Borrower cannot claim one-time settlement as a matter of right: Bombay High Court

The Nagpur Bench of the Bombay High Court has held that a borrower or guarantor cannot seek a One-Time Settlement (OTS) to settle their debts as a matter of right, and that courts cannot compel banks to disclose their internal benchmarks for deciding on such matters or force banks to accept such proposals [Archana Wani Vs Bank of India].

The Court was hearing a writ petition filed by Archana Wani, a director and shareholder of N Kumar Housing and Infrastructure Pvt. Ltd., who had challenged Indian Bank’s rejection of her OTS proposal to settle certain loans in respect of which the company was the guarantor.

Dismissing Wani's plea, a Division Bench of Justices Anil S Kilor and Rajnish R Vyas observed,

“Just because the borrower has submitted the proposal for OTS which from time to time is taken into consideration and rejected by giving reason that it does not match benchmark, will not create semblance of right in favour of the borrower ... As rightly submitted by the learned counsel for the bank, it deals with public money and therefore, asking it to settle the account by accepting OTS would not be in the interest of public at large."

The Bench reiterated that such matters should be left to the commercial wisdom of banks.

"If the bank/financial institution is of opinion that loanee has the capacity to make the payment or bank is able to recover the entire loan amount, even by auctioning the mortgaged property, the bank would be justified in refusing to grant benefit under the OTS scheme, and ultimately, such decision should be left to the commercial wisdom of the bank ... it is always to be presumed that bank shall take a prudent decision whether to grant the benefit under the OTS scheme, having regard to the public interest involved, we do not intend to interfere," it held in the October 17 ruling.

By way of background, the Indian Bank (earlier Allahabad Bank) had in 2011 sanctioned a ₹62-crore term loan to Poonam Resorts Ltd. for the construction of a club-cum-resort project in Nagpur. N Kumar Housing and Infrastructure stood as guarantor and mortgaged its property to secure the loan.

When the borrower defaulted, the loan account was declared a non-performing asset (NPA) in March 2017. The bank proceeded under Sections 13(2) and 13(4) of the SARFAESI Act, and later filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 before the NCLT, Mumbai.

Wani alleged that the bank was acting “like a private moneylender” by rejecting her OTS offers without transparency or disclosure of the benchmark applied. She sought court directions to compel the bank to reveal the basis of its decision-making and to have an independent scrutiny conducted by the Reserve Bank of India (RBI).

The Bench framed a central issue as whether a borrower or guarantor can compel a bank to disclose its OTS benchmarks or accept a settlement proposal.

The Court noted that no specific OTS policy had been produced to show that such a scheme was in force or that the bank was bound to disclose its parameters. The Court found no arbitrariness in the bank’s conduct, observing that OTS decisions fell squarely within its commercial discretion.

The Bench also rejected the an argument that the borrower's legitimate expectation was flouted in this case, noting the absence of any RBI-mandated OTS scheme or consistent past practice to justify such a claim.

Holding that exercising writ jurisdiction in this case would not be in the interest of justice, the Court dismissed the petition.

The petitioner (Wani) was represented by Senior Advocate Devendra Chauhan, assisted by Advocates Chaitanya Dhruv and Parth Malviya

Indian Bank was represented by Advocates AT Purohit with TY Sharif

RBI was represented by Advocate SN Kumar

Poonam Resorts Ltd was represented by Senior Advocate Akshay Naik with Advocate Rohan Deo

The IRP for the N Kumar Housing and Infrastructure was represented by Advocate CS Dhore.

[Read Judgment]