BANKING LAW ASSIGNMENT

Simco Rubber Products (P) Ltd. Vs. Bank of India – (2004) 51 SCL 272 ( All).

THE AMITY UNIVERSITY, DUBAI

Batch: 2017-2022

Under the guidance of:                    Submitted by:

Mrs. Palak Jagtiani Name: Sangitha Roy 
                                                               Program: BA.LLB(H)
                                                                AUD No.: 7044
 AMITY UNIVERSITY,DUBAI

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Certified that this project titled “Simco Rubber Products (P) Ltd. Vs. Bank of India
– (2004) 51 SCL 272 ( All)” is the bonafide work of “SANGITHA ROY” who carried
out the project work under my supervision.

Teacher In-charge: ………………………………………………

Internal Examiner:……………………………………………….
Simco Rubber Products (P) Ltd. Vs. Bank of India – (2004) 51
SCL 272 ( All)
Allahabad High Court

Equivalent citations: 2004 51 SCL 272 All

Bench: M Katju, R Tripathi [ CITATION Kat03 \l 1033 ]

ACTS:

Constitution of India – Article 226 – There is no error of law on the face of the
record to issue Certiorari.

There is no statutory duty to be complied with for issue of Mandamus.

Banking Regulation Act, 1949 Section 36 - Guidelines framed by Reserve Bank of

India for recovery of dues relating to non-performing assets of public sector banks,
cannot be utilized by borrowers who have willfully defaulted in repayment of loan
and have diverted funds to other businesses.

Facts

The petitioner company had availed certain credit facilities from the respondent bank.
Pursuant to the guidelines dated 27.07.2000/29.1.2003 framed by Reserve Bank for
recovery of dues relating to NPAs of public sector banks, the petitioner company
approached the respondent bank for one time settlement (OTS) under the said
guidelines, as their account fell under the category of NPA prescribed in the
guidelines. In response to the same, the bank informed the petitioner company vide
their letter dated 8.03.2003 that its account does not fall under the guidelines for
OTS. The petitioner company filed the above writ petition praying for issuance of a
writ of certiorari to quash the said letter of the bank and for a writ of mandamus to
direct the bank to accept their offer for OTS.

Issues

1. Whether RBI guidelines for recovery of dues relating to NPAs can be utilized as a
handle by borrowers who have willfully defaulted in repayment of loans and have
diverted funds to other businesses through other banks in violation of contractual
liability with the bank?
2. Whether a writ of mandamus could be granted against the respondent bank to
accept the proposal of one time settlement in the absence of a statute or rule casting
such a duty on the bank ?

Arguments on behalf of the petitioner

(i) The cash credit facility falls under the category of NPA from 31.12.1997 upto
31.3.2000.

(ii) The account became a doubtful asset since it remained NPA for a period
exceeding two years on 31.3.2000.

(iii) A compromise settlement as stated in clause (A)(i) as mentioned in the letter

dated 29.3.2003 became applicable to the petitioner’s case.

(iv) The bank’s contention that the petitioner company is not entitled to OTS was
patently illegal as no reason has been given by the bank as to why the petitioner’s
account does not fall under the guidelines.

(v) The guidelines of RBI are statutory in nature and hence, it was obligatory on the
part of the respondent bank, being a nationalized bank, to comply with the same.

Arguments on behalf of the Respondent

(i) The petitioner is a willful defaulter, trying to get undue advantage of the
guidelines to get the benefit of OTS to which he is not entitled.

(ii) If petitioner’s claim is granted, it will open a Pandora’s box for unscrupulous
borrowers who will seek declaration of their account as NPA.

(iii) The guidelines are only directory in nature and that the guidelines are not framed
for borrowers who have willfully defaulted in repayment of the loan and have
diverted the funds to other business through other banks illegally.

(iv) The petitioner never produced the balance sheets nor informed the bank about its
financial difficulties and that no request for rehabilitation, stock revival or inability to
pay was ever received by the bank till 4.03.2003 when suddenly the petitioner
demanded for OTS.

