Gujarat High Court rules on State Bank of India's OTS Scheme

Gujarat High Court rules on State Bank of India's OTS Scheme

Terms the conduct of the bank as arbitrary and violative of the Constitution of India

The Gujarat High Court has held that once a customer acts on the basis of an offer made by a bank under its One Time Settlement (OTS) Scheme, the principle of promissory estoppel applies. The bank is then estopped from acting to the detriment of the customer.

The petitioner received a letter from the State Bank of India (respondent) offering an OTS of outstanding dues of Rs.12, 34, 54,566 and instead make a payment of Rs.9,90,58,133. The bank offered that if the amount was paid before 31 December 2017, the petitioners would be eligible for an additional incentive of 10 percent over the OTS amount.

In October 2017, the petitioner indicated remitting the amount by the due date and asked the bank to release the documents and give it a No Dues Certificate (NDC). However, the same was not released despite the full payment.

The bank, on the other hand, sent a letter in August 2018 reporting the petitioners as fraud to the Reserve Bank of India (RBI) for some transactions in 2016. It said that the petitioners were, thus, deemed unentitled to the benefits of OTS.

Initially, the petitioners contested that the principle of promissory estoppel applied in the instant case since the bank could not have cancelled the OTS letter when it had not informed the case as fraud. The bank's action of not releasing the title papers and issuing an NDC and clearing the charges against the petitioners was bad in law.

The petitioners said that the application filed under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002, should be withdrawn.

The petitioner cited an earlier case of Gujarat State Financial Corporation vs Lotus Hotels Private Limited arguing to estopping the bank from backing out.

While the bank contested that the present petition was not maintainable since there was an alternative remedy available to the petitioners of approaching the Debt Recovery Tribunal. It referred to the OTS Scheme to indicate that cases reported as fraud would not be eligible. The company had committed fraud by selling the collateral mortgage securities without permission or obtaining a NOC from the bank and did not deposit the sale proceeds with the bank also. Therefore, the OTS Scheme was withdrawn.

But Justice Biren Vaishnav observed, "When the entire amount was paid pursuant to the OTS settlement, the bank could not have cancelled the settlement vide its letter dated 28.08.2018 stating that as the case of the petitioners was reported as fraud, the petitioners were not entitled to the benefits of ATS. In light of the decision in the case of Lotus Hotels, it is clear that the principle of promissory estoppel applies."

He added, "The bank by its conduct of offering an OTS settlement intended to create legal relation, which the petitioners had acted upon. The action was apparently accepted in principle by the bank as not only for the title clearance certificate but valuation reports letters were written by the bank to the advocates and the valuers. The amounts were paid and accepted by the bank and once the petitioners acted upon the promise set out by the bank, the bank cannot be allowed to go back on its proposal stating that the scheme of OTS was not applicable as the cases of the petitioners was reported as fraud."

Justice Vaishnav stated that the conduct of the bank against the petitioners was arbitrary and violated the constitutional guarantee enshrined under the Constitution of India as held by the Supreme Court in the Central Bank of India vs Devi Ispat case.

The court directed the bank to issue an NDC to the petitioner and release the mortgage documents in its custody for the release of the properties. It also ordered the bank to withdraw all pending proceedings against the petitioners under the Sarfaesi Act and declare those null and void.