In a significant ruling impacting borrowers, guarantors, and financial institutions, the Nagpur bench of the Bombay High Court has clarified that courts do not have the authority to compel banks to alter loan agreements or extend One-Time Settlement (OTS) benefits. The court emphasized that such decisions fall under a bank’s commercial discretion, and contractual obligations remain binding on borrowers and guarantors.
The case involved a director of a Nagpur-based housing and infrastructure company who had taken a ₹62-crore loan from Indian Bank (formerly Allahabad Bank) in 2011 for a resort project. The petitioner also stood as a guarantor, mortgaging personal property. Following default, the loan account was declared a Non-Performing Asset (NPA) in 2017.
Subsequently, the bank initiated recovery proceedings under multiple legal frameworks:
- SARFAESI Act: Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
- Debts Recovery Tribunal (DRT): For debt recovery through statutory procedures.
- Insolvency Proceedings under IBC Section 7, 2016: Before the National Company Law Tribunal (NCLT), to initiate insolvency against the borrower.
The petitioner challenged the bank’s refusal to grant OTS benefits, requesting the High Court to direct the bank to consider a settlement under the scheme.
A division bench comprising Justices Anil Kilor and Rajnish Vyas dismissed the plea, noting that issuing a writ of mandamus under Article 226 of the Constitution to force a bank to provide OTS benefits would not be in the interest of justice. The bench stated, “We cannot direct the bank to rewrite terms and conditions of the agreement. The decision to grant OTS benefits rests entirely with the bank’s commercial wisdom.”
The court clarified that if a bank determines that a borrower has the capacity to repay the outstanding loan or that recovery is feasible through auction of mortgaged property, refusal to grant OTS benefits is justified.
The bench further rejected the argument that insolvency laws are intended to provide companies a “lease of life.” It stated that borrowers and guarantors remain liable for repayment and cannot deviate from contractual obligations once terms are agreed upon.
The judges highlighted that the principle of fairness under legitimate expectation also favors the bank’s position. According to the court, “Fairness would obviously mean repayment of the outstanding amount within the agreed period. Judicial interference in such financial matters would not serve public interest.”
This reinforces that while insolvency frameworks provide mechanisms for resolution, they do not absolve debtors of their repayment obligations, particularly when commercial loans are governed by clear contracts
The decision strengthens contractual discipline in the banking sector and underscores the importance of prudence in taking loans. “Borrowers and guarantors must understand that signing loan agreements entails binding obligations. Banks are not legally bound to extend one-time concessions merely because repayment is delayed.
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