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2021 SCC OnLine Kar 12934 : AIR 2021 Kar 155 : (2021) 4 AIR Kant R 186 :
(2021) 6 Kant LJ 608 (DB)

In the High Court of Karnataka*


(BEFORE KRISHNA S. DIXIT AND PRADEEP SINGH YERUR, JJ.)

W.A. No. 100103/2021†


Manne Guru Prasad … Appellant;
Versus
Pavaman Ispat Private Limited, rep. by its Authorised
representative, G. Lakshminarayana Shetty and Others …
Respondents.
And
W.A. No. 100109/2021‡
Shri Ramappa … Appellant;
Versus
Pavaman Ispat Private Limited, rep. by its alleged Managing
Director, Smt. K.P. Vijayalakshmi and Others … Respondents.
Writ Appeal No. 100103/2021 (GM-RES) and Writ Appeal No. 100109/2021(GM-
RES)
Decided on July 13, 2021
Advocates who appeared in this case:
Shri Ashok Harnahali, Sr. Counsel for Shri Mahantesh R. Patil, Adv.
Shri Uday Holla, Sr. Counsel for Shri Suhas B. Sappannavar, Adv. for R1;
Shri S.C. Hiremath, Adv. for R2
Shri K.N. Phanindra, Sr. Counsel for Shri Jagadish Patil & Shri Santosh Malligawad,
Adv.
Shri Uday Holla, Sr. Counsel for Shri Suhas B. Sappannavar, Adv. for R1;
Shri S.C. Hiremath, Adv. for R2
JUDGMENT
1. The appeal in W.A. No. 100103/2021 is by the auction purchaser of the
mortgaged properties that secured the repayment of the loans in question; the
companion appeal in W.A. No. 100109/2021 is by the surety; both these Intra-Court
appeals seek to lay a challenge to the Judgment & Order dated 06.04.2021 rendered
by a learned Single Judge of this Court in borrower's W.P. No. 100312/2021 (GM-RES)
whereby he has been handed relief : in re. the breach of OTS terms : the respondent-
Canara Bank's letter dated 27.01.2021 whereby the OTS offer was withdrawn having
been quashed, a direction has been issued to give effect (to accept) to the OTS offer
dated 22.01.2021 wherein a sum of Rs. 15.20 crore was offered.
2. The contesting respondent borrower having entered caveat/appearance through
it's counsel resists the appeals making submission in justification of the impugned
order and the reasons on which it has been constructed; it is pertinent to mention
here itself that during the course of hearing, the principal borrower, surety & the
auction purchaser were given an option to revive their offers; both the appellants have
come up with much higher offers; the appellant surety came forward with an offer of
Rs. 23 Crore and the auction purchaser revised his offer from Rs. 15,00,52,000/- to
Rs. 25,20,99,999/-; the principal borrower did not avail the opportunity; these
aspects have been discussed by us, infra.
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BRIEF FACTS OF THE CASE:


(a) Under the Term Loan Agreement and Hypothecation Agreement both dated
29.01.2009, the writ petitioner had availed a loan of Rs. 53.60 Crore & a cash
credit facility upto Rs. 3 Crore from the respondent-Canara Bank; the appellant
Shri K. Ramappa was the surety; the loans having bulged to above Rs. 100 crore
now owing to run of time and not been repaid despite demand, the coercive
actions for recovery were resorted to by the bank.
(b) The writ petitioner (hereafter ‘borrower’) vide letter dated 22.04.2017 had
offered to pay Rs. 5 crore by way of One Time Settlement; that was turned
down by the bank by letter dated 15.11.2018; later he revised the OTS offer to
Rs. 11 crore vide letter dated 30.01.2019; this was accompanied by Banker's
Cheques in all for Rs. 20 lakh; the mortgaged properties were sought to be put
to e-auction vide notice dated 21.06.2010 u/s 14(2) of SARFEASI Act, 2002 read
with Rule 8(6) of Security Interest (Enforcement) Rules 2002; fearing this, the
borrower remitted Rs. 4 crore on 22.07.2019 and requested the bank to defer
the e-auction that was scheduled held on 24.07.2019.
