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

Case Title: 
Shri Pawan Agrawal Vs Small Industries Development Bank Of India (SIDBI)

Date of Order: 
September 15, 2022

Bench: 
Justice Sanjay Dwivedi

Parties:
Petitioners- Shri Pawan Agrawal
Respondents- Small Industries Development Bank Of India (SIDBI)

SUBJECT

The respondent-Bank had sanctioned a loan to the company M/s. Madhya Bharat Phosphate Private Limited to which the petitioner, being the Director of the company, stood as guarantor by mortgaging his property. On the loan being declared as Non-Performing Asset, the Bank went on to initiate Corporate Insolvency Process. After some negotiation, the parties agreed to a One Time Settlement by which the petitioner can offer to pay a certain amount towards the full and final settlement of his personal guarantee. After modifying the offers put forth by the petitioner several times, the Bank itself gave an offer to the petitioner to pay Rs.75 21,690.80 with 5% upfront amount towards full and final satisfaction of his personal guarantee. The petitioner accepted the offered OTS amount by the Bank. However, the Bank withdrew its offer by means of a letter dated 23.11.2021. Despite approaching the Bank several times, there was no response. Thus, the petitioner approached this Court. Despite a notice being delivered, nobody was present in representation of the respondent-Bank. Thus this judgement was delivered on the basis of arguments submitted by the petitioner and the available documents on record.

IMPORTANT PROVISIONS

• Doctrine of Legitimate Expectation- This doctrine is one of the fundamental principles of European Community Law. It has its origins from the statement of Lord Diplock in CCSU vs Minister for the Civil Service [1985 AC 374]. It states that a person may have a legitimate and reasonable expectation of benefit from an administrative authority, and if so the court shall protect his such right. This may arise from any situation similar to the following circumstances:

1. a person is given permission to enjoy a certain right, unless and until he is communicated the opposite or it is withdrawn, on the basis of rational reasons, and on which he may comment upon.
2. he has assurance from the concerned authority that he shall be informed before such withdrawal, and the reasons for the same, which he may contend.
3. it may extend to a benefit in the future also, which has not been enjoyed yet. 

OVERVIEW

• The respondent-Bank had sanctioned a loan to M/s. Madhya Bharat Phosphate Private Limited of which the petitioner was the Director, and he stood as guarantor, mortgaging his immovable property. When the loan account of the Company became NPA, the Corporate Insolvency Resolution Process was initiated. This was done before the NCLT and based on its order dated 11.09.2018. In this manner, the Bank received a sum of Rs.3,28,91,948/- in lieu of the agreed loan facility. On receiving the required amount the Bank issued NOC in favour of the Company. A copy of NOC was made available on record.
• Despite this, the Bank further initiated recovery from the guarantor, that is, the petitioner. In a letter dated 23 10.2020, the Bank asked the petitioner to submit a compromise proposal towards full and final settlement of his personal guarantee. In reply to this, the petitioner submitted an offer of Rs 30,00,000/- which was the first of the several offers refused by the Bank, asking the petitioner to modify the amount. The petitioner escalated it to Rs.35,00,000, which was also refused. On offering Rs.40,00,000, the Bank asked him to visit the Branch for a discussion, following which the amount was escalated to Rs. 56. 30 Lac, 10% of which was deposited as an upfront amount with the Bank.
• The Bank accepted the offer to consider One Time Settlement (OTS) , Rs 56.30 lac subject to an upfront deposit of Rs 5.63 lac as 10% of OTS amount. In response, the petitioner submitted a compromise offer in the format prescribed by the Bank. The Bank demanded a copy of the same which was submitted by the petitioner. After this, by an order dated 23.11.2021, Bank again made an offer to the petitioner to pay Rs.75.21.690.80 with a 5% upfront amount towards full and final satisfaction of his personal guarantee. The petitioner accepted this. However, in a letter dated 3.12.21, the Bank withdrew its offer.
• In response to a representation done by the petitioner on 29.01.22, the Bank demanded entire outstanding dues from the petitioner. When the petitioner approached the bank to settle the issue, there was no response.
• Thus, the petitioner demanded issuance of the writ of Certiorari, quashing the letters sent by the Bank indicating withdrawal of the offer and the demand for entire outstanding dues. A writ of Mandamus was also requested to be issued, directing the respondent to accept the compromise offer put forth by the petitioner. The letter offering the petitioner to pay Rs.75.21.690.80 with a 5% upfront amount towards full and final satisfaction of his personal guarantee was also to be reinstated.
• The petitioner further requested the Court to command the Bank not to issue any more illegal demands from the petitioner, along with any other relief the Court deems fit and a cost of the petition.

