A bank cannot be deemed a defaulter where the customer’s account was already inoperative with a zero balance.

Pascas Associate, respondent no. 3, maintained Current Account No. 3296298908 with State Bank of India’s C-Zone, Durgapur Branch. The account had a nil balance from 31 December 2020 and was classified as “inoperative”.

ESIC initiated recovery proceedings against Pascas Associate for alleged arrears under the Employees’ State Insurance Act, 1948, including a prohibitory order dated 25 June 2024 and a show-cause notice dated 12 November 2024.

By order dated 14 February 2025, the Recovery Officer treated SBI as a “deemed defaulter” under Section 45G(3)(x) of the ESI Act, alleging that SBI had failed to comply with the prohibitory order and had permitted withdrawals from Pascas Associate’s account.

Thereafter, on 11 March 2025, a garnishee order was issued to the Reserve Bank of India, directing it to remit ₹90,84,887, with further interest, from amounts allegedly payable to SBI.

During the proceedings, RBI deducted the amount, but subsequently credited it back to SBI’s account.

SBI challenged both orders on the ground that no amount was due from it to Pascas Associate and that the account had been inoperative with a zero balance since 2020.

1. Whether SBI could be declared a “deemed defaulter” for allegedly failing to comply with the prohibitory order when Pascas Associate’s account had been inoperative and had a nil balance since 31 December 2020.

2. Whether the garnishee order issued against the RBI for recovery of Pascas Associate’s alleged ESI dues from SBI was legally sustainable.

3. Whether the orders dated 14 February 2025 and 11 March 2025 were liable to be quashed as contrary to law and an abuse of the process of law.

The Court applied Sections 45A, 45G and 45H of the Employees’ State Insurance Act, 1948, concerning determination and recovery of ESI contributions, prohibitory orders and recovery from third parties or garnishees.

Section 45G permits recovery from a person who owes money to the defaulter or is likely to owe money to the defaulter, while Section 45H incorporates the procedure under the Second and Third Schedules to the Income-tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962.

The governing principle applied was that a bank can be required to remit money belonging or payable to the defaulter only where such money is actually held by, or due from, the bank; a bank cannot be treated as a deemed defaulter merely because it maintains an inoperative account with no balance or available funds.

The Court found that the account of Pascas Associate had remained inoperative and had a zero balance since 31 December 2020, well before the prohibitory order dated 25 June 2024.

Consequently, SBI had no money belonging to Pascas Associate that could be transferred to ESIC and no amount was due from SBI to the account-holder within the meaning of the recovery provisions.

The allegation that SBI had released funds in breach of the prohibitory order was unsupported by proof.

Since the statutory basis for treating SBI as a deemed defaulter was absent, the consequential garnishee order addressed to RBI—premised on money allegedly due from RBI to SBI—was also unsustainable.

The Court therefore held that the Recovery Officer had acted erroneously and had abused the recovery process.

The garnishee order issued to RBI was consequently invalid. The orders dated 14 February 2025 and 11 March 2025 were quashed and set aside, and WPA 6508 of 2025 was allowed.

Connected applications were disposed of and any interim order was vacated.