(c) After seeing the reluctance of the bank, the borrower further revised his OTS
offer to Rs. 15 crore & 20 lakh; this having impressed the bank, it issued a
letter dated 30.11.2019 accepting the said offer on the condition that the earlier
paid amount of Rs. 4.2 crore being adjusted, the remainder i.e., Rs. 11 crore
should be paid on or before 15.03.2020. In the meanwhile, the Deputy
Commissioner, Ballari District had issued section 14(2) notice dated 17.12.2019;
the bank vide letter dated 24.07.2019 requested the Deputy Commissioner to
withdraw the coercive notice in view of the OTS.
(d) The borrower vide letter dated 17.01.2020 had requested the bank to accord
consent for assigning the outstanding debt (Rs. 107,000,000/-) to the Asset
Reconstruction and Securitization Company; other back up actions were also
being worked out, is the version of the borrower before us; to this, the bank did
agree of course subject to the rider of making the entire OTS payment on or
before 15.03.2020;
(e) The above condition of requiring the payment of making entire OTS amount
within the agreed time, having not been adhered to, the bank withdrew the OTS
facility vide letter dated 27.01.2021; this was challenged by the borrower in the
subject writ petition in the first week of February-2021; obviously the appellants
were not parties; the learned Single Judge by the interim order dated
24.03.2021 had restrained confirmation of then contemplated auction;
thereafter the writ petition came to be allowed on 06.04.2021 and the relief as
mentioned above has been accorded; hence, these appeals, with leave.
3. Having heard the learned counsel for the parties and having perused the papers,
we are inclined to accord leave and grant indulgence in the matter as under and for
the following reasons:
(I) A BRIEF LEGAL POSITION AS TO OTS SCHEMES:
(i) The field of banking business is occupied by several legislations and the
Rules/Regulations promulgated thereunder; the Reserve Bank of India Act,
1934, the Banking Regulation Act, 1949, The Recovery of Debts and
Bankruptcy Act 1993. SARFAESI Act, 2002, are a few to name; the RBI is a
watchdog of finance & economy of the nation, apart from being the prime
banking institution of the country; it is conferred with the authority of issuing
binding directions inter alia to the Public Sector Banks vide Central Bank of
India v. Ravindra (2002) 1 SCC 367; the One Time Settlement Schemes
obtaining in the Banks & Financial Institutions are governed by the Guidelines
issued by the RBI under Sections 21 & 35A of the 1949 Act; the Banks are
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bound by the same under Section 21(3).


(ii) These OTS Schemes having statutory force require the prescription of time
lines for making the payments as agreed; time schedules which are stipulated
consensually by the bank & the borrower are the essential terms of bargain
and ordinarily cannot be altered, subject to all just exceptions; normally, OTS
facility being a statutory concession, and eventually result in some loss of
public money; the borrowers are bound to honour the agreed terms OTS and
the breach thereof entitles the Banks to rescind the facility, and recall the
entire loan too; the schemes of the kind are intended to get back the debts
(minus the concession granted) to the lender institutions swiftly & without
much complication; loanees are also benefited to the extent of differential of
the amount offered in the OTS and the amount otherwise actually payable by
them.
(iii) There is a duty cast on the banks and financial institutions to ensure that the
operation of OTS schemes would not cause avoidable loss of public money and
therefore the concessions given in the form are reasonable; whilst operating
the OTS Schemes, they have to practice principles of non-discrimination,
fairness & reasonableness, vide Sardar Associates v. Punjab & Sind Bank,
(2009) 8 SCC 257; in adjudging the validity of coercive actions such as
auctioning taken by the Banks for recovering the loans on the failure of the
borrower to adhere to OTS terms, the dominant consideration is securing of
best price, vide KSIID Corporation Ltd. v. Cavalet India Limited, (2005) 4 SCC
456; the actions of the bank falling short of these standards obtaining in the
realm, even in contractual matters of the kind, may run the risk of
invalidation.
(iv) The loan transactions entered into between the Bank & borrower are
essentially a matter of contract, is undisputable; even then, the extant RBI
Guidelines under which the OTS Schemes have been evolved, regulate the
repayment of loans as per the terms agreed; the Public Sector Banks being
the instrumentalities of ‘State’ under Article 12 of the Constitution, their
actions/inactions even when filled with contractual elements, are liable to
suffer a restrictive judicial scrutiny under Articles 226 & 227, depending upon
the facts & circumstances of each case, is also true.
