In a landmark judgment that strengthens the rights of small businesses against rigid banking norms, the Orissa High Court has delivered a stern rebuke to restrictive lending practices. The court unequivocally stated that a bank cannot turn a borrower's fundamental right to mobility into a paid service, while quashing a 4% foreclosure fee imposed on a micro, small, and medium enterprise (MSME).
The Case of the Poultry Unit and the Disputed Charge
The legal battle centered on a private poultry unit located in Berhampur. This MSME had initially secured a term loan of Rs 1.80 crore from a nationalised bank under a dedicated scheme for small businesses. Seeking more favorable terms later on, the borrower approached a private bank to take over this existing loan liability.
After the private bank cleared all outstanding dues to the nationalised bank, it formally took over the loan account on May 26, 2024. Despite the full and final settlement, the original lender, the nationalised bank, imposed a foreclosure charge of 4% on the borrower. Furthermore, the bank refused to release the original title deeds, property papers, and collateral securities until this fee was paid.
The petitioner informed the court that numerous requests for a waiver of this charge and the release of the crucial documents were completely ignored. Left with no other recourse, the MSME unit approached the Orissa High Court on August 14, presenting all relevant documents for judicial review.
Court's Scathing Observations and Verdict
After a thorough examination of the facts, Justice S K Panigrahi, in a verdict dated November 29 and uploaded on December 4, delivered a powerful judgment. The court found no credible justification for the bank's continued retention of the property documents after the loan was fully repaid.
Justice Panigrahi termed the bank's stance as "arbitrary and violative of the petitioner’s proprietorial rights." The judgment emphasized that the act of withholding property documents to coerce payment of an unjustified foreclosure fee was unacceptable.
The court held the borrower entitled to a complete waiver of the foreclosure charge. It directed officials of the nationalised bank to "forthwith release the MSME’s property documents along with all other allied documents" without insisting on the payment of such charges. To ensure compliance, the judge also ordered the bank to submit an affidavit within one month, confirming they had followed the court's directive.
A Precedent for MSME Borrowing Rights
This ruling is being hailed as a significant precedent for India's vast MSME sector, which often faces challenges in dealing with large financial institutions. The court's clear language framing mobility—the right to switch lenders for better terms—as a right rather than a chargeable commodity strikes at the heart of restrictive clauses that can trap small businesses.
The verdict sends a strong message to lending institutions about fair practices, especially concerning loan takeover and foreclosure processes. It reinforces the legal protection available to MSMEs against arbitrary charges and upholds their right to unencumbered ownership of property documents once a debt is settled. This decision is expected to empower countless small business owners across Odisha and potentially influence similar cases nationwide.
