Bank breached escrow agreement by failing to follow payment hierarchy, causing GST non-compliance under Section 70 CGST Act 2017

M/s Marbaniang Projects Private Limited Versus Punjab National Bank (United Bank of India), The Chief Manager, Punjab National Bank, Shillong, The General Manager Punjab National Bank, Shillong Meghalaya.

M/s Marbaniang Projects Private Limited Versus Punjab National Bank (United Bank of India), The Chief Manager, Punjab National Bank, Shillong, The General ... Issues Involved:

1. Maintainability of the writ petition considering pending adjudication before the Debts Recovery Tribunal.
2. Whether the adjustments made by the respondent Bank to the receivables deposited in the Escrow Account constitute a breach of the Escrow Agreement.
3. Whether the petitioner Company had control or the right to operate the Escrow Account.

Issue-wise Detailed Analysis:

1. Maintainability of the Writ Petition:

The primary contention regarding the maintainability of the writ petition was the pending proceedings before the Debts Recovery Tribunal (DRT). The respondent Bank argued that since proceedings are ongoing in the DRT, the writ petition should not be entertained. However, the court found that the issues in the writ petition are distinct and pertain specifically to the alleged breach of the Escrow Agreement by the respondent Bank, which led to the non-payment of GST. The court also noted that the writ petition was filed before the initiation of proceedings in the DRT. The non-joinder of GST authorities as a party was deemed not to disable the writ petition, as the core issue was the alleged breach of the Escrow Agreement. Therefore, the writ petition was held maintainable.

2. Breach of the Escrow Agreement:

The court examined whether the adjustments made by the respondent Bank to the receivables deposited in the Escrow Account constituted a breach of the Escrow Agreement. The Escrow Agreement explicitly prioritized taxes and statutory payments over debt repayment. Despite this, the respondent Bank adjusted the funds towards debt repayment, leading to the non-payment of GST by the petitioner. This action was found to be in violation of the Escrow Agreement. The court highlighted that the breach of the agreement resulted in the petitioner being unable to comply with GST requirements, adversely affecting its financial standing and leading to proceedings by GST authorities. The court concluded that the respondent Bank's actions were a breach of the Escrow Agreement.

3. Control Over the Escrow Account:

The court analyzed whether the petitioner Company had control or the right to operate the Escrow Account. It was established that the respondent Bank had been adjusting amounts from the Escrow Account since 2017 and maintained control over the account. The Escrow Agreement specified that the respondent Bank was responsible for making statutory payments based on instructions from the petitioner. The court noted that the petitioner had requested permission to operate and view the account, which was not granted, indicating that the petitioner had no control over the Escrow Account. This lack of control further supported the petitioner's claim that the Bank's actions were unilateral and contrary to the agreement.

Conclusion:

The court accepted the petitioner's contentions regarding the breach of the Escrow Agreement and the lack of control over the Escrow Account. However, full relief could not be granted due to the absence of GST authorities as parties in the proceedings. The court directed the respondent Bank to take corrective measures to facilitate the filing of GST returns by the petitioner Company from 2017 onwards. The writ petition was allowed to the extent indicated and disposed of accordingly.