Bank Cannot Backout From OTS Offer After It Is Accepted By Borrower: Madhya Pradesh High Court

The Madhya Pradesh High Court recently held that a Bank cannot backout from implementing the One Time Settlement (OTS) offer it had proposed, after it was accepted by the borrower.

Calling such an action by the Bank as arbitrary and unreasonable, Justice Sanjay Dwivedi observed-

In the case at hand, the petitioner being a guarantor had mortgaged his personal property and after much haggling happened between the parties, the offer made by the respondent-Bank was accepted by the petitioner and therefore looking to the object of OTS Scheme which ensures speedy closer of the cases to avoid tardy recovery from borrower in which to larger extent the bank faces difficulty to recover the amount, unflaggingly I find no justifiable reason for the respondent-Bank to back-out from the offer accepted by the petitioner that too pursuant to the offer made by the Bank.

Facts of the case were that the Petitioner, in the capacity of the Director of a company, stood as guarantor for a loan advanced by the Respondent Bank and had mortgaged his immovable property for the same. The loan was later declared as Non-Performing Asset by the Bank. After a round of negotiations, both parties agreed to settle the loan with the Bank proposing an OTS offer which was accepted by the Petitioner. However, the Bank subsequently withdrew the offer. The Petitioner made multiple representations to the Respondent Bank against the withdrawal but to no anvil. Aggrieved, he approached the Court to challenge the actions of the Bank.

The Petitioner submitted before the Court that the Bank did not provide him with a justifiable reason to withdraw the OTS offer that was agreed upon by both the parties. He further pointed out that the Bank did not submit any pleading before the Court in his case, which went on to demonstrate that their decision was illogical. Therefore, it was asserted that his petition be allowed.

Examining the submissions of the Petitioner and the documents on record, the Court concurred with the contentions put forth by him. Explaining the rationale behind an OTS offer, the Court observed-

The basic object of the OTS Scheme is that the account which became irregular and/or declared Non-Performing Account and if an acceptable offer is made by the defaulter for settling the dispute finally, then to avoid time consuming litigation in the courts and wasting energy in recovering the amount, it could be settled so as to recover the amount, which is undoubtedly a public money. In other words, the Bank may be writing off possibly substantial portion of its liabilities, but once it agrees, the borrower can take appropriate steps to raise the amount, and ordinarily, the bank should not resile from this arrangement.

The Court opined that a Bank is at liberty to accept or reject the offer put forth by the borrower to settle an NPA but a borrower cannot, as a matter of right, pray for grant of benefit of OTS scheme. Having said that, the Court noted that if the offer given by the Bank has been accepted by the borrower, the Bank cannot backout from its offer and that too without assigning any reason.

Supplementing its observations, the Court referred to the decision of a division bench of the Court in Shri Mohanlal Patidar v. Bank of Maharashtra & Anr., wherein it was held that an OTS scheme is binding and that the Bank can neither enhance the amount nor by any stretch of imagination can treat the offer, which was duly accepted, as elapsed.

Finding merit in the case of the Petitioner, the Court held the actions of the Bank to be arbitrary and unreasonable-

As such, the decision taken by the Respondent-Bank backing out with its proposal, which had already been accepted by the petitioner, is nothing but an arbitrary action and it can very well be held that the Bank has not acted in just, proper and reasonable manner.

In view of above discourse, the action of respondent-Bank of withdrawing its offer already accepted by the petitioner and asking him to deposit full amount, cannot be given stamp of approval.

With the aforesaid observations, the Court set aside the order passed by the Respondent Bank, whereby the OTS scheme offered to, and later accepted by the Petitioner was subsequently withdrawn. Accordingly, the petition was allowed.

Case Title : SHRI PAWAN AGRAWAL v SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

Case citation: 2022 LiveLaw (MP) 213

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