(II) FOUNDATIONAL FACTS EMERGING FROM RECORD:
(i) The respondent Canara Bank is the lender; the writ petitioner, who happens
to be a respondent in the appeals, is the principal borrower; appellant Shri K.
Ramappa is the surety for the term loan; repayment of loan is secured by
mortgage of immovable properties; borrower's first OTS proposal dated
22.04.2017 in a sum of Rs. 5 crore was later upwardly revised to Rs. 11
crore on 30.01.2019; Bank having not agreed; the offer was upwardly
revised to Rs. 15.20 crore on 21.11.2019; borrower had already paid Rs. 4.2
crore; all this happened after the bank resorted to coercive acts of recovery;
(ii) the lender bank vide letter dated 30.11.2019, had accepted the latest OTS
offer of Rs. 15.20 Crore, is true; however, it had specifically stipulated the
timeline as under:
“iv. In the event of non-compliance with any of the terms of the sanction by you,
including payment of the OTS amount as per the stipulated schedule, the OTS
sanction stands automatically withdrawn without assigning any reasons for the
same and the Bank reserves the right to proceed as it deems fit including
proceeding legally for recovery of the entire dues.”
It cannot be disputed that the timelines mandatorily prescribed for making the
payments in terms of OTS were not adhered to, is not in dispute; the borrower had
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failed to remit the agreed amount within the stipulated period i.e. on or before
15.03.2020.
(iii) The borrower vide letter dated 13.03.2020 had sought for elongation of
stipulated period of payment up to 31.05.2020; the bank vide letter dated
30.05.2020 rescinded the OTS facility, the agreed amount not reaching its
hands in terms of OTS. The borrower vide representation dated 26.06.2020
requested the bank to withdraw the aforesaid Rescinding Letter dated
30.05.2020 stating that minimum 45 days were required for assignment of
debt and that he would pay interest on the delayed payment, as well; the
bank declined and went ahead with the coercive acts of recovery since the
conduct of the borrower did not generate confidence.
(III) RECOVERY OF DEBTS, WRIT JURISDICTION AND APEX COURT
DECISION IN CAVALET INDIA CASE:
(i) The vehement contention of learned Sr. Adv. Mr. Uday Holla appearing for the
borrower that already Rs. 4.20 crore was paid to the bank, and rest of the
money was being organized by intended assignment of debt done with the
consent of the lender bank, may be true; however, the bank had specifically
made it clear whilst granting consent for the assignment of debt that in no
circumstance the timeline for payment in terms of OTS would be elongated;
the borrower having acquiesced in the same now cannot turn around and
contend to the contrary; the equity which he seeks at the hands of this Court
estopps him from blowing hot and cold.
(ii) The OTS Schemes are in the nature of an apology to the basic norm on which
the law of contract is founded : pacta sunt servanda (ascribed to Hugo
Grotius, a 17th Century Dutch Jurist) which means “do, as agreed”; the norm
requires that the debtor should repay the debt as per the terms of loan
agreement; these schemes are by their very nature & effect a concession that
mainly benefit the defaulting borrowers; not the ideals of social contract, but
the realities gained through the experience of life dictate formation of such
policies; a person who avails the concession, cannot later turn around and
seek alteration of the terms subject to which such concession was granted in
accordance with the statutory schemes like the OTS; an argument to the
contrary, subject to all just exceptions, would be unconscionable : ordinarily,
the Writ Courts do not grant relief where the grounds for prayer are tainted
with unconscionability.
(iii) In matters between the banker & borrower, a Writ Court has no much say
except in two situations : where there is a statutory violation on the part of
the bank/financial institution, or where the bank acts unfairly/unreasonably;
Courts exercising constitutional jurisdiction u/A 226 do not sit as Appellate
Authorities over the acts & deeds of the bank and seek to correct them; even
the doctrine of fairness/reasonableness does not convert the Writ Courts into
appellate authorities over administrative decisions concerning the banking
business; unless the action of the bank is apparency malafide, even a wrong
decision taken by it cannot be interfered.