ISSUES RAISED

• Whether a Bank can back out from implementing the One Time Settlement (OTS) offer it had proposed after it was accepted by the borrower?

ARGUMENTS ADVANCED BY THE PETITIONER

• The offer to pay Rs.75.21.690.80 with a 5% upfront amount towards full and final satisfaction of the petitioner’s personal guarantee was put forward by the Bank after much correspondence between them, which was also accepted by the petitioner. There was no reason for the Bank to withdraw the offer without any reason. This act was in contradiction to the object of the On Time Settlement offer itself.
• The Bank did not give any response to the petitioner despite a certain amount according to the offer being deposited to the Bank, by the petitioner as an upfront amount.  The conduct of the Bank deserves to be castigated the Bank did not appear before Court to justify its actions also. It is highly unexpected and unacceptable of a Government Bank to behave in this manner.
• As the Bank itself has not come forward to provide any logical ground behind its actions, it lacks the same. Hence, the petition deserved to be allowed.

JUDGEMENT ANALYSIS

• The dispute, in this case, was only regarding the personal guarantee given by the petitioner. It can be seen that the Bank has already recovered an amount of Rs.3,28,91,948/- under this reason. It cannot be understood why the respondent-Bank is not settling the dispute despite the fact that they themselves made the offer which the petitioner accepted and also deposited the upfront amount as demanded.
• The One Time Settlement Scheme essentially means that the petitioner is given a chance by the Bank to give a lump sum amount in order to settle all his liabilities and accounts with them. The objective behind this scheme is that both parties can avoid time consuming litigation and settle the amount to be recovered, which is the money of the public. Once such an offer is made, and the liable party complies to it, and all necessary steps towards this are taken, the Bank is not supposed to resile from this agreement. In this case, the withdrawal of the Bank in the last minute, even after the petitioner complies to all demands made, cannot be understood or accepted.
• Since the Bank is a government bank, and is supposed to adhere to the statute that comes with the definition of State, it should make a just and necessary decision to act in a bona fide manner, especially when the matter involved is a question of public money.
• The Division Bench of the Madhya Pradesh High Court, in the case of Shri Mohanlal Patidar v. Bank of Maharashtra & Another [W.P.No.22127/2021] has discussed the ‘Doctrine of Legitimate Expectation’ which intends that the Bank cannot further enhance an offer that was duly accepted and made. That is, further escalation of the OTS amount cannot be made after the offer has been accepted once, as it is binding on the Bank.
• In the present case, the letter dated 23.11.2021 given by the Bank to the petitioner mentioning his eligibility to settle all accounts through the OTS scheme and all terms and conditions related to it, proves that the Bank had made the offer in the first place. The letter mentioned the OTS amount to be Rs.75,21,690.80 and the petitioner was asked to let the Bank know of his decision within November 30, 2021, after which the matter shall be taken forward for acceptance. The petitioner responded on 26.11.2021 accepting the offer and also submitted the details required that made it clear by what time he would pay this amount.
• The bench took note of the letter sent by the Bank to the petitioner informing him that his letter was being considered and he would be sent a sanction letter. The petitioner’s case was already found to be eligible as it was shortlisted for the same, and the only step to be taken was acceptance. Thus, the bench found that the act of withdrawing the letter was based on false premises that the petitioner’s case was not eligible for OTS. 
• On being tested under the doctrine of Legitimate Expectation it is said that a person can have a reasonable or legitimate right to expect to be treated a certain way by an administrative authority, even if he has no given right to believe so. Thus in this sense, the Bank has wronged in backing away from the offer put forward and modified by itself.
• The action of the Bank is arbitrary in nature and not just or reasonable in nature. Thus this action cannot be approved by the court. Thus, the letter by which the Bank withdrew itself from the offer was set aside.
• The amount to be deposited by the petitioner was to be settled within ten days from this order being issued and the Bank is to accept this amount as full and final satisfaction of the petitioner’s personal guarantee, within ten days of this deposit being made.

CONCLUSION

Thus, the court allowed this petition, on grounds that the action of the Bank was unacceptable. It being a government Bank, was not expected to behave so. The petitioner had the right to believe that the Bank should not withdraw from the final offer, and should accept the amount of Rs. 75,21,690.80 as a full and final settlement from his part, under the doctrine of ‘legitimate Expectation’. Thus, the withdrawal of the Bank was set aside and the petitioner was favoured by this judgement.

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