While holding that a bank cannot unilaterally debit the account of a third party with whom it has no privity of contract, the Allahabad High Court (Lucknow Bench) has directed immediate refund with FD rate interest along with Rs. 1 lakh compensation. The Court ruled that a bank cannot unilaterally debit the bank account or fixed deposit of a third party, such as the wife of a deceased borrower, to recover dues owed by the deceased, when there is no privity of contract between the bank and such third party.
The Court explained that retiral benefits such as gratuity, pension, and provident fund retain their character as protected benefits even after they are received by the beneficiary, and cannot be attached, forfeited, or appropriated by a bank through private or unilateral action. At the same time, the Court cautioned that the surreptitious transfer of a fixed deposit account between branches for the purpose of debiting the amount and then transferring it back constitutes mala fide action and is anathema to banking practice, amounting to a serious breach of trust since banks are merely custodians of bank accounts.
The High Court said that while a bank may have a legal right to proceed against the legal heir of a deceased borrower and recover dues, the same has to be done strictly as per the due process of law and not in an arbitrary, capricious, or whimsical manner.
The Division Bench comprising Justice Shekhar B. Saraf and Justice Abdhesh Kumar Chaudhary observed that the petitioner had no privity of contract with the Bank and that the recovery sought to be made from her account was not legally permissible and was against all banking norms. The Court noted that the irrevocable standing instruction given by the deceased husband was itself illegal in law.
The Court further observed that gratuity cannot be forfeited unless the conditions under Section 4(6) of the Payment of Gratuity Act, 1972 are met. The Court noted that there were no documents on record to show what amount of gratuity received after the husband’s death was traceable to the amount debited from the wife’s account. The Court found that the entire process adopted by the Bank of transferring the fixed deposit from one branch to another to debit the same and then transferring the account back stinks of mala fide action, both with regard to procedure and substantive law, and that the Bank tried to take advantage merely because the petitioner had a fixed deposit in the respondent-Bank.
The Court characterised the Bank’s conduct as a serious breach of trust, since banks are merely custodians of bank accounts and hold the money in trust for and on behalf of the account holder. The Court further noted that while the Bank may have a legal right to proceed against the petitioner as the legal heir of the deceased and recover the dues, the same has to be done as per the due process of law established in India and not in an arbitrary, capricious, and whimsical manner.
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Briefly, the petitioner approached the High Court against the Reserve Bank of India, State Bank of India, and SBI General Insurance, seeking redressal for the alleged illegal debit of INR 19.90 lakhs from her bank account. The petitioner’s husband, who was an Assistant Professor at Medicine Hospital, Ring Road, Lucknow, had availed a personal loan (Xpress Credit Loan) of Rs. 15 lakhs from the State Bank of India on Nov 03, 2020. The petitioner was admittedly neither a signatory nor a consenting party to the loan as a co-applicant, co-borrower, guarantor, surety, indemnifier, or nominee, and there existed no privity of contract between her and the respondent-Bank.
The loan was secured through an insurance cover from SBI General Insurance, for which a premium of INR 8,803/- was paid by the deceased husband. While availing the loan, the husband had given an irrevocable standing instruction dated 3rd November 2020 authorising SBI to collect and receive any amount payable towards provident fund, gratuity, pension, or similar dues on his behalf in the event of retirement, resignation, termination, or discontinuation of services, and undertook not to shift or close his salary account with SBI till the loan was liquidated.
The husband passed away on 6th May 2021 due to Covid-19. Instead of pursuing lawful recovery steps, the Bank began coercing the petitioner for payment and issued a legal notice calling upon her to pay the outstanding of Rs. 13.87 lakhs, failing which it proposed to initiate civil suit, recovery proceedings, and reporting to credit information agencies. Subsequently, the Bank placed the petitioner’s salaried account on hold, which was removed only upon the intervention of the RBI Ombudsman after she filed a complaint.
During the intervening negotiations, the Bank encashed the petitioner’s fixed deposit and debited an amount of Rs. 19.90 lakhs from her account, while surreptitiously shifting her account from Ashiyana Branch to Jankipuram Branch (where the husband’s loan was availed) and then back to Ashiyana Branch, allegedly without her permission.