(iv) It is not for the Court or a third party to substitute it's decision howsoever
prudent or business like it may be, for the decision of the bank; in commercial
matters, the Courts do not risk their judgments for the judgments of the
bodies to which that task is assigned; a Public Sector Bank or a Financial
Institution cannot wait indefinitely to recover its dues; the fairness required of
the bank cannot be carried to the extent of disabling it from recovering what
is due; in matters of loan transactions, fairness cannot be a one-way street;
both the bank & the borrower have to be equally fair to each other; nearly,
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thus said the Apex Court in Cavalet India (Supra); these observations equally
apply to the appeals at our hands.
(v) As already mentioned above, the OTS offers have been made by the borrower
thrice; he was accorded consent by the Bank to the assignment of loan to the
company in question subject to the rider that the timeline for payment in
terms of OTS would not be altered; the loan transaction essentially being a
matter of contract, the OTS-like-arrangement is only a novatio & a new
arrangement is brought about by the bargain of parties namely the lender, the
borrower & the surety, done across the table; that being the position,
ordinarily, the Courts cannot alter the terms of contract even when it has
statutory elements; the time within which the remittance of the amount has
to be made is an essential term of OTS, disentitles the defaulting borrower
from invoking the writ jurisdiction; the Division Bench decision in Rama
Industries v. the Assistant General Manager, AIR 2006 P&H 95, strengthens
this view of ours; we do not subscribe to the view taken by a learned Single
Judge of this Court in W.P. No. 3749/2007 (GM-DRT) between Kemtrode
Private Ltd. v. The Recovery Officer, DRT, disposed of on 01.08.2008.
(vi) There is yet another reason for not agreeing with the passionate submission
of Mr. Holla : granting relief to the defaulting borrower has to be consistent
with the statutory scheme of OTS; the Writ Courts cannot ask the Bank to do
something that offends the intent & content of such schemes whereunder
transactions have been consciously struck between the parties; after all,
Courts cannot rewrite the contract between the parties in the absence of
statutory enablement; secondly, the concession if shown by the Writ Courts to
a defaulting borrower who has availed the benefit under a statutory OTS
Scheme, would run the risk of being pressed into by unscrupulous debtors as
a precedent to defer, if not defeat, the banker's actions for recovery of
outstanding loans; this is undesirable; it is not that, in extraordinary cases
too, a scrupulous litigant cannot be granted relief In writ jurisdiction;
however, no such case is made out before us.
(IV) LOCUS STANDI OF SURETY TO MAINTAIN APPEAL:
(i) The liability of the surety is co-extensive with that of the principal borrower,
edicts Section 133 of the Indian Contract Act, 1872; such liability is co-
terminus as well; Mr. Holla is right in contending that once the OTS payment
is made, the surety too is discharged; when the law of contract was enacted
during the Colonial Regime about a century & half ago, the proposition was as
simple as it was stated; but, now the matter has become a bit complex; some
implications ensue from the intervening legislation namely, the Credit
Information Companies (Regulation) Act, 2005; the loan transaction
culminating in the availment of OTS facility and its subsequent rescinding by
the lender bank arguably constitute a ‘credit information’ as defined u/s 2(d)
of the Act; the guarantor of loan answers the inclusive definition of ‘client’
given u/s 2(c); similarly the borrower fits in Section 2(b) and the banker, in
the definition of ‘credit institution’ given u/s 2(f); the surety arguably suffers
an adverse ‘credit scoring’ as defined u/s 2(g); thus, the surety has some
legal stake in the OTS deals, more particularly when the letter containing the
OTS offer was officially marked to him, as well.
(ii) However, the above having been said, there is no contract between the
borrower and the surety for protecting the arguable ‘credit scoring’ of the
later; a surety is entitled to the protection of credit scoring so that he will not
be disfavoured when he goes to other banks for borrowing, is understandable;
having this in mind, presumably, the surety had made the representation
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alarming the bank that the auction of mortgaged property would fetch more
money than the OTS offer; he had moved the Writ Court too; he himself has
come up with an offer of Rs. 23 crore before us; this is about Rs. 8 crore more
than the last OTS offer; however a caveat needs to be entered : the right of
contribution which the surety may have qua the borrower may not exceed the
value of the said OTS offer; we hasten to add that we have not expressed any
opinion on these aspects here, the same not falling within the focal point of
our consideration.
