State Instrumentalities Cannot Supplement Reasons For Withholding Public Money Via Affidavits Years Later: Calcutta High Court

"The validity of an impugned order must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise; any reason supplemented through a subsequent affidavit is not sustainable." Calcutta High Court, in a significant ruling dated 30 September 2026, held that a State instrumentality cannot unilaterally withhold deposits for decades and subsequently attempt to justify such retention through unsubstantiated allegations introduced for the first time in an affidavit-in-opposition.

 Justice Ajay Kumar Gupta, presiding over the matter, affirmed that the failure to record or communicate reasons for withholding funds at the time of the cause of action precludes the respondent from constructing a fresh defense through affidavits years later.

The Petitioner, Golden Multi Services Club Ltd., had entered into two Memorandums of Understanding (MoUs) with the National Insurance Company Ltd. in 2004 for Group Mediclaim and Personal Accident insurance. Following the termination of these MoUs in December 2004, the Petitioner sought the refund of its security deposit of Rs. 1 Crore and an unadjusted cash deposit balance of Rs. 41,45,696. The Respondent failed to refund the amount, leading the Petitioner to approach the High Court in 2006, alleging that the funds were being illegally retained without any justification or evidence of financial default.

The primary question before the court was whether the writ petition is maintainable for the recovery of money in a contractual dispute involving an allegation of arbitrary retention by a State entity. The court was further called upon to determine if the Respondent could justify the withholding of these funds based on allegations of financial irregularity and potential statutory violations raised for the first time in its affidavit-in-opposition, filed years after the cause of action arose.

Maintainability of Writ Petition

The Court rejected the Respondent's contention that the matter involved disputed questions of fact only suitable for a civil suit. Relying on the Supreme Court’s ratio in ABL International Ltd. v. Export Credit Guarantee Corporation of India Ltd., the court observed that a writ petition is maintainable to rectify the arbitrary and mala fide actions of the State even in contractual matters, provided the essential facts rest on documents rather than complex factual disputes.

Doctrine of Administrative Record

The court underscored that the Respondent failed to produce any contemporaneous documents justifying the withholding of the deposits. Applying the principle established in Mohinder Singh Gill v. Chief Election Commissioner, the court held that an order must stand or fall on the reasons cited at the time it was made. An authority cannot supplement fresh reasons via subsequent affidavits to fill gaps in its initial justification.

"The respondents' defences of statutory violation, fraudulently engineered claims, and consequent lien/set-off being unsubstantiated by any contemporaneous document or proceeding, for the reasons recorded hereinabove."

Absence of Financial Default

The court examined the specific clauses of the MoUs, which permitted the insurer to adjust the security deposit only in the event of a "financial default" by the Petitioner. It was observed that no such default was ever quantified or formally communicated by the insurance company during the two decades the litigation remained pending. The court characterized the retention of Rs. 1,41,45,696 as illegal, arbitrary, and a violation of Article 14 and 300A of the Constitution.

"This Court also does not find any contemporaneous documents from the side of the Respondents regarding adjustments towards General/security deposit of Rs. 1 Crore and/or unadjusted Cash Deposit Balance amount totalling Rs. 41,45,696/-."

Allowing the writ petition, the court directed the National Insurance Company Ltd. to refund the security deposit of Rs. 1 Crore without interest, as per the original terms of the MoU. Furthermore, the court ordered the refund of the unadjusted cash deposit balance of Rs. 41,45,696, along with simple interest at 7% per annum. Failure to comply within one month will attract an enhanced interest rate of 9% per annum until actual payment is realized.

Date of Decision: 30 September 2026