Dehi HC says banks can't mediate in client disputes

The Delhi High Court has ruled that banks do not have the right to act as arbitrators in case of internal disputes with their client firms.

The ruling came in the case of TCIL Bellsouth and the Union Bank of India and others wherein the bank had suspended operations of the company's account following a dispute between two shareholders. The company had challenged the bank's decision.

In the judgement, justice Vikramjit Sen said, "The bank is not expected to act as a judicial authority and decide which of the two parties was truly a representative of TCIL Bellsouth."

"The bank is expected to look into the Articles of Association and the board resolution passed from time to time for determining which persons have authority to operate the petitioner's bank accounts,"

TCIL, a government company, is the biggest shareholder in TCIL Bellsouth. After the resignation of the CEO of the company, TCIL Bellsouth's board had passed a resolution delegating the CEO's powers to one of its directors (SN Singh).

TCIL Bellsouth moved the court when the bank stopped operations of its account stating that TCIL has taken exception to appointment of SN Singh as stand-in CEO.

Petitioner's counsel Tarkeshwar Nath had submitted that TCIL Bellsouth's board had delegated powers of the CEO to Singh through a due process and the action was in conformity with its Articles of Association.

The bank could not act unilaterally, relying solely on the advice of one of the shareholders, Nath had contended. Sen directed the bank to allow operations of the company's account, as far as they are "in consonance with Articles of Association and board resolution.

"The court also clarified that at present Singh shall "be vested with all powers hitherto enjoyed by the petitioner and/or Sudhir Saxena (former CEO) so far as bank operations are concerned."

"The court also issued notice to the bank and Ministry of Finance through Secretary (banking) asking them as to why the petition should not be admitted. The court has directed them to file their replies within four weeks and has fixed October 25 for further hearing.