Introduction

The Supreme Court of India (“Apex Court”) in the case of The Bijnor Urban Cooperative Bank Limited, Bijnor & others vs. Meenal Agarwal & others, 2 held that the High Court cannot issue a writ of mandamus3 compelling a financial institution/bank to afford a borrower the benefit of One Time Settlement (“OTS”) under Article 226 of the Indian Constitution. It went on to say that benefits under the OTS Scheme (“Scheme”) cannot be sought as a matter of right, but must instead meet the Scheme's eligibility requirements. 

Brief Facts 

The Bijnor Urban Cooperative Bank Limited (“Appellants”) had provided a credit facility of INR 1,00,00,000 (Indian Rupees One crore) (“Credit Facility”) to Meena Agarwal (“Respondent”). Since the Respondents failed to deposit any money into the loan account set up for repaying the Credit Facility4 (“Loan Account”), even though they were servicing two other loan accounts on a regular basis, the Appellant labelled the Loan Account as a non-performing asset (“NPA”) and also initiated proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). Further, when the Appellant issued the Scheme5 the Respondent submitted an application for the consideration, which was rejected vide communication dated September 17, 2019 (“Bank Decision”), as her Loan Account was declared as an NPA. To remove this difficulty of NPA, the Respondent deposited INR 60,00,000 (Indian Rupees Sixty lakhs). Pursuant to this, the Appellant passed a resolution dated December 28, 2020 stating that, the Respondent is not eligible for benefit under the Scheme as the Loan Account is entirely recoverable, and all options for recovering the loan amount have not yet been exhausted, thus there is still a prospect of recovering the loan amount.

Proceedings before the Allahabad High Court 

The Respondent filed a writ petition6 before the Allahabad High Court (“High Court”), challenging the Bank Decision, which was disposed of, directing the Appellant to consider the Respondent's grievance and decide her representation after giving her an opportunity to be heard. Thereafter, the Respondent resubmitted an application to the Appellant for grant of OTS benefit, which was again rejected by the Appellant7 (“Bank Order”). Subsequently, the Respondent filed a fresh writ petition8 before the High Court to quash the rejection of OTS benefit by the Appellant and prayed for a writ of mandamus to direct the Bank to give the benefit of OTS. 9 After hearing both the parties, the High Court in exercise of powers under Article 226 of the Constitution of India, issued a writ of mandamus directing the Appellant to reconsider the Respondents application for grant of benefit under the Scheme (“High Court Order”). Aggrieved by the High Court Order, the appeal came before the Apex Court. The issues that came for consideration before the Apex Court  were: 

a. Whether benefit under the Scheme can be prayed as a matter of right? 

b. Whether the High Court in exercise of powers under Article 226 of the Constitution of India can issue a writ of mandamus directing the Appellant to positively consider the grant of benefit under the Scheme and that too de hors the eligibility criteria mentioned under the Scheme?

Contentions

The counsel for the Appellant submitted that, a conscious decision was taken by the Appellant and the Settlement Advisory Committee, in consideration to the Reserve Bank of India (“RBI”) guidelines10 and the Scheme, that the Respondent was not eligible for grant of benefit of OTS as she did not fulfil the eligibility criteria for availing the benefit of OTS and therefore, erred in issuing the writ of mandamus in exercise of its powers under Article 226 of the Constitution of India11 and setting aside the Bank Order. It further submitted that the benefit of OTS cannot be asked as a matter of right by any person who is in default, but it is granted as per the RBI guidelines and the conditions in the Scheme. Moreover, the Respondent had been making regular payments in the other two loan accounts, insofar as the Loan Account was concerned, not a single payment was made till March 2020. The counsel contended that the Respondent intentionally deposited INR 60,00,000 (Indian Rupees Sixty lakhs) to avail the OTS benefit, upon which the Appellant had found that there were chances of recovering the entire loan amount by auctioning the mortgaged property or other properties put as security. Most importantly it was submitted that if it is found that there are chances of recovering the loan amount by auctioning the mortgaged property and/or by auctioning the other properties which are put as a security and the chances of recovery of the entire loan amount are not diminished, the Appellant is justified in refusing to grant the benefit under the Scheme.

The counsel for the Respondent argued that under the Scheme, a loanee is required to deposit at least 25% (twenty five percent) of the total amount along with the application, however the Respondent had deposited more than 50% (fifty percent) of the total amount. Therefore, Respondent’s application for grant of OTS benefit was rejected even though she was eligible for such benefit and was ready to deposit the entire OTS amount and as such the rejection by the Appellant was arbitrary and against principles of natural justice. It was further put forth that, since the Appellant had accepted the deposit of INR 60,00,000 (Indian Rupees Sixty lakhs), the rejection of the application for grant of benefit under the OTS is malafide

Judgment  

The Apex Court noted that under the RBI guidelines, the Scheme's grant of benefits cannot be prayed as a matter of right and must be subject to the Scheme's eligibility criteria being met. It was further noted by the Apex Court that a wilful defaulter in repayment of loan who has not paid even a single instalment after taking the loan will be considered in the category of “defaulter” and will not be eligible for grant of benefit under the Scheme.12 Since in the present case, the Respondent and her husband were making the payments regularly in two other loan accounts and those accounts are regularised, they have the capacity to make the payment even with respect to the Loan Account. While reaching its judgement, the Apex Court held that the HighCourt cannot issue a writ of mandamus compelling a financial institution/bank to award a borrower the benefit of OTS in the exercise of its powers under Article 226 of the Indian Constitution. The grant of benefit will always be subject to the eligibility criteria and if the bank/financial institution is of the opinion that the loanee has the capacity to make the payment and/or that the bank/financial institution is able to recover the entire loan amount even by auctioning the mortgaged property/secured property, either from the loanee and/or guarantor, the bank would be justified in refusing to grant the benefit under the Scheme. Hence, the High Court Order was quashed and set aside.

CONCLUSION

This judgment by the Apex Court will prove to be a vital step to stop unscrupulous loan defaulters from taking undue advantage of OTS. It will give banks/ financial institutions the authority to take prudent decisions of whether to grant the benefit or not under the Scheme and safeguard public funds. It will also ensure that the Scheme is availed by borrowers actually in need of such benefit and not encourage wilful defaulters to use it as an escape mechanism to wriggle out of its obligations. In conclusion, the banks and/or financial institutions will be able to recover the loan amounts from defaulters capable of repaying the loan amounts, without the defaulters hiding behind the interpretation loopholes of the RBI Guideline and the Scheme.