When the Court Refuses to Be an Arbitrator: Kerala HC Declines Intervention in OTS Disputes

In a significant reinforcement of the limits of judicial intervention in commercial banking disputes, the Kerala High Court has dismissed an appeal brought by M/s. Classic Agencies against Indian Overseas Bank. The Division Bench, led by Justices Anil K. Narendran and Muralee Krishna S., ruled that the judiciary cannot be called upon to rewrite or extend the terms of a One Time Settlement (OTS) contract between a borrower and a financial institution.

The Backdrop: A Failed Settlement

The appellants, a business entity facing recovery proceedings, had initially secured an OTS facility from the Indian Overseas Bank in December 2024. Under the terms stipulated in the sanction letter, the borrower was required to adhere to specific payment conditions. Critically, the agreement included a clause declaring that failure to meet these terms would result in the automatic cancellation of the settlement facility.

After failing to comply with these terms, the appellants sought an extension from the bank. When the bank proved reluctant, the petitioners approached the High Court under Article 226 of the Constitution, seeking a writ of mandamus to force the bank to extend the deadline and stay all coercive recovery measures.

The Legal Tug-of-War

The appellants argued that because they had already paid Rs. 1.19 Crore towards the settlement amount, the court should exercise its extraordinary jurisdiction to protect their interests while their request for more time remained pending.

The Indian Overseas Bank, however, stood its ground. Represented by its Standing Counsel, the bank pointed to the clear, contractual nature of the OTS facility. Their primary contention echoed a long line of Supreme Court jurisprudence: the court is not a forum for negotiating private financial contracts, especially when statutes like the SARFAESI Act already provide a dedicated mechanism for debt recovery and grievance redressal through the Debt Recovery Tribunal (DRT).

Courts Are Not Contract Managers

The High Court’s analysis rested on the established legal principle that the decision to grant or modify an OTS scheme is entirely within the "commercial wisdom" of the bank. Citing the Supreme Court’s stance in State Bank of India v. Arvindra Electronics Pvt. Ltd. , the Bench clarified that a court cannot issue a writ of mandamus to "positively grant" or "reschedule" a settlement.

"Rescheduling the payment under OTS and granting extension of time would tantamount to rewriting the contract, which is not permissible while exercising the powers under Art.226 of the Constitution of India," the court noted.

Furthermore, the court emphasized that the existence of the SARFAESI Act renders the High Court an inappropriate venue for these commercial squabbles. The Act provides a comprehensive, expert-led forum (the DRT) to evaluate statutory violations and fairness, rendering the "constitutional remedy" an unnecessary and inappropriate shortcut for litigants trying to circumvent the law.

Key Observations

The judgment serves as a stern reminder to borrowers:

• On Judicial Restraint: "The court cannot exercise the said power in the absence of any legal right. More circumspection is required in a financial transaction... when a statute prescribes a particular mode, an attempt to circumvent that mode shall not be encouraged by a writ court."
• On the Nature of OTS: "No writ of mandamus can be issued by the High Court... directing a financial institution / bank to positively grant the benefit of One Time Settlement (OTS) to a borrower."
• On Contractual Integrity: "Rescheduling the payment under OTS and granting extension of time would tantamount to rewriting the contract, which is not permissible."

Final Verdict: A Closed Door

The Kerala High Court concluded that it had "absolutely no grounds" to entertain the writ appeal. By dismissing the plea, the court has safeguarded the sanctity of bilateral commercial agreements and reiterated that financial institutions must be allowed to make prudent decisions based on their own internal guidelines, free from judicial interference in their contract enforcement processes.

For borrowers, the message is clear: if an OTS deadline expires, the legal recourse lies within the specialized framework of the SARFAESI tribunals, not the wide-reaching, but circumspect, writ jurisdiction of the High Court.