(iii) The records disclose that the appellant surety had vide representation dated
12.02.2019 objected to the bank casually accepting the OTS offers to the
detriment of public money; he had approached the Writ Court in W.P. No.
109279/2019 which came to be disposed of on the very same day vide order
dated 06.04.2021 itself, directing the bank to consider the said
representation; both the principal borrower and the lender banks being parties
eo nominee to the said writ petition were represented by their advocates too;
a copy of this order is now placed on record; this itself invests sufficient locus
standii in him.
(iv) During the course of hearing of these appeals, the appellant surety came
forward with the ‘Memo of Undertaking’ dated 07.07.2021 which reads as
under:
“The undersigned counsel for the appellant herein most humbly submits that,
pursuant to the inquiry of this Hon'ble Court the appellant Sri. K. Ramappa, that
the appellant is ready to pay Rs. 23,00,00,000/- (Rupees Twenty Three Crore only)
Towards the one time settlement of the Loan. The appellant herein undertakes to
pay the same within 30 days from the date of this Hon'ble Court…”
It is not that the borrower was not aware of surety's representation dated
12.02.2019 in which he had stated inter alia about the subject mortgaged property
being capable of fetching the auction price much higher than the sums stated in the
OTS offers; after all the surety has also a stake in the loan transaction and he
cannot escape the liability; that being the position, the principal borrower in all
fairness ought to have arraigned him as a respondent to the writ petition; that
having not been done, he is not justified in opposing surety's request for the grant
of leave to file the writ appeals; added to this, the borrower did not avail the
opportunity of revising his OTS offer; therefore, we granted the leave as sought for
and heard the appeals on merits.
(V) LOCUS STANPII OF THE AUCTION PURCHASER:
During the pendency of the writ petition, the learned Single Judge vide ad
interim order dated 24.03.2021 had, in a sense, permitted auctioning of the
property by restraining the confirmation of contemplated auction sale; auction
purchaser had also sought for his impleadment in the writ petition; the e-auction
was held on 08.04.2021 (presumably being unaware of the disposal of the writ
petition on 06.04.2021) and the highest bid of Rs. 15,00,52,000/- of the
appellant in Writ Appeal No. 100103/2021 came to be accepted; he has also paid
Rs. 78 lakh on 05.04.2021 being the pre-deposit for participation in the auction;
he has also remitted Rs. 2,97,13,000/- on 09.04.2021; that apart, he has now
come forward with a very high offer of Rs. 25,20,99,999/-; this is much higher
than the revised OTS offer of the borrower i.e., Rs. 15.20,00,000/-; the borrower
despite giving the same opportunity as was given to the appellants herein, declined
to improve his offer figure; when the public money is involved, a Writ Court has to
scrutinize the things with objectivity and ensure that no loss of such money takes
place. Therefore, leave is granted for maintaining the appeal.
VI. LOAN TRANSACTION; BREACH OF OTS; DEBTOR'S EQUITY ARGUMENTS &
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JUDICIAL INTERVENTION:
(i) The learned Single Judge has granted relief to the borrower on the doctrine of
promissory estoppel; this doctrine has several shades of meanings &
limitations; it cannot be operated as a thumb rule; several civilized
jurisdictions treat promissory estoppel as an offshoot of equity; as already
mentioned above, the equity & fairness required of a Public Sector Banks
cannot be carried too far and to an unrealistic extent of disabling or delaying
the very recovery of the public money which they have lent; while not
insisting upon the borrower to honour the OTS commitment undertaken by
him; the Banks alone cannot be shackled hand & foot by invoking the doctrine
of promissory estoppel.
(ii) After all, these equity-born-doctrines are not a one-way traffic; equity seeker
himself has a duty to be equitable to the other side; this is how the Apex
Court alerted the writ courts in Cavalet India case (supra); despite grating
opportunity the borrower did not come forward with the revised offer, whereas
the appellants did; where the public money is involved, a Writ Court has to
assume a realistic role of a trustee in ensuring that the public money is not
lost in the conundrums of constitutional contentions; Courts have to have a
pragmatic approach when matters touching economics are brought before
them for adjudication.