(v) The petitioners made false averments that they deposited the sale proceeds with
the bank. In fact, they were not routed through the respondent bank but diverted to
other banks, thus committing willful default and malfeasance apart from
manipulating and misquoting the position of its account by not showing the credit of
the account.
(vi) The guidelines dated 27.07.2000 do not apply to the petitioners since their
account was neither classified in doubtful category nor under the loss making
category as required under the guidelines, because the petitioner continued to deposit
amounts which saved the account from becoming NPA.

(vii) The assets of the petitioner company and of the guarantors are such as would
enable them to recover their dues.

Observations of the Court

"No party has a legal right to get a one time settlement. We agree with the contention
in paragraph 3 of the counter affidavit that the RBI guidelines have been framed for
recovering the money from chronic non performing assets and it cannot be utilized as
a handle by borrowers who have willfully defaulted in repayment of loan and have
diverted the funds to other businesses through other banks in violation of the
contractual liabilities with the Bank.

7. As held by a Division Bench of this Court in M.M.Accessories v. U.P. Financial

Corpn.2002 (46) ALR 261 (per G.P. Mathur, J.), a settlement means a settlement or
compromise between the two parties to which both have given their consent. Since
the Bank has not given its consent to one time settlement the petitioner cannot insist
on getting a one time settlement.

8. It may be clarified that a one time settlement, like an order granting facility of
repaying the loan in installments, really amounts to rescheduling the loan. In our
opinion it is only the Bank or financial institution, which has granted the loan which
can reschedule the same. This Court cannot direct one time settlement because that
would mean the Court directing rescheduling of a loan. This Court has already held in
several decisions that the Court cannot direct repayment of bank loans in
installments, as that would mean rescheduling of a loan.

9. A writ of certiorari lies when there is an error of law apparent on the face of the
record. It does not lie only to get a direction for rescheduling of a loan by one time
settlement or fixing installments, even when there is no error of law.

10. Similarly, as held by this Court in M.M. Accessories’ case (supra) no mandamus
can be issued directing one time settlement of a loan.';

After discussing in detail the principles on which a writ of mandamus can be issued
as stated in

"The Law of Extraordinary Legal Remedies – by F.G. Ferris and F.G. Ferris Jr." and
citing various case laws1 adopting the said principle in our country to the effect that,
a writ of mandamus can be granted only in a case where there is a statutory duty
imposed upon the officer concerned and there is a failure on the part of that officer to
discharge the statutory obligation, the Court observed as under:

"11. In a matter where a creditor is enforcing its liability upon the debtor, the debtor
has no legal right to claim that the claim be settled on favourable terms proposed by
him whereby the claim of the creditor is reduced. Therefore, in our opinion, the
prayer made by the petitioners that this Court should issue a writ of mandamus to the
respondents to accept the proposal of one time settlement made by them cannot be
granted as it does not come within the principles on which a writ of mandamus can be
issued under Article 226 of the Constitution."

"13. The RBI guidelines are not meant for willful defaulters like the petitioner who
has deliberately defaulted in repayment of loan and has diverted the funds to other
businesses through other banks in violation of the contractual liability with the
respondent Bank. The RBI guidelines vide clause (A)(i)(a)(c)2 excludes willful
defaulter like the petitioner. We are satisfied that the petitioner is wrongly trying to
get itself classified as NPA. This cannot be allowed otherwise unscrupulous
borrowers will take similar benefit to get this N.P.A. The petitioner has manipulated
and misquoted the position of its accounts by not showing credit side of the account
which kept on upgrading the status of the account and it never became a loss making,
substandard and doubtful asset. As stated in the counter affidavit, the petitioner has
continued to deposit the amount, which has saved the account from becoming
substandard and his interest liability is cleared."

Decision

The writ petition was dismissed. [CITATION GSH \l 1033 ]

Conclusion

OTS cannot be claimed as a matter of right from the bank. A court of law cannot
direct OTS because that would mean the court is directing rescheduling of a loan.
Where a creditor is enforcing its liability upon the debtor, the debtor has no legal
right to claim that the claim be settled on favourable terms proposed by debtor
whereby the claim of the creditor is reduced.
Works Cited
G.S.Hedge, Bohra B.S and Unnikrishnan M.
<https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/62574.pdf>.

Katju, M. Indian Kanoon. 2003. 20 October 2020 <https://indiankanoon.org/doc/615040/>.