RBI Directives Prevail: Bombay HC Recalls Order Based on Unlawful Loan Transfer Compromise - 2025-03-12

Bombay High Court Recalls Order, Citing Violation of RBI Directives in Loan Transfer Compromise

Mumbai, India – In a significant ruling emphasizing the binding nature of Reserve Bank of India (RBI) directives, the Bombay High Court has recalled its previous order that was based on a compromise found to be unlawful. The case, presided over by Justice Sandeep V.Marne , involved a dispute stemming from a loan account of M/s. Shaila Clubs & Resorts Private Limited ( Shaila Clubs ) and its subsequent assignment to Savannah Lifestyle Private Limited ( Savannah ) by Vasantdada Shetkari Sahakari Bank Ltd. (the Bank ), which is under liquidation.

Background of the Case

The legal proceedings originated from recovery actions initiated by the Bank against Shaila Clubs for defaulting on a loan secured by mortgaged property. Savannah , operating a recreational club on Shaila Clubs ' property under a conducting agreement, intervened to protect its possession. The Bank , under liquidation, offered a one-time settlement (OTS) scheme, which Savannah sought to utilize not just for settling the loan but also for acquiring the loan account itself. This led to a compromise agreement, formalized as 'Minutes of Order,' and initially approved by the High Court on October 21, 2022, disposing of Writ Petition No. 11610 of 2022.

Challenge to the Compromise

However, the Official Liquidator of the Bank , along with a suspended director of Shaila Clubs , challenged the order, arguing that the compromise was unlawful. Their primary contention was that the assignment of Shaila Clubs ' loan to Savannah violated the RBI's 2021 Directives on Transfer of Loan Exposures. These directives, issued under Sections 21 and 35A of the Bank ing Regulation Act, 1949, restrict loan transfers, particularly of stressed assets, to specific eligible entities, which Savannah , a private entity, is not.

Arguments Presented

For the Bank and Shaila Clubs :

Senior Advocate Mr. Navroz Seervai, representing the Bank , argued that the Minutes of Order were unlawful as they contravened RBI Directives , which are binding on banking companies. He highlighted that Savannah was not an eligible transferee for the loan account and that the compromise was reached in unrelated proceedings, bypassing the actual borrower, Shaila Clubs . Mr. Vikram Nankani, representing the suspended director, further emphasized that Shaila Clubs was not a signatory to the Minutes of Order and that the compromise was outside the scope of the original writ petition.

For Savannah Lifestyle:

Represented by Senior Advocate Dr. Virendra Tulzapurkar, Savannah contended that the Liquidator had taken an independent commercial decision to settle the loan, and the RBI Directives were inapplicable as the loan was not necessarily a 'stressed asset' in the context of the OTS. They argued that the Bank was ready to close the loan account, and the subsequent transaction between Savannah and Shaila Clubs was a separate matter to be addressed in the ongoing Corporate Insolvency Resolution Process (CIRP) before the National Company Law Tribunal (NCLT).

Court's Reasoning and Reliance on Legal Principles

Justice Marne meticulously examined the RBI's 2021 Directives , noting Clause 3 which specifies entities to whom these directives apply, including cooperative banks, and Clause 9 defining ‘permitted transferees.’ Crucially, Clause 54 restricts the transfer of stressed loans to permitted transferees and asset reconstruction companies (ARCs). The court underscored that Savannah was not a recognized lender under the RBI guidelines, rendering the loan assignment unlawful.

The judgment cited the Supreme Court's ruling in Sudhir Shantilal Mehta V/s. Central Bureau of Investigation , reinforcing the binding nature of RBI directives. Justice Marne stated, "I am therefore of the view that the transaction of assignment of loan of Shaila Clubs by the Bank in favour of Savannah is specifically prohibited under the 2021 RBI Directives as Savannah is not an eligible transferee."

The court also addressed the issue of 'Minutes of Order,' referring to Ajay Ishwar Ghute and others V/s. Meher K. Patel and others , where the Supreme Court cautioned against routinely accepting Minutes of Order without due scrutiny of their legality and impact on all necessary parties. Justice Marne pointed out that the compromise directly affected Shaila Clubs , which was not a signatory to the Minutes of Order, further underscoring the unlawfulness of the compromise.

Pivotal Excerpt from the Judgment

> "The compromise effected between Bank and Savannah actually affects the interest of Shaila Clubs , who is not the signatory to the compromise. Mere presence of Advocate of Shaila Clubs before the Court on 21 October 2022 or failure on the part of the Advocate to raise any objection to disposal of the petition in view of the Minutes of Order would not convert unlawful compromise into lawful one."

Final Decision and Implications

The Bombay High Court allowed the applications for recall and review, setting aside its order dated October 21, 2022. Writ Petition No. 11610 of 2022 was restored and scheduled for further hearing. This decision serves as a crucial reminder of the stringent regulatory framework governing banking transactions, particularly loan transfers, and emphasizes the judiciary's role in ensuring adherence to RBI directives. It also highlights the importance of lawful compromises under Order XXIII Rule 3 of the Code of Civil Procedure, emphasizing that court orders based on compromises must be legally sound and protect the interests of all affected parties, including those not directly party to the compromise. The ruling reaffirms the principle that neither parties nor the court can bypass statutory regulations, even through consent-based mechanisms.