The Calcutta High Court has ruled that Sections 45G and 45H of the ESI Act cannot be mechanically invoked against a bank to recover a customer’s dues, and once the underlying Section 45A order was kept in abeyance for fresh hearing, the consequential garnishee orders became infructuous. Accordingly, the High Court quashed the two garnishee orders issued by the ESIC Recovery Officer against SBI and the RBI respectively.
The Court emphasised that since Section 45H applies the Income Tax (Certificate) Rules to ESI recovery and is penal in character, an opportunity of hearing or at least a notice is mandatory before a third party can be asked to pay on behalf of a defaulter employer. The Court also observed that SBI could not have remitted any amount from the customer’s ‘inoperative’ account, and therefore branding SBI as a ‘deemed defaulter’ was without application of mind and violated the principles of natural justice.
Briefly, State Bank of India (SBI) had approached the Calcutta High Court challenging two Garnishee orders issued by the Recovery Officer under the Employees State Insurance (ESI) Act, one addressed to SBI and the other to the Reserve Bank of India (RBI). The background was that the Recovery Officer had initially issued a prohibitory order against the bank account of Eastern Division (Projects) Engineers Cooperative Society Limited (Respondent No. 3), which is a customer of SBI’s Murgasol Branch.
SBI responded by letter, confirming that a ‘hold’ had been marked on the current account of the establishment and also forwarded a demand draft of Rs. 1.26 lakhs along with two years statements of the current and cash credit accounts. The dispute between the establishment and the ESI Corporation related to coverage and allotment of code numbers, and the establishment had earlier filed petition, in which interim order was refused. In the connected appeal, the Division Bench by an interim order, permitted the establishment to operate its account in the usual course of business while keeping Rs. 5 lakhs frozen.
The Division Bench also disposed another application, keeping the impugned order in abeyance, restraining coercive measures against the establishment, and directing a fresh hearing before the appellate authority under Section 45 of the ESI Act. Despite these directions, by a letter issued under Section 45G of the ESI Act, the ESI Corporation declared SBI to be a ‘deemed defaulter’, and by a further garnishee order, sought to recover the dues from SBI’s deposit lying with the RBI.
A Single Judge Bench of Justice Shampa Dutt (Paul) noted that SBI had argued that Sections 45G and 45H of the ESI Act had been wrongly invoked against it. The Bench explained that Section 45G(3) contemplates a notice to a person who holds money of the principal employer, and the primary duty of the ESI Corporation before recovering money from a banker is to ascertain whether the banker is actually in a position to pay the demanded amount or is prevented by any authority of law from remitting it. Further, Section 45H applies the provisions of the Income Tax Act and the Income Tax (Certificate) Rules to recovery under the ESI Act, and being a penal provision, an opportunity of hearing or at least a notice is necessary before demanding money from a third party on behalf of a defaulter employer.
The Court further observed that SBI could not have remitted any amount to the ESI Corporation from an ‘inoperative’ account of the customer, and therefore branding SBI as a ‘deemed defaulter’ in relation to the dues of Respondent No. 3 was without any application of mind and in violation of the principles of natural justice. The Court also noted that the conduct of Respondent No. 1 in issuing notices relating to proceedings that were pending before the Division Bench amounted to an abuse of the process of law.
The RBI placed documents before the Court confirming that the amount debited from SBI’s account pursuant to the impugned garnishee orders had since been credited back to SBI’s account. Accordingly, the Court observed that the impugned garnishee orders had been passed to implement the order under Section 45A of the ESI Act, which had itself been kept in abeyance by the Division Bench on March 17, 2025, with a direction for a fresh hearing.
