Borrowers Cannot Force Banks to Disclose OTS Benchmarks or Accept Settlement: Bombay High Court Under SARFAESI/IBC - 2025-10-17

Commercial Wisdom Rules: No Writ of Mandamus to Force OTS

In a significant ruling for banking institutions and credit recovery, the Bombay High Court has affirmed that borrowers cannot demand the disclosure of internal bank "benchmarks" for One Time Settlement (OTS) schemes, nor can they compel banks to accept such settlements as a matter of right. A Division Bench comprising Justice Anil S. Kilor and Justice Rajnish R. Vyas dismissed a writ petition filed by a borrower who challenged the rejection of their settlement proposals, reinforcing the sanctity of contract and the primacy of the bank's commercial discretion.

The Backdrop: From Loans to Litigation

The dispute arose from a ₹62 crore term loan granted in 2011 to N. Kumar Housing and Infrastructures, with the petitioner serving as a Director and shareholder. Following default, the loan account was classified as a Non-Performing Asset (NPA) in 2017.

When the lender—Indian Bank (erstwhile Allahabad Bank)—initiated recovery measures under the SARFAESI Act and subsequently filed an insolvency application under the Insolvency and Bankruptcy Code (IBC) before the NCLT, the petitioner approached the High Court. The petitioner argued that the bank was acting like a "private money lender" by refusing to disclose the objective benchmarks used to weigh OTS proposals, claiming this was a violation of the Reserve Bank of India’s guidelines.

The Argument: Transparency vs. Business Prudence

The petitioner contended that she entertained a "legitimate expectation" that the bank, as a state-entitled actor, would operate with fairness and transparency. They sought a directive for the RBI to perform an audit of the bank’s accounts and argued that the bank’s vague rejections of settlement offers were arbitrary.

Conversely, the Bank stood firm, asserting that a loan agreement is a formal contract. They argued that public money is at stake, and forcing a bank to accept an OTS that does not meet its internal recovery standards would effectively rewrite the terms of an existing agreement. The Bank emphasized that the court’s Article 226 powers should not be used to interfere with the commercial wisdom of a creditor, especially when legal avenues like the Debts Recovery Tribunal were already available.

Legal Analysis: The Limits of Judicial Intervention

The Court scrutinized the doctrine of "legitimate expectation," finding it inapplicable here. The judges noted that while the doctrine is rooted in fairness, fairness does not equate to a borrower's right to deviate from repayment obligations.

Citing the Supreme Court’s decision in Bijnor Urban Cooperative Bank Ltd vs. Meenal Agrawal , the High Court clarified that no borrower can claim the benefit of an OTS as a matter of right. Distinguishing the case from other precedents like Vidarbha Industries Power Limited , the Court reasoned that because the borrower was solvent and the bank possessed sufficient security to mitigate its losses, it was under no obligation to accept a diminished return.

Key Observations

The judgment offers several definitive takeaways regarding the nature of banking contracts:

• On the sanctity of contracts: "Directing the Bank to reschedule the payment under OTS would tantamount to modification of the contract which can be done by mutual consent under Section 62 of the Indian Contract Act."
• On Bank discretion: "If the bank/financial institution is of the opinion that the loanee has the capacity to make the payment and/or that the bank/financial institution is able to recover the entire loan amount... the bank would be justified in refusing to grant the benefit under the OTS Scheme."
• On Judicial Restraint: "Establishing that the grant of benefit under the OTS is always subject to the eligibility criteria... such a decision should be left to the commercial wisdom of the bank whose amount is involved."

The Verdict: A Clear Message for Borrowers

The High Court ultimately dismissed the petition, stating that exercising writ jurisdiction to second-guess a creditor’s decision-making process would not be in the interest of justice. The court's order reinforces that legal frameworks like the SARFAESI Act and the IBC provide the necessary infrastructure for debt recovery, and that courts should not be used as platforms to negotiate or stall legitimate repayment obligations.

While the court permitted a temporary extension of a pre-existing stay for six weeks, it left no room for doubt: the commercial management of public debt rests with the banks, not the judiciary. This decision significantly limits the ability of defaulting borrowers to use "lack of transparency" in OTS negotiations as a tactical delay mechanism.