No Right to One-Time Settlement, Bombay High Court Reaffirms Bank's Commercial Wisdom

The court, dismissing a guarantor's plea to compel a bank to accept an OTS proposal, emphasized that banks deal with public money and their commercial decisions on loan settlements should not be dictated by courts through writ jurisdiction.

NAGPUR, INDIA – The Bombay High Court has delivered a decisive ruling reinforcing a cornerstone principle of banking law: a borrower or guarantor cannot claim a One-Time Settlement (OTS) as a matter of right. In a judgment that underscores the judiciary's deference to the commercial wisdom of financial institutions, the Nagpur Bench held that courts cannot issue a writ of mandamus under Article 226 of the Constitution to compel a bank to accept an OTS proposal or rewrite the terms of a loan agreement.

The decision came in the case of Archana Wani v. Indian Bank , where the petitioner, a director and shareholder of N Kumar Housing and Infrastructure Pvt. Ltd., challenged Indian Bank’s rejection of her OTS proposal. The company stood as a guarantor for a ₹62 crore term loan extended to Poonam Resorts Ltd., which was classified as a Non-Performing Asset (NPA) in 2017 following defaults.

Dismissing the plea, a Division Bench of Justices Anil S. Kilor and Rajnish R. Vyas made a clear and unequivocal observation on the nature of OTS schemes. “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,” the Bench stated.

The court highlighted the public interest element inherent in banking operations, noting that banks are custodians of public money. The judgment articulated, “As rightly submitted by the learned counsel for the bank, it deals with public money and therefore, asking it to settle the account by accepting OTS would not be in the interest of public at large." This reasoning firmly places the onus on banks to make prudent decisions that safeguard their financial health and, by extension, the interests of their depositors and the public.

Case Background and Legal Proceedings

The case originated from a ₹62 crore term loan facility granted by the respondent bank (formerly Allahabad Bank) in 2011 to Poonam Resorts Ltd. for a clubhouse and resort project. The petitioner's company, N. Kumar Housing and Infrastructure, acted as a mortgagor and guarantor for this loan. Following the principal borrower's default, the account was declared an NPA in 2017.

The bank subsequently initiated multiple recovery actions. It took recourse under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), issuing notices under Section 13(2) and later proceeding with measures under Section 13(4). Concurrently, the bank filed an application before the Debts Recovery Tribunal (DRT) for recovery of dues and a company petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal (NCLT).

Amidst these parallel proceedings, the petitioner submitted an OTS proposal, which the bank rejected. The petitioner then approached the High Court, seeking a directive for the bank to disclose its internal benchmark for OTS and settle the matter.

Senior Advocate Devendra V. Chauhan, representing the petitioner, argued that the bank's rejection was arbitrary. However, Senior Advocate Akshay Naik and Advocate A.T. Purohit, for the bank, contended that accepting an OTS is a commercial decision and not an enforceable right.

The Court's Rationale: Upholding Commercial Discretion

The High Court framed the central issue as whether a borrower or guarantor can compel a creditor bank to disclose its benchmark and settle a loan through an OTS proposal. The Bench decisively answered in the negative.

The court reasoned that the decision to grant an OTS benefit falls squarely within the commercial wisdom of the bank. If a financial institution believes it can recover the entire loan amount, either because the loanee has the capacity to pay or through the auction of mortgaged property, it is justified in refusing an OTS. The judgment stated, "...such decision should be left to the commercial wisdom of the bank whose amount is involved and it is always to be presumed that bank shall take a prudent decision whether to grant the benefit under the OTS scheme."

By refusing to interfere, the court reinforced the principle that judicial review under Article 226 should not extend to second-guessing the commercial assessments of financial experts. The Bench concluded that issuing a writ of mandamus would not be in the interest of justice and would effectively mean rewriting a private contract, an act beyond the scope of its powers.

Legal and Industry Implications

This judgment serves as a significant reaffirmation for the banking sector, solidifying its autonomy in debt resolution negotiations. It clarifies that while OTS schemes are a vital tool for recovery, they are a discretionary instrument offered by banks, not a right that borrowers can demand. For legal practitioners, the ruling sets a clear precedent: challenges to OTS rejections are unlikely to succeed in writ courts unless there is demonstrable evidence of mala fides, arbitrariness in procedure, or a violation of the bank's own stated policy, rather than a mere disagreement with the commercial outcome.

