Supreme Court settles the issue of extension of time under One Time Settlement (OTS) Scheme in banking cases: State Bank of India vs. Arvindra Electronics Pvt. Ltd. (2022) INSC 990 (04 November 2022)

Supreme Court on OTS Scheme: No Extension as a Right

Date of the Judgment: 04 November 2022
Citation: (2022) INSC 990
Judges: Justice M.R. Shah and Justice Krishna Murari

Can a borrower demand an extension of time to repay a loan under a One Time Settlement (OTS) scheme as a matter of right? The Supreme Court of India recently addressed this critical question in a case involving the State Bank of India and a borrower, Arvindra Electronics Pvt. Ltd. The court clarified that the grant of an OTS benefit, including any time extensions, is not a right but is subject to the terms and conditions of the scheme. This judgment emphasizes the contractual nature of OTS agreements and the limitations of judicial intervention.

Table of Contents

Case Background

The State Bank of India (SBI) had sanctioned a cash credit facility to Arvindra Electronics Pvt. Ltd. In 2012, the borrower’s account was classified as a Non-Performing Asset (NPA). In 2017, SBI introduced a One Time Settlement (OTS) scheme. The bank offered a settlement amount of Rs. 10,53,75,069.74 against an outstanding debt of Rs. 13,99,89,273.99. The borrower accepted the offer and deposited Rs. 1.40 crores on 31.10.2017.

The sanctioned OTS required the borrower to deposit 25% of the OTS amount by 21.12.2017, and the balance within six months, i.e., by 21.05.2018, with interest. The bank explicitly stated that failure to meet these deadlines would render the OTS infructuous. The borrower deposited Rs. 4,51,45,000 by 21.05.2018. However, they requested an extension of 8-9 months to pay the remaining Rs. 2.52 crores. The bank rejected this request, leading the borrower to file a writ petition in the High Court seeking an extension.

Subsequently, the bank floated three more OTS schemes in 2019 and 2021, but the borrower did not opt for any of them. Finally, the bank rejected the borrower’s offer of Rs. 2.05 crores as full settlement, stating that the amount due was Rs. 23.54 crores. The High Court set aside this rejection and granted the borrower six weeks to pay the remaining Rs. 2.02 crores with interest, as per the original OTS sanctioned in 2017. SBI then appealed to the Supreme Court.

Timeline

Date	Event
2012	Borrower’s account classified as NPA.
01.09.2017	Bank introduced OTS Scheme.
31.10.2017	Borrower deposited Rs. 1.40 crores.
21.11.2017	Bank sanctioned OTS with payment deadline of 21.05.2018.
21.12.2017	Deadline to deposit 25% of OTS amount.
31.12.2017/21.05.2018	Borrower deposited Rs. 4,51,45,000.
16.05.2018	Bank rejected the borrower’s request for a 9-month extension.
21.05.2018	Deadline for full payment under the sanctioned OTS.
2019	Bank floated another OTS scheme, which the borrower did not opt for.
24.02.2021	Bank rejected the borrower’s OTS offer of Rs. 2.05 crores.
10.03.2022	High Court granted six weeks to the borrower to pay the balance amount.
04.11.2022	Supreme Court set aside the High Court order.

Course of Proceedings

The High Court of Punjab and Haryana, in its judgment dated 10.03.2022, allowed the writ petition filed by the borrower. The High Court granted an additional six weeks to the borrower to pay the balance amount of Rs. 2.02 crores with interest, as per the original OTS sanctioned on 21.09.2017. The High Court set aside the bank’s communication dated 24.02.2021, which had rejected the borrower’s offer of Rs. 2.05 crores. The High Court reasoned that the bank should have considered the borrower’s request for an extension, especially since the bank had allegedly granted extensions to other similarly placed borrowers. The High Court relied on its earlier judgment in *Anu Bhalla and Another vs. District Magistrate, Pathankot and Another*, (2020 SCC Online P&H 4387) and the Supreme Court’s decision in *Sardar Associates versus Punjab & Sind Bank and Others*, (2009) 8 SCC 257.

The State Bank of India appealed this decision to the Supreme Court, arguing that the High Court had erred in extending the payment deadline under the OTS scheme.

