kharwanlang, Adv.; Mr. S. Dutta, Adv.; Ms. P. Riahtam, Adv.
The court held that the Bank's adjustment of funds from the Escrow Account violated the Escrow Agreement, prioritizing statutory payments over debt repayment, and mandated corrective measures for GST compliance.
Headnote:(A) Central Goods and Services Tax Act, 2017 - Rule 59(5)(a) - Recovery of Debts and Bankruptcy Act, 1993 - Section 19(8) - Writ petition challenging the Bank's adjustment of funds in an Escrow Account against statutory liabilities including GST - The petitioner Company alleged that the Bank violated the Escrow Agreement by prioritizing debt repayment over statutory payments, leading to non-compliance with GST obligations. (Paras 1, 2, 3, 5, 12, 20)
(B) Escrow Agreement - The court emphasized that the Escrow Agreement mandated that statutory payments take precedence over debt repayment, and the Bank's actions constituted a breach of this agreement. (Paras 14, 17)
(C) Maintainability of Writ Petition - The court held that the writ petition was maintainable despite ongoing proceedings before the Debts Recovery Tribunal, as the issues raised were distinct from those in the recovery proceedings. (Paras 13, 20)
(D) Control of Escrow Account - The court found that the petitioner Company had no control over the Escrow Account, which was operated solely by the Bank. (Paras 18, 20)
Facts of the case:
The petitioner Company sought financial assistance from the respondent Bank for a hotel project, leading to the establishment of an Escrow Account for routing cash flows. The Bank adjusted funds from this account towards debt repayment, violating the agreement and causing GST compliance issues.
Findings of Court:
The Bank was held liable for breaching the Escrow Agreement by failing to prioritize statutory payments, and the writ petition was allowed to direct the Bank to facilitate GST compliance.
Issues: The main issues included the maintainability of the writ petition, whether the Bank's adjustments breached the Escrow Agreement, and the control over the Escrow Account.
Ratio Decidendi: The court ruled that the Bank's actions violated the Escrow Agreement, which prioritized statutory payments, and that the writ petition was maintainable despite related proceedings in the Debts Recovery Tribunal.
Result: Writ petition allowed to direct corrective measures for GST compliance.
| Table of Content |
|---|
| 1. petitioner sought financial assistance (Para 1 , 2) |
| 2. bank's wrongful adjustment of funds (Para 3 , 4) |
| 3. impact on gst compliance (Para 5 , 6) |
| 4. bank's contention on maintainability (Para 7 , 8 , 9 , 10 , 11) |
| 5. issues to be adjudicated (Para 12 , 13 , 18 , 19 , 20) |
| 6. breach of escrow agreement (Para 14 , 15 , 16 , 17) |
| 7. writ petition allowed with directions (Para 21) |
JUDGMENT AND ORDER
1. The writ petitioner by this instant petition impugns the action of the respondent Bank in not releasing the amounts which is deposited in an Escrow Account, for payment of statutory liabilities including GST from the year 2017 onwards till date.
2. The brief facts are that the petitioner Company had approached the respondent Bank for financial assistance, for construction of a hotel -cum- commercial complex, which was approved and a term loan of Rs. 22 Crores was sanctioned. Thereafter, in order to meet the business expansion, an additional term loan of Rs. 8 Crore was sought, which was agreed to by the Bank with the terms and conditions that all cash flows of the business was to be routed through a designated account such as revenue receipts/receivables from the project including deposits, service charges, equity/shareholders contribution and deposited into the Project Escrow Account. Accordingly, an Escrow Agreement was executed on 20.02.2015, by the parties with the condition that further withdrawals from the Escrow Account upto the final settlement under the financing agreements, shall be permitted for the purposes of taxes and statutory requirements. However, the petitioner Company received an email dated 05.11.2020 from one of its tenants, informing that the GST amount had not been paid to the concerned authorities, whereafter it was discovered that the respondent Bank despite the stipulated conditions had adjusted the entire funds towards its debt repayment. Hence the writ petition.
3. Mr. K. Paul, learned Senior counsel assisted by Ms. B. Kharwanlang, learned counsel for the petitioner has submitted that under the Escrow Agreement, it had been specifically provided that withdrawals from the Escrow Account upto the final settlement was that taxes and statutory payments would take first precedence over other dues such as project expenses, payment interest, debt service reserve account and debt repayment. However, he submits the respondent Bank without any intimation, had wrongly adjusted all the rental deposits towards the loan repayment, which is in absolute violation of the said Escrow Agreement. The action of the Bank he contends despite the stipulated conditions, in adjusting the entire funds including its debt repayment, has led to a cascading effect, whereby the Escrow Agreement stood frustrated leading to the non-payment of taxes further compounding the petitioner’s GST liabilities. He then submits that with the input tax credit not being passed down the same has resulted in the non-payment of rent by the tenants of the petitioner Company, which led to the petitioner Company being classified as NPA in 2019.
4. The learned Senior counsel then submits that admittedly the petitioner Company, does not operate or have control over the Escrow Account, and the respondent Bank has been adjusting amounts since 2017 from the receivables deposited in the Escrow Account, and that any statutory payments can only be paid by the respondent Bank on the standing instructions/mandate of the account holder i.e. the petitioner Company. The learned Senior counsel has then referred to the additional affidavit filed by the respondent Bank on 01.08.2023, to support his contention and has also placed reliance on 2(two) letters of the petitioner Company on this point, wherein request for Viewing Rights and request for Permission to Operate had been made.
5. On another limb of submission i.e. the impact on GST compliance, it is submitted that the Company had filed GSTR-1 returns and as the Escrow Agreement had been violated by the respondent B
