The Calcutta High Court quashed garnishee orders directing the Reserve Bank of India to recover ESI dues from State Bank of India, holding that a bank cannot be deemed a defaulter under the Employees State Insurance Act when its customer’s account is inoperative and no amount is due from the customer. The judgment underscores the necessity of applying natural justice before attaching liability on third parties.
Background & Facts
The Dispute
The dispute arose from garnishee orders issued by the Employees State Insurance Corporation’s Recovery Officer directing the Reserve Bank of India to recover alleged ESI dues from State Bank of India on account of its customer Pascas Associate.
Key Facts
- Pascas Associate is a constituent/customer of State Bank of India, C-Zone, Durgapur Branch, holding Current Account No. 3296298908.
- The account had a zero balance from 31 December 2020 and was recorded as “inoperative”.
- On 25 June 2024, a prohibitory order under Section 45H of the Employees State Insurance Act, 1948 was issued for recovery of dues of Pascas Associate, a covered establishment under the ESI Act.
- A show cause notice dated 12 November 2024 was issued by ESIC to Pascas Associate for failing to remit ESI dues.
- On 14 February 2025, ESIC passed an order declaring State Bank of India a “deemed defaulter” under Section 45G(3)(x) of the Employees State Insurance Act, 1948.
- On the same date, a garnishee order was issued to the Reserve Bank of India directing it to remit ₹90,84,887 (Rupees Ninety lakh eighty-four thousand eight hundred eighty-seven only) with interest at ₹2034.08 per day (12 % per annum) from 12 March 2025 onwards until payment.
- Subsequently, on 11 March 2025, another garnishee order was issued to the Reserve Bank of India under Section 45G of the ESI Act read with the Second and Third Schedules of the Income Tax Act, 1961 and the Income Tax (Certificate Proceedings) Rules, 1962, again naming SBI, C-Zone, Durgapur Branch as the deemed defaulter for the same amount and prohibiting further debit transactions from Pascas Associate’s account without first transferring the amount to ESIC.
- During the hearing, the Reserve Bank of India debited the said amount from SBI’s account; on 25 August 2026 it placed documents before the Court showing that the amount had been credited back to SBI’s account.
- The petitioner contended that, since Pascas Associate’s account was inoperative and no amount was due from the customer to the bank, SBI could not be held liable as a deemed defaulter and the garnishee orders violated natural justice.
- The respondent maintained that the prohibitory order and the deemed-defaulter declaration were legally sustainable and that the bank had an obligation to comply with the garnishee directions.
Procedural History
- 25 June 2024: Prohibitory order under Section 45H ESI Act issued against Pascas Associate.
- 12 November 2024: Show cause notice issued by ESIC to Pascas Associate.
- 14 February 2025: ESIC order declaring SBI a deemed defaulter under Section 45G(3)(x) ESI Act; first garnishee order to RBI issued.
- 11 March 2025: Second garnishee order to RBI issued.
- 03 September 2026: Judgment reserved by the Calcutta High Court.
- 23 September 2026: Judgment delivered.
- 25 August 2026: RBI placed documents showing the debited amount had been credited back to SBI’s account.
Relief Sought
The petitioner sought quashing of the garnishee orders dated 14 February 2025 and 11 March 2025, a direction that no further recovery proceedings be initiated against SBI on account of Pascas Associate’s dues, and restitution of any amount already debited from its account, together with costs.
The Legal Issue
The central question was whether State Bank of India could be held liable as a ‘deemed defaulter’ under Section 45G(3)(x) of the Employees State Insurance Act, 1948 for the ESI dues of its customer Pascas Associate when the customer’s account with the bank was inoperative and had a zero balance, and whether the garnishee orders issued to the Reserve Bank of India under Section 45G of the ESI Act read with the Income Tax Act, 1961 were legally sustainable and compliant with the principles of natural justice.
Arguments Presented
For the Appellant/Petitioner
The petitioner argued that a bank can be treated as a deemed defaulter only when there is an actual amount due from the customer to the bank. Since Pascas Associate’s account showed zero balance from 31 December 2020 and was inoperative, no sum was owing to SBI, and therefore the declaration under Section 45G(3)(x) was without application of mind. The petitioner further contended that the garnishee orders violated natural justice because they were passed without giving the bank an opportunity to show that no amount was recoverable from the customer’s account. Reliance was placed on the principle that statutory liability cannot be imposed on a third party absent a legal obligation, and that the Recovery Officer’s orders amounted to an abuse of process.