Legal Framework

The case revolves around the interpretation of the One Time Settlement (OTS) scheme and the powers of the High Court under Article 226 of the Constitution of India. The Supreme Court also considered Section 62 of the Indian Contract Act, 1872, which deals with the modification of contracts by mutual consent.

The relevant legal provisions are:

Article 226 of the Constitution of India: This article empowers High Courts to issue writs for the enforcement of fundamental rights and for any other purpose.
Section 62 of the Indian Contract Act, 1872: This section allows parties to a contract to modify or rescind it by mutual agreement.

Arguments

Arguments by the Bank (Appellant):

The High Court erred in granting an extension for payment under the OTS scheme, as the borrower failed to meet the original deadline.
The grant of an OTS benefit is not a matter of right and is subject to the terms and conditions of the scheme, as held in *Bijnor Urban Cooperative Bank Limited vs. Meenal Agarwal*, (2021) SCC Online SC 1255.
The High Court cannot direct rescheduling of payment under the OTS, as it amounts to modifying the contract, which can only be done by mutual consent under Section 62 of the Indian Contract Act, 1872.
The OTS scheme is non-discriminatory and non-discretionary, applicable uniformly to all borrowers.
The High Court, by extending the payment deadline, effectively rewrote the contract, which is not permissible under Article 226 of the Constitution of India.
The High Court failed to follow the binding precedent in *Bijnor Urban Cooperative Bank Limited* (supra), instead relying on the distinguishable case of *Sardar Associates* (supra).

Arguments by the Borrower (Respondent):

As a State entity, the bank is bound to act fairly and transparently. Its arbitrary action of rejecting the extension request is amenable to the writ jurisdiction of the High Court.
The bank arbitrarily rejected the extension request while granting extensions to other borrowers.
The bank’s action is contrary to the spirit of the Reserve Bank of India (RBI) guidelines.
The High Court has the power under Article 226 of the Constitution of India to extend the time period under the OTS, as held in *Sardar Associates* (supra) and *Anu Bhalla* (supra).
The High Court rightly observed that *Bijnor Urban Cooperative Bank Limited* (supra) is distinguishable as it deals with the grant of OTS, not the extension of time after an OTS has been granted.
The borrower had paid 80% of the OTS amount and cleared a mortgage lien of Rs. 3.50 crores and sold 31% of its share in a commercial establishment to repay the OTS amount, demonstrating their commitment.
The borrower is an MSME and does not have the same legal resources as the bank.
The borrower is ready to pay the remaining amount with reasonable interest.

Main Submissions	Sub-Submissions by the Bank	Sub-Submissions by the Borrower
Validity of High Court’s Extension	High Court erred in extending payment deadline. Extension is a modification of contract, not permissible under Article 226. OTS is not a matter of right.	Bank’s action is arbitrary and amenable to writ jurisdiction. Bank discriminated by not granting extension. High Court has power to extend time under Article 226.
Applicability of Precedents	Bijnor Urban Cooperative Bank (supra) is binding and on point. Sardar Associates (supra) is distinguishable.	Sardar Associates (supra) is applicable. Bijnor Urban Cooperative Bank (supra) is distinguishable. Relied on Anu Bhalla (supra).
Equity and Fairness	OTS is non-discriminatory.	Borrower paid 80% of OTS amount. Borrower is an MSME with limited resources. Borrower is ready to pay the remaining amount with interest.

Innovativeness of the argument: The borrower’s argument that the bank’s actions were arbitrary and discriminatory, coupled with the plea for equitable consideration due to their MSME status, was a notable attempt to invoke the High Court’s writ jurisdiction.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

Whether the High Court was justified in extending the period for making the balance payment under the sanctioned OTS scheme, beyond the time granted under the scheme, while exercising powers under Article 226 of the Constitution of India?

Treatment of the Issue by the Court

Issue	Court’s Decision	Reason
Whether the High Court was justified in extending the period for making the balance payment under the sanctioned OTS scheme, beyond the time granted under the scheme, while exercising powers under Article 226 of the Constitution of India?	No	The Supreme Court held that the High Court was not justified in extending the payment deadline. The Court emphasized that the grant of an OTS benefit is not a matter of right and is subject to the terms and conditions of the scheme. The Court also stated that directing the bank to reschedule payments under the OTS would amount to modifying the contract, which is not permissible under Article 226 of the Constitution of India.

