Borrowers Have No Legal Right to Compel Bank for One Time Settlement: Bombay High Court - 2025-10-17

Commercial Wisdom Prevails: Bombay HC Denies Plea to Compel Bank OTS

In a significant ruling for banking institutions managing non-performing assets, the Bombay High Court at Nagpur has reaffirmed the autonomy of banks in financial restructuring. The bench, comprising Justices Anil S. Kilor and Rajnish R. Vyas, dismissed a writ petition that sought to compel a lender to accept a One Time Settlement (OTS) proposal and mandate the disclosure of internal "benchmarks."

The Backdrop: A Loan Gone Sour

The dispute stemmed from a term loan of Rs. 62 crores sanctioned in 2011 to N. Kumar Housing and Infrastructures for a resort project. Following defaults in repayment, the account was classified as a Non-Performing Asset (NPA) in 2017.

Since then, the bank initiated recovery proceedings under both the SARFAESI Act and the Insolvency and Bankruptcy Code (IBC), 2016. In parallel, the petitioner, a director of the borrowing company, approached the High Court under Article 226 of the Constitution, arguing that the bank was acting arbitrarily in rejecting various OTS proposals and failing to disclose the parameters determining settlement eligibility.

The Arguments: Fairness vs. Contractual Obligation

The petitioner contended that the bank was functioning like an opaque private moneylender, ignoring Reserve Bank of India (RBI) guidelines. They argued for the court to intervene by directing the bank to provide transparent benchmarks for settlement.

Conversely, the Respondent Bank maintained that the underlying loan agreement is a commercial contract. They argued that public funds are at stake and the bank’s decision to pursue recovery through litigation is a matter of commercial wisdom. Furthermore, the bank asserted that since no specific policy was violated, the court should not exercise its extraordinary jurisdiction to rewrite the terms of a freely entered contract.

Legal Analysis: The Limits of Judicial Mandamus

The court clarified that the doctrine of "legitimate expectation" is rooted in fairness, which, in the context of banking, primarily implies the timely repayment of debts. The court rejected the notion that a borrower can claim the benefit of an OTS as a matter of right.

Referencing the Supreme Court mandate in Bijnor Urban Cooperative Bank Ltd. vs. Meenal Agrawal , the High Court emphasized that if a bank determines that a borrower has the capacity to pay or that recovery is possible through the sale of secured assets, a forced settlement would only reward dishonest financial conduct.

Key Observations

The judgment features several critical passages defining the scope of judicial interference in debt recovery:

• "It is crystal clear that issuing writ of mandamus under Article 226 of Constitution, would not in the interest of justice by directing the bank to consider the benefit of OTS to the borrower –guarantor."
• "Asking the creditor / bank to settle the amount as per OTS proposal would amount to rewriting terms and conditions of contract."
• "Ultimately, such a decision should be left to the commercial wisdom of the bank whose amount is involved and it is always to be presumed that the financial institution/bank shall take a prudent decision."
• "The doctrine of legitimate expectation is rooted in fairness. The fairness would obviously mean repayment of outstanding amount within the period agreed."

Final Verdict: A Hands-Off Approach

Dismissing the petition, the court maintained that it cannot, and should not, stand in the way of statutory recovery proceedings initiated under the SARFAESI Act or the IBC. The ruling serves as a strong precedent: borrowers cannot use the writ jurisdiction to escape contractual obligations or to dictate terms of settlement to financial institutions.

While the court granted a six-week extension of the existing interim protection to allow the parties breathing room, it made it clear that the stay would automatically vacate, effectively signaling that the legal doors for stalling legitimate debt recovery are firmly closing.