Judiciary Reinforces Creditor Primacy, Defines Limits on OTS and Borrower Rights

New Delhi – In a series of significant rulings that clarify and reinforce the legal framework governing debt recovery and corporate insolvency, Indian courts have delivered crucial judgments strengthening the commercial wisdom of lenders and delineating the boundaries of borrower rights. A recent Bombay High Court decision, emphatically stating that a One-Time Settlement (OTS) is a discretionary tool for banks and not an inherent right of the borrower, headlines a quarter of intense judicial activity that has provided critical guidance on the Insolvency and Bankruptcy Code, 2016 (IBC) and the SARFAESI Act.

These developments, spanning from the Supreme Court to various High Courts and the National Company Law Appellate Tribunal (NCLAT), collectively underscore a judicial trend favouring creditor-led resolution processes while addressing procedural ambiguities and the interplay between insolvency law and other statutes.

Bombay High Court: OTS is a Privilege, Not a Right

In a definitive ruling with wide-ranging implications for banking litigation, the Bombay High Court in Archana Wani v. Indian Bank dismissed a plea from a guarantor seeking to compel the bank to accept an OTS proposal. A Division Bench of Justices Anil S Kilor and Rajnish R Vyas delivered a sharp rebuke to the notion that borrowers can claim settlement as a matter of right.

The court 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.”

Highlighting the fiduciary duty of banks, the bench asserted that lenders deal with public money, and forcing a settlement that may not align with their commercial judgment would not be "in the interest of public at large." This judgment reinforces the principle that the decision to grant an OTS lies squarely within the commercial wisdom of the financial institution. The court reasoned that if a bank believes it can recover the full amount through measures like auctioning mortgaged property, it is justified in refusing an OTS. This decision provides a strong precedent for banks facing writ petitions attempting to mandate settlements and reaffirms that courts, under Article 226, cannot rewrite the terms of lending agreements.

Supreme Court on IBC: Clarifying Moratorium and Tribunal Efficacy

The Supreme Court has been actively shaping the IBC landscape, issuing several pivotal rulings aimed at enhancing the efficiency and clarity of the insolvency regime.

One of the most pressing issues addressed was the alarming number of vacancies in insolvency tribunals. In Mansi Brar Fernandes vs. Shubha Sharma , the apex court directed the Union Government to fill vacancies at the NCLT and NCLAT on a "war-footing." Recognizing the strain on the system, the Court suggested constituting dedicated IBC benches and utilizing the services of retired judges on an ad hoc basis. This directive signals the judiciary's serious concern over infrastructural deficits hampering the timely resolution of insolvency cases.

On the substantive side, the Court clarified the scope of the IBC moratorium. In Sincere Securities Private Limited & Ors. v. Chandrakant Khemka & Ors. , it was held that the moratorium does not bar the voluntary surrender of a corporate debtor's leased property if retaining the asset is unviable and the Committee of Creditors (CoC) approves the decision. This pragmatic interpretation provides flexibility in managing unviable assets during the Corporate Insolvency Resolution Process (CIRP).

Further solidifying the role of the CoC, the Supreme Court in the JSW Steel matter ( KALYANI TRANSCO Vs MS BHUSHAN POWER AND STEEL LTD. ) ruled that the CoC does not become functus officio immediately upon the approval of a resolution plan. Its role continues until the plan is fully implemented or a liquidation order is passed, ensuring its oversight throughout the resolution lifecycle.

NCLAT on Procedural Integrity and Creditor Rights

The NCLAT has been instrumental in refining the operational aspects of the IBC, delivering a plethora of judgments that provide granular guidance to insolvency professionals, creditors, and corporate debtors.

A key theme has been the primacy of the CoC's commercial wisdom. The appellate tribunal held that a resolution plan approved by the CoC cannot be set aside merely because a dissenting financial creditor is dissatisfied with the asset valuation ( Central Bank of India v. Bijendra Kumar Jha ). It also affirmed that a plan providing 'NIL' payment to operational creditors can be upheld if their claims are properly dealt with as per the legislative scheme, which does not mandate payment to them in a liquidation scenario ( Masyc Projects Pvt. Ltd. v. Pulkit Gupta ).

In a significant procedural clarification, the NCLAT ruled that the required 66% majority for passing a resolution must be calculated based on the voting shares of all creditors, including those absent, and not just those present and voting ( Saariga Construction Pvt. Ltd. v. Arvind Kumar ).

Several rulings also touched upon the interplay of the IBC with other laws and prior agreements:

• PMLA vs. IBC: In a crucial decision ( Mr. Anil Kohli v. Directorate of Enforcement ), the NCLAT held that assets attached under the Prevention of Money Laundering Act (PMLA) are not part of the resolution estate. Consequently, the NCLT cannot direct the Enforcement Directorate to release such assets, even if the attachment occurred during the CIRP. This ruling clarifies the hierarchy between the two statutes in the context of assets deemed "proceeds of crime."
• EPFO Dues: The NCLAT consistently held that EPFO claims based on inspections or assessments conducted after the commencement of CIRP or liquidation are unenforceable and cannot be admitted ( CA Pankaj Shah v. EPFO and The Regional P.F. Commissioner v. Alok Kailash Saksena ).
• OTS Proposals: Reinforcing the principle seen in the Bombay High Court's ruling, the NCLAT held that a corporate debtor's expressed intention to enter into an OTS amounts to an admission of debt and default ( Rajratan Babulal Agarwal v. State Bank of India ).

High Courts Weigh In on Jurisdiction and Inter-Statutory Conflicts

High Courts across the country have also contributed vital interpretations on debt recovery laws. The Calcutta High Court, in ARCL Organics Ltd. v. Stressed Asset Stabilization Fund , ruled that a scheme of compromise sanctioned under the Companies Act cannot be frustrated by a secured creditor invoking the SARFAESI Act, preventing secured creditors from unilaterally undermining a court-approved restructuring.

The Madras High Court provided significant clarification on the role of Resolution Professionals (RPs). In Anil Kumar Ojha v. The State , it held that an RP is a "public servant" under the Prevention of Corruption Act, and thus, sanction is required for their prosecution. In K.J. Vinod v. Registrar, NCLT , the court established that the NCLT is bound to appoint the Interim Resolution Professional (IRP) proposed by the applicant under Sections 7 and 10 of the IBC, limiting the adjudicating authority's discretion in this matter.

Conclusion: A Maturing Insolvency Framework

The recent flurry of judicial pronouncements marks a significant step in the evolution of India's insolvency and debt recovery jurisprudence. The courts are meticulously ironing out procedural wrinkles, clarifying the scope of statutory provisions, and balancing the interests of various stakeholders.

The overarching theme is the reinforcement of a creditor-in-control model, where the commercial wisdom of the CoC is paramount, and borrower attempts to delay or subvert recovery through tactical litigation are being decisively curtailed. The clear message from the judiciary—that OTS is a commercial negotiation, not a legal right—combined with directives to strengthen tribunal infrastructure, signals a concerted effort to make the IBC framework more robust, predictable, and effective in achieving its core objective of timely and value-maximizing resolution. Legal professionals navigating this complex field must take careful note of these developments, which are fundamentally shaping the strategies for both lenders and debtors in the Indian economic landscape.