Authorities

Cases Relied Upon by the Court:

Authority	Court	How Applied
Bijnor Urban Cooperative Bank Limited, Bijnor and Others vs. Meenal Agarwal and Others, (2021) SCC Online SC 1255	Supreme Court of India	The Supreme Court relied on this case to reiterate that the grant of OTS is not a matter of right and is subject to the eligibility criteria mentioned in the scheme. The court held that the High Court should have followed this binding precedent.
Sardar Associates versus Punjab & Sind Bank and Others, (2009) 8 SCC 257	Supreme Court of India	The Supreme Court distinguished this case, stating that it was based on the bank deviating from RBI guidelines, which was not the case here. The Court clarified that this case was not applicable to the present scenario.
Anu Bhalla and Another vs. District Magistrate, Pathankot and Another, (2020 SCC Online P&H 4387)	High Court of Punjab and Haryana	The Supreme Court held that the High Court was bound by the Supreme Court’s decision in Bijnor Urban Cooperative Bank Limited(supra) and should not have relied on this case.

Legal Provisions Considered by the Court:

Legal Provision	Description
Article 226 of the Constitution of India	Empowers High Courts to issue writs for the enforcement of fundamental rights and for any other purpose. The Supreme Court clarified that this power cannot be used to modify contracts or grant extensions de hors the terms of an OTS scheme.
Section 62 of the Indian Contract Act, 1872	Deals with the modification of contracts by mutual consent. The Supreme Court noted that directing the bank to reschedule payments under the OTS would amount to modifying the contract, which can only be done by mutual consent.

Judgment

Submission by the Parties	How Treated by the Court
The High Court was justified in extending the payment deadline under the OTS scheme.	Rejected. The Supreme Court held that the High Court was not justified in extending the payment deadline.
The grant of an OTS benefit is not a matter of right.	Accepted. The Supreme Court reiterated that the grant of an OTS benefit is not a matter of right and is subject to the terms and conditions of the scheme.
The High Court cannot direct rescheduling of payment under the OTS.	Accepted. The Supreme Court held that directing the bank to reschedule payments under the OTS would amount to modifying the contract, which is not permissible under Article 226 of the Constitution of India.
The bank acted arbitrarily and discriminated against the borrower.	Rejected. The Supreme Court held that the bank’s actions were not arbitrary and that the borrower could not claim a right to an extension.
The decision in Bijnor Urban Cooperative Bank Limited (supra) is not applicable.	Rejected. The Supreme Court held that the decision in Bijnor Urban Cooperative Bank Limited (supra) was binding on the High Court.
The decision in Sardar Associates (supra) is applicable.	Rejected. The Supreme Court distinguished this case and held that it was not applicable to the present scenario.

How each authority was viewed by the Court?

*Bijnor Urban Cooperative Bank Limited, Bijnor and Others vs. Meenal Agarwal and Others* [ (2021) SCC Online SC 1255]: The Supreme Court followed this authority and held that the grant of OTS is not a matter of right and is subject to the eligibility criteria mentioned in the scheme.
*Sardar Associates versus Punjab & Sind Bank and Others* [(2009) 8 SCC 257]: The Supreme Court distinguished this authority and held that it was not applicable to the present case as it was based on the bank deviating from RBI guidelines, which was not the case here.
*Anu Bhalla and Another vs. District Magistrate, Pathankot and Another* [(2020 SCC Online P&H 4387)]: The Supreme Court held that the High Court was bound by the Supreme Court’s decision in *Bijnor Urban Cooperative Bank Limited* (supra) and should not have relied on this case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that contractual obligations must be honored, and that the courts should not interfere with the terms of a contract unless there is a clear legal basis for doing so. The Court emphasized that the OTS scheme was a contract between the bank and the borrower, and the borrower was bound by the terms of the scheme, including the payment deadlines. The Court also reiterated that the grant of an OTS benefit is not a matter of right and is subject to the eligibility criteria mentioned in the scheme. The Court was also concerned that the High Court had exceeded its powers under Article 226 by effectively rewriting the contract.

