In a recent judgment in the case of State Bank of India v. Arvindra Electronics Pvt. Ltd[1]., the Supreme Court addressed the issue of whether a High Court can intervene in terms of a one-time settlement (OTS) agreement made between a borrower and a lending bank by extending the time for payment under Article 226 of the Constitution. The Supreme Court opined that the High Court could not have invoked jurisdiction under Article 226 of the constitution because it would change the parties' contracts without their permission.
The appeal is filed by SBI against the Punjab and Haryana High Court order[2] dated 10 Mar 2012, in a writ petition filed by the Respondent/Borrower seeking a direction to extend the payment period under the OTS under Article 226 of the Indian Constitution. The case of the writ petitioner is that the Bank had issued an OTS to the respondent/borrower. The respondent was in default under the OTS and sought SBI for an extension, which was denied. The borrower also presented additional OTS alternatives to the bank, which were declined. Aggrieved by the action, the borrower filed a writ petition before the Punjab and Haryana High Court.
The Punjab and Haryana High Court extended the deadline for paying the remaining balance due and payable under the authorized OTS Scheme by six weeks and held that the High Courts would have the jurisdiction to extend the settlement period as originally provided for in the OTS sanction.
The Supreme Court, in the appeal, was persuaded by the Appellant's arguments that "issuing a writ under Article 226 to reschedule the payment under OTS would be tantamount to contract modification.". The Apex Court also further held that this can only be done by mutual consent under Section 62 of the Indian Contract Act, and the impugned order thus violates that section. The Supreme Court also relied on its previous decision in Bijnor Urban Cooperative Bank Limited v. Meenal Agarwal[3], while deciding this appeal.
OTS & Schemes?
When a loan is in default and the borrower is unable to repay it, financial institutions would use a one-time settlement to recover the loan amount by waiving a percentage of the principal and interest. OTS is a negotiation between the borrower and the financial institution, and it will only become effective if both parties agree.
RBI on OTS
The Reserve Bank of India lacks clear guidelines for the financial institution's regulation and maintenance of OTS; instead, financial institutions have informed the RBI about the functional features and independent management, and it is largely up to the banks' discretion. Banks invoke OTS based on internal guidelines made from time to time, and the OTS system and modalities are never made public.
The Reserve Bank of India published a circular on 3rd Sep 2005[4], proposing a one-time settlement arrangement for the recovery of NPAs less than Rs 10 crores, These rules established a simplified, non-discretionary, and non-discriminatory system for resolving chronic NPAs in the SME sector, which was executed uniformly by all public sector banks. The guidelines do not cover willful misconduct, fraud, or malfeasance.
During the Global pandemic, RBI published FAQs addressing micro, small, and medium enterprises (MSME), in which the RBI, in a circular[5] dated 4th May 2009, recommended the sector's associations provide a one-time settlement arrangement for the MSME sector. It was also suggested that each bank make its own management decisions about non-performing loan settlements based on its business judgment and that banks implement a non-discretionary OT programme that allows them to deal swiftly and wisely with OTS.
Views of the High Courts and the Supreme Court on the Extension of OTS
From time to time, the constitutional courts expressed diverse opinions while answering questions about issuing directions under Article 226 for the extension of the period for a one-time one-time settlement.
In the case of Bijnor Urban Cooperative Bank Limited, Bijnor and Others v. Meenal Agarwal and Others, the Supreme Court held that a writ of mandamus can be issued by the High Court in the exercise of powers under Article 226 of the Constitution of India, directing a financial institution or bank to positively grant the benefit of OTS to a borrower. Further, it was held that the benefits of benefit under the OTS are always subject to the eligibility criteria mentioned under the OTS Scheme benefits and the guidelines issued from time to time and the decision should be left to the commercial wisdom of the bank whose amount is involved, and it is always to be presumed that the financial institution or bank shall take a prudent decision.
In Sardar Associates v. Punjab and Sind Bank[6], the Supreme Court vide its order dated 31 Jul 2009 held that financial institutions must settle the case under RBI guidelines through a one-time time settlement and should invite a proposal for settlement and recovery of the agreed amount.
On the other hand, in M/s Milkhi Ram Bhagwan Dass v. District Magistrate[7], the High Court of Punjab and Haryana held that the borrower's request for an extension was not legitimate, and the writ petition was dismissed on both the merits and the maintainability.
High Court on Exceptional Situations:
Interestingly, in the same timeline, in another writ petition of Anu Bhalla and others v. District Magistrate, Pathankot[8] order dated 22nd Sep 2020, the High Court of Punjab and Haryana ruled that it was appropriate for a court to extend the deadline for settlement payment in deserving cases. The Court also cited the case of Sardar Associates (supra), while referring to the ratio of the case and exercising jurisdiction under Article 226 of the Constitution of India. The High Court in the writ petition also disagreed with the ruling in the Milkhi Ram (Supra) case. The bench claimed that the judgment solely relied on a decision by the Allahabad High Court. The bench also held that this could not be regarded as a valid legal argument to revoke a borrower's rights entirely.
In the case of Behl Roller Flour Mills v. Punjab and SBI[9], the Punjab and Haryana High Court opined that a qualified and legitimate borrower was eligible for the extension.
The Punjab and Haryana High Court, in Amrik Singh v DCB Bank Ltd. and Anr[10], vide its order dated 6th Apr 2022, allowed the Petitioner’s writ petition under Article 226 considering the fact of Exceptional circumstances such as the Covid-19 Global Pandemic. Similarly, in the case of K.P. Umasankar v. The Punjab National Bank[11], the petitioner requested an extension of time for payment under the OTS scheme because the original borrower died before the debt was paid off. The respondent bank denied the respondent’s application, which led the petitioner to file a writ petition before the Kerala High Court seeking an extension of time. In its order dated 7th Jul 2022, the High Court held that "On the view that these factors cumulatively compel the Court to hold that there are certain exceptional circumstances, as noticed by the Supreme Court in P. Vijayakumari and Ors. v. Indian Bank [12] by this Court (High Court of Kerala) in the case of Bindu Vijayakumar v. Regional Manager, SBI, Kollam, and Others[13], to hold that a direction can be issued to the bank to accept the balance payable under the One Time Settlement offer along with interest to compensate the bank for the delay in making the payment"
From the above-discussed cases, it is clear that the Maintainability of a Writ Petition and requesting an extension for payment of OTS under Article 226 of the Constitution varies from case to case and was only allowed in exceptional circumstances. According to the recent Supreme Court decision, the acceptance of the OTS scheme is entirely at the discretion of the bank and cannot be claimed as a borrower's right. However, the court did not dismiss the writ petitions entirely. The court noted that it could require banks to follow RBI OTS circulars. The Apex Court’s decision will be a critical step in preventing dishonest loan defaulters from improperly utilizing OTS. It will also ensure that only debtors who truly require the benefit of the scheme use it, preventing deliberate defaulters from abusing it.
Citations & References: [1] RPCD.PLNFS. BC.No.39 / 06.02.31/ 2005-06 [2] RPCD. SME&NFS. BC.No.102/06.04.01/2008-09 [3] (2009) 8 SCC 257 [4] CWP No. 327 of 2020 P & H (DB) [5] 2020 SCC OnLine P&H 4387 [6] CM-1375-2021 in RA-CW-22-2021 in CWP-20520-2019 [7] 2022 LiveLaw (PH) 77 [8] MANU/KE/2102/2022 [9] MANU/SC/0341/2018 [10] MANU/KE/0019/2022 [11] 2022 SCC OnLine SC 1522 [12] 2022 SCC OnLine P&H 3144 [13] 2021 SCC OnLine SC 1255
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