For the Respondent/State
The respondent maintained that the prohibitory order under Section 45H and the deemed-defaulter declaration under Section 45G(3)(x) were validly issued, and that the bank, as the custodian of the customer’s account, was obligated to comply with the garnishee directions. It argued that the Recovery Officer had sufficient material to conclude that SBI was liable, and that the garnishee orders were in accordance with the ESI Act read with the Income Tax Act, 1961. The respondent also submitted that the bank’s internal records showing an inoperative account did not absolve it of the statutory duty to remit the dues once the customer was declared a covered establishment.
The Court's Analysis
The Court began by noting that the garnishee orders were premised on the assumption that State Bank of India owed money to ESIC on account of Pascas Associate’s dues. It examined Section 45G(3)(x) of the ESI Act, which deems a person a defaulter when, among other circumstances, “the defaulter has failed to transfer the dues to the Corporation despite having received the same from the employee.” The Court observed that the provision presupposes the existence of an amount actually received by the defaulter from the employee. In the present case, the evidence showed that Pascas Associate’s account with SBI had been inoperative since 31 December 2020 and carried a zero balance; consequently, SBI had not received any amount from the customer that could be transferred to ESIC.
The Court further held that the Recovery Officer’s reliance on the prohibitory order dated 25 June 2024 was misplaced. A prohibitory order merely restricts the account holder from making withdrawals; it does not create a debt owed by the bank to the corporation. Since the account was inoperative, there were no funds to be restrained, and the bank was under no statutory obligation to transfer non-existent sums.
Applying the principles of natural justice, the Court emphasized that liability cannot be fastened on a third party without affording it a reasonable opportunity to contest the factual basis of the claim. The petitioner had repeatedly pointed out the inoperative status of the account and the absence of any recoverable amount, yet the orders were passed without affording a hearing on that specific issue. This procedural lapse rendered the orders an abuse of process.
The Court also noted that the Reserve Bank of India had, during the proceedings, debited the amount from SBI’s account and later credited it back, demonstrating that the garnishee direction had been executed on a mistaken premise. The restitution of the amount reinforced the conclusion that no liability existed.
Finally, the Court held that the garnishee orders, being unsupported by law and violative of natural justice, must be quashed. It set aside the orders dated 14 February 2025 and 11 March 2025, allowed the writ petition, and directed that no further recovery proceedings be initiated against SBI on account of Pascas Associate’s dues.
"Accordingly, garnishee orders dated 14th February, 2025 and 11th March, 2025, issued by the Recovery Officer under the EPF Act, being not in accordance with law and an abuse of the process of law, are hereby quashed and set aside."
The Verdict
The Calcutta High Court allowed the writ petition and quashed the garnishee orders dated 14 February 2025 and 11 March 2025 issued by the Recovery Officer under the Employees State Insurance Act. The Court held that State Bank of India could not be deemed a defaulter under Section 45G(3)(x) of the ESI Act when its customer’s account was inoperative and had a zero balance, and that the orders were not in accordance with law and amounted to an abuse of process. Consequently, the amount of ₹90,84,887 together with interest at 12 % per annum from 12 March 2025 was relieved, and the Reserve Bank of India was directed to ensure that no further debit transactions be made from SBI’s account on this account.
What This Means For Similar Cases
Liability Requires Actual Receipt
Banks and other third parties can be held as deemed defaulters only when they have actually received the dues from the employee or customer. An inoperative account with zero balance negates the prerequisite of receipt, and thus no liability arises under Section 45G(3)(x) of the ESI Act.
Natural Justice Cannot Be Bypassed
Before issuing garnishee or recovery orders against a third party, the authority must provide an opportunity to dispute the factual basis of the alleged liability. Failure to do so constitutes an abuse of process and renders the order liable to be set aside.
Restitution Follows Erroneous Attachment
If a garnishee order is executed on a mistaken premise, the concerned party is entitled to restitution of the amount debited, together with any interest or costs incurred. Courts will look to the actual flow of funds to determine whether liability truly existed.
