Failure to Pay Upfront Deposit Under OTS Scheme Justifies Rejection, Even if Not Stated in Order: Supreme Court - 2025-09-17

Supreme Court Upholds Bank's Rejection of OTS Application Citing Borrower's Non-Compliance with Upfront Deposit Rule

New Delhi: In a significant ruling on banking law, the Supreme Court has held that a bank is justified in rejecting a borrower's application under a One-Time Settlement (OTS) scheme if the borrower fails to pay the mandatory upfront amount, even if this specific reason was not cited in the rejection letter. A bench of Justices Dipankar Datta and Augustine George Masih overturned the Andhra Pradesh High Court's decision, which had directed the State Bank of India (SBI) to reconsider the application of Tanya Energy Enterprises.

The Court emphasized that compliance with all stipulated conditions is fundamental for a borrower to claim the benefit of an OTS scheme and that courts can uphold an administrative decision on valid grounds found in the record, even if not explicitly stated in the original order.

Case Background

The case originated from a loan default by Tanya Energy Enterprises, which had availed credit facilities from SBI by mortgaging seven immovable properties. After the account was classified as a Non-Performing Asset (NPA) in 2017, SBI initiated recovery proceedings.

A compromise settlement offered in 2018 failed after the borrower defaulted on the payment schedule. Subsequently, SBI initiated measures under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, leading to the auction of one of the mortgaged properties.

In October 2020, SBI introduced a new "OTS 2020 Scheme." Tanya Energy Enterprises applied for this scheme, but its application was rejected by the bank on November 17, 2020, citing the borrower's past conduct and failure to adhere to court orders. The borrower challenged this rejection in the Andhra Pradesh High Court, which ruled in its favour, directing SBI to reconsider the application. The High Court's Division Bench upheld this order, prompting SBI to appeal to the Supreme Court.

Key Arguments Presented

• State Bank of India (Appellant): Represented by Additional Solicitor General Mr. Venkatraman, SBI argued that an OTS scheme cannot be enforced as a right. The bank contended that the borrower's past conduct, including the failure of a previous compromise and non-compliance with orders from the Debts Recovery Tribunal (DRT), justified the rejection.

• Tanya Energy Enterprises (Respondent): Senior Counsel Mr. D.S. Naidu, appearing for the borrower, argued that the rejection was arbitrary. He submitted that the High Court had correctly found the borrower eligible under the scheme's clauses and had only directed a fair reconsideration, not a positive grant of the OTS. The respondent contended that the failure of the earlier settlement should not be a ground to deny a fresh application under a new scheme.

Supreme Court's Analysis and Pivotal Findings

The Supreme Court's judgment, authored by Justice Dipankar Datta, centered on a crucial clause of the OTS 2020 Scheme that both the borrower and the High Court had overlooked.

The Mandatory Upfront Deposit

The bench pointed to Clause 4(i) of the OTS 2020 Scheme, which mandated that an application must be accompanied by an upfront deposit of 5% of the OTS amount. The Court observed:

"It is, therefore, clear that every borrower in default, to have his application under the OTS 2020 Scheme considered, was required to apply together with an up-front payment of 5% of the OTS amount... We did not find the respondent, while applying for the benefit of the OTS 2020 Scheme, to have deposited a single paisa towards up-front payment. In terms of clause 4(i)... any application received without up-front payment is not required to be processed even."

This failure, the Court concluded, rendered the application incomplete and disentitled the borrower from having it processed, let alone considered favourably.

Can Courts Uphold Orders on Unstated Grounds?

A key legal question addressed was whether the Court could uphold the bank's rejection based on the non-payment of the upfront deposit, a ground not mentioned in the rejection letter. While acknowledging the precedent set in Mohinder Singh Gill v. Chief Election Commissioner —that an administrative order's validity must be judged by the reasons stated within it—the Court carved out a nuanced exception.

The bench held that in appropriate cases, particularly where a fundamental and undisputed failure is evident from the record, a court can uphold the order on such an alternative ground to serve the cause of justice. The Court reasoned:

"...it would be open to the court to uphold it on such alternative ground subject, of course, to the affected party being put on notice and an opportunity to respond. This approach, which would prioritize fairness and justice over technicalities, does not run contrary to or inconsistent with the law laid down in the afore referred precedents."

The Final Verdict

The Supreme Court allowed SBI's appeal, setting aside the judgments of the High Court's Single Judge and Division Bench. It ruled that the High Court had erred by not considering the borrower's fatal non-compliance with a mandatory condition of the OTS scheme.

The Court permitted SBI to proceed with the enforcement of its security interest in accordance with the law. However, in a gesture of final opportunity, it allowed the respondent to submit a fresh, workable proposal for settlement, which the bank could consider at its discretion, but not under the lapsed OTS 2020 Scheme.