The decision aligns with a consistent line of judicial thinking that prioritizes the financial prudence of banks managing public funds over the pleas of defaulting borrowers seeking discounted settlements. It also sends a strong message to guarantors that their liability is co-extensive with the borrower, and they cannot force a settlement that the creditor bank deems commercially unviable. As banks continue to navigate the complexities of debt recovery through various legal frameworks like the SARFAESI Act and IBC, this ruling strengthens their hand in pursuing full recovery where feasible.

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In Other News: Key Developments in Insolvency and Corporate Law

A digest of recent significant rulings from the Supreme Court, High Courts, and Appellate Tribunals shaping the landscape of insolvency, banking, and corporate law.

Supreme Court on IBC and RERA

• CoC's Role Post-Resolution Plan: The Supreme Court held that the Committee of Creditors (CoC) does not become functus officio merely upon the approval of a resolution plan. It continues to exist with a role to play until the plan is fully implemented or a liquidation order is passed ( KALYANI TRANSCO Vs MS BHUSHAN POWER AND STEEL LTD. ).
• Filling NCLT/NCLAT Vacancies: Expressing concern over judicial vacancies, the Supreme Court directed the Union Government to fill positions at the NCLT and NCLAT on a “war-footing” and ensure that Real Estate Regulatory Authority (RERA) bodies are adequately staffed ( Mansi Brar Fernandes vs. Shubha Sharma ).
• Homebuyers' Rights: The Court ruled that homebuyers whose claims were verified and admitted by the Resolution Professional cannot be denied possession of their flats under a resolution plan, even if their claims were filed with some delay ( AMIT NEHRA & ANR. VERSUS PAWAN KUMAR GARG & ORS. ).

High Court Rulings of Note

• SARFAESI vs. Companies Act Scheme: The Calcutta High Court ruled that a scheme of compromise sanctioned under the Companies Act cannot be frustrated by a secured creditor invoking provisions of the SARFAESI Act ( ARCL Organics Ltd. Versus Stressed Asset Stabilization Fund ).
• Resolution Professional as Public Servant: In a significant interpretation, the Madras High Court held that an Insolvency Resolution Professional (IRP) is a public servant, and sanction under the Prevention of Corruption Act is required for their prosecution ( Anil Kumar Ojha v. The State and Others ).
• NCLT Bound to Appoint Proposed IRP: The Madras High Court clarified that in the absence of pending disciplinary proceedings, the NCLT has no statutory discretion to reject or substitute the IRP recommended by a corporate applicant under Sections 7 or 10 of the IBC ( K.J. Vinod v. Registrar, NCLT & Anr. ).

Key NCLAT Decisions

• 'NIL' Payment to Operational Creditors: The NCLAT held that a resolution plan approved with 100% CoC voting share cannot be interfered with merely because it provides 'NIL' payment to operational creditors, provided their claims have been properly dealt with as per the legislative scheme ( Masyc Projects Pvt. Ltd. Versus Pulkit Gupta, RP of Vadraj Cement Ltd. & Ors. ).
• OTS Proposal as Admission of Debt: A corporate debtor's statement expressing intent to enter into an OTS with a financial creditor amounts to an admission of both the debt and the default, the NCLAT ruled ( Rajratan Babulal Agarwal Versus State Bank of India & Anr. ).
• Requirement for CoC Resolution: The NCLAT clarified that the required 66% majority for passing a resolution must be calculated based on the voting shares of all financial creditors in the CoC, not just those present and voting ( Saariga Construction Pvt. Ltd. Versus Arvind Kumar, RP, Richa Industries Ltd. & Anr. ).
• PMLA vs. IBC: In a ruling on the conflict between statutes, the NCLAT held that assets of a corporate debtor attached under the Prevention of Money Laundering Act (PMLA) do not form part of the resolution estate. The NCLT cannot direct the Enforcement Directorate to release such assets, even if the attachment occurred during the CIRP ( Mr. Anil Kohli Resolution Professional Versus Directorate of Enforcement ).