The Supreme Court of India, in a significant ruling on banking law, has held that a borrower’s failure to deposit the mandatory upfront amount with their application for a One-Time Settlement (OTS) scheme renders the application incomplete and ineligible for processing. A bench comprising Justices Dipankar Datta and Augustine George Masih set aside a judgment of the Andhra Pradesh High Court that had directed the State Bank of India (SBI) to reconsider a borrower’s OTS application. The Court found that the borrower’s non-compliance with the essential precondition of the scheme was a fundamental flaw justifying the bank’s rejection.
Background of the Case
The case originated from a credit facility availed by Tanya Energy Enterprises (the respondent/borrower) from the State Bank of India (the appellant/secured creditor), for which seven immovable properties were mortgaged. The borrower defaulted on repayments, leading SBI to classify the account as a “non-performing asset” (NPA) and issue a demand notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
Subsequently, SBI initiated recovery proceedings before the Debts Recovery Tribunal (DRT), Vishakhapatnam. In November 2018, the bank sanctioned a “compromise sanction letter” for Rs. 5 crore, but the borrower failed to adhere to the payment schedule, causing the compromise to be cancelled in February 2019.
Following the failed compromise, SBI proceeded with measures under Section 13(4) of the SARFAESI Act, issuing a sale notice for the mortgaged properties. The borrower’s challenge before the DRT resulted in a temporary stay, which was later vacated due to non-compliance with deposit conditions. One of the properties was eventually sold in an auction.
In October 2020, SBI introduced a new OTS scheme (OTS 2020 Scheme). Tanya Energy Enterprises applied to avail this scheme through letters dated October 19 and November 10, 2020. However, on November 17, 2020, SBI rejected the application, citing the borrower’s past conduct, including failure to comply with the previous compromise and DRT orders.
Aggrieved by the rejection, the borrower filed a writ petition in the High Court of Andhra Pradesh. A Single Judge allowed the petition, holding that the scheme was non-discretionary and directed SBI to process the application. The decision was upheld by a Division Bench in a writ appeal filed by the bank, prompting the present appeal before the Supreme Court.
Arguments of the Parties
Mr. Venkatraman, learned Additional Solicitor General appearing for SBI, argued that the High Court erred in its decision. He contended that an OTS scheme cannot be enforced through a writ petition under Article 226 of the Constitution unless all conditions are met. He emphasized that the borrower’s conduct, including failure to honour commitments and DRT orders, was a relevant factor that justified the rejection of the OTS proposal.
Conversely, Mr. D.S. Naidu, learned senior counsel for Tanya Energy Enterprises, defended the High Court’s judgment. He argued that the court had only directed a reconsideration, not a positive grant of OTS. He submitted that the rejection was arbitrary, especially since the borrower had deposited Rs. 1.5 crore in good faith over time. He asserted that the failure of the 2018 compromise could not be a valid ground for rejecting an application under the new 2020 scheme.
Court’s Analysis and Reasoning
The Supreme Court, after examining the records, identified a critical aspect that was overlooked by the High Court: Clause 4(i) of the OTS 2020 Scheme. This clause stipulated that a borrower must deposit 5% of the OTS amount as an upfront payment at the time of submitting the application to indicate their willingness for the settlement.
The judgment noted, “We did not find the respondent, while applying for the benefit of the OTS 2020 Scheme, to have deposited a single paisa towards up-front payment.” The Court held that this omission was fatal to the application. According to the terms of the scheme, “any application received without up-front payment is not required to be processed even. Thus, in the first place, the respondent’s application was incomplete and it did not have any right in law to claim that such application should be processed.”
The bench acknowledged the legal principle established in Mohinder Singh Gill v. Chief Election Commissioner, which mandates that the validity of an administrative order must be judged only by the reasons stated within it. However, the Court carved out an exception for cases where an alternative and fundamental ground for the decision is apparent from the records, even if not explicitly mentioned in the rejection order.
The Court found that the failure to make the upfront payment was such a fundamental ground that it “strikes at the heart of the matter and fully justifies the conclusion in the impugned order of rejection.”
The judgment further clarified that merely not falling into the “not eligible” category under clause 2.1 of the scheme did not automatically entitle a borrower to consideration. The Court observed, “Crossing the hurdle of eligibility per se would not entitle a defaulting borrower to claim consideration of his/its application unless the application itself satisfies the other stipulated conditions.”
The Court reasoned that directing a re-consideration would be futile, as SBI would be justified in rejecting the application again on the valid ground of non-payment of the upfront amount. “Would, in such circumstances, the cause of justice be advanced by not interfering with the impugned judgment and order? We think not,” the bench remarked.
Decision of the Court
The Supreme Court allowed SBI’s appeal and set aside the judgments of the Single Judge and the Division Bench of the High Court. The Court concluded that “the respondent’s conduct disabled itself to have a fair and objection consideration of its application for OTS.”
The appellants (SBI) were declared free to proceed with the enforcement of the security interest in accordance with the law. However, the Court also granted the respondent (Tanya Energy Enterprises) an opportunity to submit a fresh proposal for an OTS, but specified that it could not be under the now-lapsed OTS 2020 Scheme. The bench stated that if the new terms are found “reasonable, workable and acceptable,” the bank may take an appropriate decision.