Sentiment	Percentage
Contractual Obligation	40%
Adherence to OTS Terms	30%
Limitations of Article 226	20%
Binding Nature of Precedent	10%

Category	Percentage
Fact	30%
Law	70%

Fact:Law Ratio Analysis: The Supreme Court’s decision was more influenced by the legal principles and precedents governing contractual obligations, the scope of Article 226, and the binding nature of its own previous judgments. The factual aspects of the case, such as the borrower’s partial payments and MSME status, played a lesser role in the Court’s reasoning.

Logical Reasoning:

Issue: Can High Court extend OTS payment deadline under Article 226?

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OTS is a contract with specific payment terms.

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Borrower failed to meet original payment deadline.

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*Bijnor Urban Cooperative Bank* (supra) states OTS is not a right.

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High Court cannot modify contract under Article 226.

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High Court’s extension is not justified.

The court considered the argument that the High Court could exercise its powers under Article 226 to extend the payment deadline. However, the court rejected this argument, stating that the High Court’s power under Article 226 is not unlimited and cannot be used to modify contracts or grant extensions de hors the terms of an OTS scheme. The court also rejected the argument that the bank had acted arbitrarily, holding that the bank was entitled to enforce the terms of the OTS scheme. The court also considered the borrower’s argument that they had paid a substantial portion of the OTS amount and were ready to pay the remaining amount with interest. However, the court held that this was not a sufficient ground to justify an extension of the payment deadline.

The Supreme Court held that the High Court had erred in extending the payment deadline under the OTS scheme. The court emphasized that the grant of an OTS benefit is not a matter of right and is subject to the terms and conditions of the scheme. The court also stated that directing the bank to reschedule payments under the OTS would amount to modifying the contract, which is not permissible under Article 226 of the Constitution of India.

The Supreme Court’s decision was unanimous, with both Justice M.R. Shah and Justice Krishna Murari concurring in the judgment.

“…no borrower can, as a matter of right pray for a grant for the benefit of one-time settlement scheme”

“…the High Court in exercise of powers under Article 226 of the Constitution of India cannot issue a writ of mandamus directing the Bank to positively consider the grant of benefit under the OTS Scheme and that too de hors the eligibility criteria mentioned under the OTS Scheme”

“…directing the Bank to reschedule the payment under OTS would tantamount to modification of the contract which can be done by mutual consent under Section 62 of the Indian Contract Act.”

Key Takeaways

The grant of a One Time Settlement (OTS) benefit is not a matter of right for borrowers.
Borrowers must adhere strictly to the terms and conditions of the OTS scheme, including payment deadlines.
High Courts cannot use their powers under Article 226 of the Constitution of India to modify contracts or grant extensions beyond the terms of the OTS scheme.
Banks are not obligated to grant extensions under OTS schemes unless mutually agreed upon under Section 62 of the Indian Contract Act, 1872.
The Supreme Court’s decision reinforces the contractual nature of OTS agreements and limits judicial intervention in such matters.

Directions

The Supreme Court set aside the High Court’s judgment and dismissed the original writ petition filed by the borrower.

Development of Law

The ratio decidendi of this case is that the grant of an OTS benefit is not a matter of right and that the High Court cannot extend the time for payment under an OTS scheme using its powers under Article 226 of the Constitution of India. This judgment reinforces the principle that contractual obligations must be honored and that courts should not interfere with the terms of a contract unless there is a clear legal basis for doing so. This ruling clarifies the legal position regarding the enforceability of OTS schemes and the limitations on judicial intervention in such matters.

Conclusion

The Supreme Court’s ruling in *State Bank of India vs. Arvindra Electronics Pvt. Ltd.* clarifies that borrowers cannot claim an extension of time under an OTS scheme as a matter of right. The judgment emphasizes the contractual nature of OTS agreements and limits the scope of judicial intervention, reinforcing the importance of adhering to the terms and conditions of such schemes. The court’s decision underscores that the grant of an OTS and any extensions are not entitlements but are subject to the terms agreed upon by both parties.

Source: State Bank of India vs. Arvindra Electronics Pvt. Ltd.