One Time Settlement Is a Concession, Not a Right: Bombay High Court Refuses to Mandate Acceptance or Benchmark Disclosure of OTS Proposal

"Just because a borrower has submitted the proposal for OTS... will not create semblance of right in favour of the borrower" —  In a significant decision Bombay High Court (Nagpur Bench) dismissed a writ petition filed under Article 226 of the Constitution, where a personal guarantor sought a judicial direction compelling Indian Bank (Erstwhile Allahabad Bank) to accept or justify its rejection of an One Time Settlement (OTS) proposal for a defaulted corporate loan. The Court categorically ruled that OTS schemes are policy-driven commercial concessions and cannot be enforced through judicial orders, especially in absence of any statutory obligation or existing public policy.

Justice Rajnish R. Vyas and Justice Anil S. Kilor ruled that not only fortifies settled legal principles governing bank-borrower relationships, but also emphasizes the primacy of contractual obligations and the restrained role of constitutional courts in financial matters involving public money.

The main issue before the Court was whether a borrower or guarantor, merely by making an OTS proposal, could seek a judicial direction under Article 226 to compel a bank to either accept the offer or disclose internal benchmarks for its rejection. The answer was an emphatic no.

“OTS Proposals Cannot Be Enforced by Mandamus”: Court Reaffirms That Judicial Review Cannot Re-write Commercial Contracts

The petitioner, Ms. Archana Wani, a Director and Shareholder of N. Kumar Housing and Infrastructure Ltd., was also the guarantor and mortgagor for a term loan of Rs. 62 Crores extended to Poonam Resorts Ltd. in 2011 by the Bank. After persistent defaults by the principal borrower, the loan account was declared a Non-Performing Asset (NPA) on 31 March 2017, triggering recovery actions under Section 13(2) and 13(4) of the SARFAESI Act, 2002. Later, insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) were also initiated by the bank before the NCLT, Mumbai.

The petitioner submitted that she had made multiple proposals for One Time Settlement, which were rejected on vague grounds that they “failed to meet the benchmark.” Alleging arbitrariness and opacity, she approached the High Court seeking directions to the bank to disclose its OTS benchmarks, and to compel acceptance of the proposal. She further invoked the doctrine of legitimate expectation, claiming that the bank’s actions were contrary to RBI guidelines and her right to fair treatment.

The Bank, represented by Mr. A.T. Purohit, opposed the petition, arguing that OTS schemes are voluntary policy concessions, and the contract terms cannot be judicially altered. It also emphasized that the recovery was of public money, and both SARFAESI and IBC proceedings were already in motion.

Rejecting the petitioner’s arguments, the Court held:

“The loan agreement entered into amongst creditor, principal borrower and guarantor is nothing but a contract and asking the creditor / bank to settle the amount as per OTS proposal would amount to rewriting terms and conditions of contract.”

"Bank Deals with Public Money; Its Commercial Wisdom Must Prevail"

One of the key observations of the Court centered around public interest and the fiduciary duty of banks. The Court refused to dilute this by allowing judicial intervention in the form of mandamus to compel banks to entertain or accept discounted settlements. It observed:

“As rightly submitted by the learned counsel for the bank, it deals with public money and therefore, asking it to settle the account by accepting OTS would not be in the interest of public at large.”

It further ruled that just because OTS proposals were submitted and rejected did not create any enforceable right:

“Just because borrower has submitted the proposal for OTS which from time to time is taken into consideration and rejected by giving reason that it does not match benchmark, will not create semblance of right in favour of the borrower.”

The Court dismissed the claim that non-disclosure of benchmarks was arbitrary:

“The contention of petitioner that benchmark was not disclosed by the bank is also not very appealable... nothing has been brought to our notice that disclosing benchmark was mandatory under any provision.”

“No Legitimate Expectation Without Policy or Promise”: Doctrine Dismissed in Absence of RBI Mandated OTS Scheme

The petitioner heavily relied on Mohanlal Patidar v. Bank of Maharashtra, 2022 (2) MPLJ 276, invoking the doctrine of legitimate expectation, and asserting that the bank's refusal violated Article 14. However, the Court found that the case had no application in absence of any formal OTS scheme or guidelines:

“There was absolutely no policy laid down by the respondent lender bank for OTS... therefore, there is no question of legitimate expectation since there was no expressed promise or existing regular practice of OTS which has been brought to the notice of the Court.”

Referring to Sardar Associates v. Punjab & Sind Bank, (2009) 8 SCC 257, the Court distinguished the facts by stating that in that case, RBI guidelines existed and were violated, whereas here, no RBI-mandated OTS scheme was produced.

"Judicial Interference in OTS Would Reward Dishonest Borrowers": Supreme Court's Guidance Followed

The Court placed significant reliance on the Supreme Court’s authoritative ruling in Bijnor Urban Cooperative Bank Ltd. v. Meenal Agrawal, (2023) 2 SCC 805, which held that no borrower can claim OTS as a matter of right, and that judicial directions under Article 226 compelling banks to consider or accept such proposals would lead to an unjust situation. Citing the judgment, the Bombay High Court observed:

“If it is held that the borrower can, as a matter of right, pray for benefit under the OTS Scheme, in that case, it would be giving a premium to a dishonest borrower... Such cannot be the intention of the bank while offering OTS Scheme.”

The Bench further noted that “the grant of benefit under the OTS is always subject to the eligibility criteria mentioned under the OTS Scheme and the guidelines issued from time to time.”

“Courts Cannot Modify Loan Contracts in Writ Jurisdiction”

On the issue of whether courts can alter the repayment terms under a contract, the Court referred to the Indian Contract Act, and the judgment in State Bank of India v. Arvind Electronics Pvt. Ltd., (2023) 1 SCC 540, reiterating:

“Rescheduling the payment under the OTS Scheme and granting extension of time would tantamount to rewriting the contract which is not permissible while exercising the powers under Article 226.”

The Court was clear that any relief in terms of contract modification must flow from mutual agreement, not judicial fiat.

Final Order and Relief

Dismissing the petition in its entirety, the Court ruled:

“We are of the opinion that exercising power under Article 226 of the Constitution of India would not be in the interest of justice and therefore, petition is dismissed.”

However, considering the fact that an interim stay on recovery proceedings had been in force since June 20, 2023, the Court allowed it to continue for a further six weeks, post which it would automatically stand vacated.

Key Takeaways:

• OTS is not a legal entitlement and cannot be claimed as a matter of right under Article 226.

• Banks are not legally bound to disclose internal benchmarks for OTS rejection unless mandated by law or policy.

• Doctrine of legitimate expectation is inapplicable in absence of express policy or promise.

• Judicial interference in financial recovery processes like SARFAESI and IBC is discouraged unless there is patent illegality or violation of law.

• Courts cannot re-write contracts under writ jurisdiction, especially when dealing with public money.

Date of Decision: 17 October 2025