Courts Cannot Mandate One-Time Settlement Concessions for Defaulting Borrowers: Kerala High Court - 2026-01-05

Repetitive Litigation to Delay Recovery Cannot Override Contractual Obligations: Kerala HC

In a significant ruling reinforcing the limits of judicial intervention in banking contracts, the Kerala High Court has clarified that borrowers cannot claim the benefits of a One Time Settlement (OTS) scheme as a matter of right. A division bench comprising Justice Anil K. Narendran and Justice Muralee Krishna S. dismissed a writ appeal, highlighting that the court cannot rewrite contracts between bankers and their customers under Article 226 of the Constitution.

The Cycle of Debt and Litigation

The case involved the appellants, who had availed three loans from the Vazhoor Farmers Service Co-operative Bank Ltd. and subsequently defaulted. Following arbitration proceedings under the Kerala Co-operative Societies Act , 1969, the bank initiated recovery measures.

Since 2021, the appellants engaged in a series of legal challenges across multiple writ petitions, seeking concessions, waivers, and instalment plans under various OTS schemes. Despite court orders providing opportunities to clear their liabilities, the appellants failed to adhere to the terms, leading the bank to move forward with the sale of the mortgaged property.

Competing Arguments: Necessity vs. Contract

The Appellants' Stand: The petitioners argued that their dire financial state, coupled with serious medical conditions like liver cirrhosis, necessitated a more lenient approach. They sought a writ of mandamus, urging the court to compel the bank to restructure their loans and grant further concessions beyond what was offered by the District Level Committee.

The Bank's Stand: The respondent bank contended that the appellants had repeatedly abused the judicial process to circumvent legitimate recovery proceedings. The bank argued that it had already extended multiple opportunities under different circulars and OTS schemes, all of which the appellants failed to fulfill, thereby making further judicial intervention unnecessary and legally untenable.

Settled Law on OTS Schemes

The High Court drew heavily on established precedents, specifically citing the Supreme Court’s ruling in * Bijnor Urban Cooperative Bank Limited, Bijnor v. Meenal Agarwal *. The bench emphasized that the grant of OTS benefits is subject to eligibility criteria and is not a default entitlement.

The court underscored that once an OTS offer is made and the borrower fails to comply, the bank is within its rights to proceed with the recovery of the dues as per the underlying contractual agreement.

Key Observations

The Court's judgment offers a stern reminder of the boundaries of writ jurisdiction:

• "It is settled law that a borrower cannot insist on a particular amount of waiver as one-time settlement, and there is no provision enabling the petitioners to insist that they should be extended a particular benefit."
• "The relationship between the banker and the customer is based on the contract. If the Writ Court interferes in the contractual relationship between the banker and the customer, it would result in rewriting of the contract, which is impermissible by a writ court."
• "The provisions for one-time settlement are a benefit offered to the borrowers to settle their liability, and if the petitioners fail to utilise such an opportunity... they cannot be heard to contend that some further concession must be extended to them."

Conclusion and Practical Implications

The Division Bench ultimately dismissed the appeal, affirming that the judiciary is not an appropriate venue for negotiating settlement terms that a borrower has already rejected or failed to honor. This ruling serves as a clear signal for borrowers: repeated attempts to use litigious strategies to delay genuine recovery proceedings will not yield further concessions from the court. For financial institutions, the decision reinforces the authority to pursue recovery when OTS frameworks have been exhausted.