Advertisement
The Nagpur bench of the Bombay High Court recently ruled that courts cannot compel banks to modify loan agreements or grant one-time settlement (OTS) benefits to borrowers or guarantors. The verdict came after a plea challenging Indian Bank's refusal to extend OTS benefits on a INR 62 crore loan sanctioned in 2011. The court held that granting OTS benefits falls within a bank's commercial judgment and cannot be enforced through judicial intervention. It further stated that borrowers and guarantors are bound by the contracts they willingly entered into.
The Nagpur bench of the Bombay High Court has clarified that banks cannot be directed by courts to change the terms of a loan agreement or to extend one-time settlement (OTS) benefits to borrowers or guarantors. A division bench comprising Justices Anil Kilor and Rajnish Vyas noted that issuing a writ under Article 226 of the Constitution to compel such actions would not serve the purpose of justice. The bench observed that courts must refrain from interfering in matters governed by commercial discretion and contractual obligations. Advertisement
The order was passed while dismissing a petition filed by a director of a Nagpur-based housing and infrastructure company, who had challenged Indian Bank's decision to deny OTS benefits on a loan of INR 62 crore sanctioned in 2011 for a resort development. The petitioner, who had also acted as guarantor by mortgaging personal property, approached the court after the bank initiated recovery proceedings.
Following defaults, the loan account was classified as a non-performing asset (NPA) in 2017. Indian Bank subsequently invoked provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, followed by recovery proceedings before the Debts Recovery Tribunal (DRT). Later, the bank also initiated insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal (NCLT).
The court observed that decisions related to OTS schemes fall entirely within the commercial wisdom of banks. It stated that if a bank considers that the borrower has the financial capacity to repay or that recovery is achievable through the sale of mortgaged property, it is justified in refusing OTS benefits. The bench maintained that banks must be allowed to take such calls based on their internal assessments without judicial interference.
Rejecting the argument that insolvency laws are intended to grant companies a second chance, the bench clarified that while such mechanisms provide an opportunity for resolution, they do not erase the borrower's or guarantor's repayment obligations. The judges pointed out that when both parties have willingly entered into contractual terms, they cannot later expect the bank to compromise on repayment conditions under the doctrine of legitimate expectation.
The court also stressed that fairness in financial dealings extends to the borrower's conduct as well. The bench stated that fairness should translate into fulfilling repayment commitments within agreed timelines rather than seeking relief through judicial intervention. It added that public interest would not be served by allowing courts to alter commercial decisions made by banks in the course of recovery.
The ruling aligns with the Supreme Court's earlier stance that one-time settlement schemes are concessions, not entitlements, and borrowers can only claim them if they meet specific eligibility and payment conditions. Legal experts believe the Bombay High Court's decision reinforces financial discipline and strengthens lenders' autonomy in handling defaults.
5th Jun, 2025
25th May, 2023
11th May, 2023
27th Apr, 2023
Advertisement
Facebook
Whatsapp
