Recently, in a decisive interpretation of the limits of judicial intervention in banking and financial matters, the Bombay High Court held that courts cannot compel banks to modify loan agreements or extend benefits under a One-Time Settlement (OTS) scheme.
The matter arose from a petition filed by a director of a Nagpur-based housing and infrastructure firm, who also stood as guarantor for a Rs. 62-crore loan sanctioned by Indian Bank (formerly Allahabad Bank) in 2011 for a resort development project. Following default, the loan account was classified as a non-performing asset (NPA) in 2017, prompting the bank to initiate recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, followed by adjudication before the Debts Recovery Tribunal (DRT) and insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, before the National Company Law Tribunal (NCLT).
The petitioner sought judicial directions compelling the bank to grant OTS benefits, arguing for relief despite default. However, the Division Bench of Justice Anil Kilor and Justice Rajnish Vyas observed, “It's clear that issuing a writ of mandamus under Article 226 of Constitution would not be in the interest of justice by directing the bank to consider the OTS benefit to the borrower or guarantor. We cannot direct the bank to rewrite terms and conditions of the agreement.”
The Court emphasised that the decision to grant OTS benefits lies within the commercial wisdom of the bank. The Court elaborated, “If the bank or financial institution is of the opinion that the borrower has the capacity to repay or that recovery is possible through auction of mortgaged property, refusal to extend OTS benefits would be justified.”
Rejecting the contention that insolvency laws provide a “lease of life” for borrowers, the Bench clarified, “While that may be true, the borrower and guarantor remain debtors, who have not repaid the amount. When parties are governed by contractual terms with full understanding, they cannot later seek to deviate from their repayment obligations.”
On the doctrine of legitimate expectation, the Court noted that fairness applies to the conduct of borrowers as well, stating, “Fairness would obviously mean repayment of the outstanding amount within the agreed period.”
The Bench concluded that public interest is not served by judicial interference in matters governed by contractual and commercial discretion, dismissing the petition and reaffirming the autonomy of banks in managing credit and recovery decisions.
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