(VII) THE SUSPICIOUS CONDUCT OF BANK OFFICIALS:
(i) As a constitutional Court, we will be failing in our duty, if we do not say a few
words about the way the bank authorities, that be, treated the matter with a
culpable casualness if not in connivance; the term loan of January 2009
coupled with the cash-credit facility runs into more than Rs. 100 crore rupees,
more than a decade having lapsed; in April 2017 the OTS offer of Rs. 5 crore
was made; bank turned it down only in November 2018; in January 2019, Rs.
11 crore offer was made; this was later revised to Rs. 15.20 crore in
November 2019; borrowers writ petition was allowed on 06.04.2021; the
same day surety's writ petition was also disposed off directing the bank to
consider his representation wherein he has specifically mentioned about the
possibility of fetching a much higher auction money;
(ii) Strangely the mortgaged property was auctioned on 08.04.2021; the highest
bid of Rs. 150,052,000/- of the appellant auction purchaser came to be
accepted; the very same buyer has revised the bid to Rs. 252,099,999/-
before us; even the surety has come up with an offer of Rs. 23 crore; the OTS
deal struck between the bank and the borrower in a small sum of Rs.
150,052,000/- raises a strong suspicion as to there being some ‘shady deal’
with the connivance of authorities of the bank; this needs to be investigated
into by the Reserve Bank; matter merits attention of the Comptroller &
Auditor General of India, as well.
In the above circumstances, we make the following:
ORDER
(i) Both these appeals succeed in part; the impugned Judgment & Order made
by the learned Single Judge are set at naught; Writ Petition No. 100312/2021
of the borrower, is dismissed;
(ii) The lender bank shall accept the revised offer of the appellant auction-
purchaser in a sum of Rs. 25,20,99,999/- (Rupees twenty five crore, twenty
lakh, ninety nine thousand, nine hundred & ninety nine) only; he shall remit
the remainder of the said amount within a period of six weeks failing which,
the amount which he has already deposited shall stand adjusted to the credit
of the principal borrower;
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(iii) If what is directed in the immediately preceding paragraph (ii) above, does
not materialize because of the fault attributable to the auction-purchaser, then
the offer of the surety appellant Mr. K. Ramappa in a sum of Rs.
23,00,00,000/- (Rupees twenty three crore) only shall be accepted; he shall
remit 50% of this amount within four weeks and the remainder within next
four weeks; if he fails to adhere to the undertaking given to this Court, he
shall pay to the Bank on account of the borrower a sum of Rs. 2.30 crore
(Rupees two crore thirty lakh) only by way of forfeiture within next two weeks;
the lender bank may recover this along with interest at the rate of 18% p.a.
thereon for the delayed period;
(iv) If what is directed in the immediately preceding paragraph (iii) above does
not materialize because of the fault attributable to the appellant surety, the
bank shall accept the revised OTS offer of the principal borrower M/s. Pavaman
ISPAT Private Ltd. made in a sum of Rs. 15,20,00,000/- (Rupees fifteen crore
& twenty lakh) only; the balance of this amount shall be remitted by the
borrower within a period of six weeks following the failure of the offer of the
appellant-surety, as mentioned in the preceding paragraph No.(ii) above;
interest too is chargeable.
Costs made easy.
Registry to mark a copy of this judgment to the RBI Governor and Comptroller &
Auditor General of India, New Delhi, forthwith.
———
* Dharwad Bench
† This Writ Appeal is filed under Section 4 of the Karnataka High Court Act, 1961, praying this Hon'ble Court to
set aside the order dated 06.04.2021, passed by the learned Single Judge of this Hon'ble Court in matter bearing
W.P. No. 100312/2021 and consequently, dismiss the said writ petition bearing W.P. No. 100312/2021.
‡ This Writ Appeal is filed under Section 4 of the Karnataka High Court Act, 1961, praying this Hon'ble Court to
call for the records in W.P. No. 100312/2021 and to set aside the order dated 06.04.2021, passed in W.P. No.
100312/2021, by the learned Single Judge of this Hon'ble Court in the interest of justice & equity.

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