Escrow priority for statutory dues prevails over debt repayment when bank action obstructs GST compliance.

An escrow arrangement that expressly ranks statutory dues and GST ahead of project costs and debt repayment must be honoured by the bank or escrow operator. The court found the writ maintainable because the grievance concerned breach of the escrow agreement, not the separate debt-recovery proceedings, and the earlier filing reinforced maintainability. It also held that adjusting receivables towards loan repayment without first providing for statutory liabilities breached the agreed priority and impeded GST compliance. The record further showed that the company had no control over, and no right to operate, the escrow account; the bank maintained and operated it. Relief was confined to corrective measures enabling GST compliance.

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Issues: (i) Whether the writ petition was maintainable notwithstanding pending proceedings before the Debts Recovery Tribunal. (ii) Whether the Bank's adjustment of receivables from the Escrow Account towards debt repayment amounted to breach of the Escrow Agreement. (iii) Whether the petitioner Company had control or the right to operate the Escrow Account.

Issue (i): Whether the writ petition was maintainable notwithstanding pending proceedings before the Debts Recovery Tribunal.

Analysis: The dispute in the writ petition was confined to the Bank's alleged failure to follow the agreed order of withdrawals under the Escrow Agreement, especially in relation to statutory dues and GST. The proceedings before the Debts Recovery Tribunal related to recovery of loan dues and were distinct in subject matter and scope. The writ petition had also been instituted earlier than the recovery proceedings. Non-impleadment of the GST authorities did not defeat maintainability because the principal grievance arose from the alleged breach of the Escrow Agreement by the Bank.

Conclusion: The writ petition was held maintainable.

Issue (ii): Whether the Bank's adjustment of receivables from the Escrow Account towards debt repayment amounted to breach of the Escrow Agreement.

Analysis: The Escrow Agreement placed taxes and statutory payments at the first level of priority, ahead of project expenses, interest, reserve account servicing, and debt repayment. The materials showed that the Bank had adjusted receivables towards loan repayment without first provisioning for statutory liabilities, and this had affected GST compliance, including filing of returns. The Court treated the statutory-payment priority in the Escrow Agreement as binding and found the Bank's conduct inconsistent with that priority. The Bank's reliance on general secured-creditor priority did not displace the contractual order governing the Escrow Account in the facts of the case.

Conclusion: The Bank's adjustment was held to be a breach of the Escrow Agreement.

Issue (iii): Whether the petitioner Company had control or the right to operate the Escrow Account.

Analysis: The record showed that the Bank maintained and operated the Escrow Account and that the petitioner had sought only viewing rights and permission to operate the account. The Bank's affidavit also stated that statutory payments could be made only on the basis of the account holder's mandate and supporting invoices and returns. The Court found that the petitioner did not have control over the Escrow Account and no right to operate it.

Conclusion: The petitioner Company was held not to have control or the right to operate the Escrow Account.

Final Conclusion: The petition succeeded in substance on the core grievance that the Bank had failed to honour the Escrow priority for statutory dues, and the Court limited relief to corrective action enabling GST compliance from 2017 onwards.

Ratio Decidendi: Where an escrow arrangement expressly prioritises statutory dues ahead of debt repayment, the bank or escrow operator must honour that contractual order and cannot appropriate receivables in a manner that impedes statutory tax compliance.

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