CONDITIONS OF ONE TIME SETTLEMENT ARE TO BE FULFILLED BY THE BORROWER

A ‘One Time Settlement’ (‘OTS’ for short  by banks is a process where a financial institution agrees to accept a lump sum, less than the total outstanding loan amount, to fully clear a debt, especially for Non-Performing Assets (NPAs). It's a negotiated resolution for borrowers facing severe financial distress, allowing banks to recover some funds while helping borrowers resolve debt without full bankruptcy, though it negatively impacts credit scores. It is a last resort to resolve debt, avoid lengthy legal action, and potentially regain creditworthiness faster than with bankruptcy. It cannot be claimed as a legal right. It is offered at the discretion of the bank.

In Assistant General Manager State Bank Of India & Anr. Versus Tanya Energy Enterprises Through Its Managing Partner Shri Alluri Lakshmi Narasimha Varma - 2025 (9) TMI 929 - Supreme Court, Tanya Energy Enterprises availed loan facility from the State Bank of India (‘SBI’ for short). The company mortgaged 7 immovable properties as security for the loans obtained by it. The State Bank of India is, thus, a secured creditor in respect of the loans obtained by Tanya Energy Enterprises. The said Enterprises defaulted in loan payment. SBI issued a demand notice on 31.05.2017 under Section 13(2) of SARFAESI. The said loan was classified as a ‘Non-Performing Asset’. The bank also claimed interest from the date of 01.06.2017.

The bank-initiated recovery proceedings under Section 19 of the Recovery of Debts and Bankruptcy Act, 1993 on 22.12.2017. The bank filed an original application before the Debts Recovery Tribunal (‘DRT’ for short), Visakhapatnam. A decree was obtained by the bank for a sum of Rs.8 crore with interest @ 13.65% till the date of realisation.

Tanya Energy paid Rs.50 lakhs to the bank and offered for one time settlement by paying Rs.5 crore on 14.05.2018. The bank issued a compromise letter on 23.11.2018 subject to the payment of amount as detailed below-

• 0.25 crore on or before 30.11.2018;
• 1 crore on or before 20.02.2018;
• 1 crore on or before 20.05.2019;
• 1 crore on or before 20.08.2019;
• 1.25 crore on or before 20.11.2019.

If entire compromise amount is not paid within 4 months, interest at minimum MCLR for the balance compromise amount paid after 4 months shall be charged from 30th day from the date of letter conveying approval of the compromise to the borrower. If, for any reason, the compromise amount or any instalment, as agreed, is not received within scheduled period, the Bank reserves the right to cancel the compromise settlement and entire dues of the Bank along with interest and costs will become due for payment.

Tanya Energy Enterprises did not respond to the terms and conditions of the settlement. Therefore, the bank cancelled the sanction letter on 22.02.2019. On 13.10.2019 Tanya paid another Rs.50 lakhs to the bank and requested the bank not to take possession of the secured assets. The bank, on 16.10.2019 initiated recovery proceedings under Section 13(4) of the SARFAESI, by issuing a sale notice in respect of the 7 mortgaged secured properties. Tanya challenged the sale notice by filing an application before DRT on 25.10.2019. The DRT granted an interim stay on 21.11.2019 subject to the payment of Rs. 1 crore in 2 instalments within 30 days. The stay was extended up to 23.12.2019. Out of Rs.1crore Tanya already paid Rs.50 lakhs. It did not pay the balance Rs.50 lakhs. The DRT declined to extend the stay.

Since the stay was vacated, the SBI again issued a notice on 12.02.2020 for the sale of the mortgaged properties. This time also Tanya challenged before DRT. The DRT did not pass stay order. Instead, the DRT granted liberty to the bank to proceed with the sale. The bank sold one property was sold on 18.03.2020 and confirmed the sale to the auction purchaser on 15.04.2020.

Meanwhile the bank introduced a scheme for one time settlement of outstanding dues more than Rs.20 lakhs and up to Rs.50 crores as on 31.03.2020. This scheme was also extended to the cases which were pending before the Courts challenging the sale notices. The bank offered Tanya to pay Rs.5.07 crores as one time settlement. Tanya offered to pay Rs.3.75 crores, in addition to its earlier payment of Rs.1.5 crores and to settle the whole dues outstanding and Tanya would withdraw the case from DRT, Visakhapatnam. On 17.11.2020 the bank rejected the offer of Tanya for one time settlement.

Tanya filed a writ petition before the High Court, Andhra Pradesh, challenging the rejection letter of the bank. In the meanwhile, the DRT set aside the sale notice and sale certificate.  Therefore, again the bank issued notice for sale on 06.04.2022. Another auction was conducted on 27.04.2022. Again, Tanya approached DRT by filing an application seeking to set aside the sale notice.

The High Court held that Tanya was entitled for One time Settlement since the same was non-discretionary and non-discriminatory. The High Court directed the bank to process the one-time settlement offer and decide in accordance with the scheme.

The bank filed appeal before the Division Bench against the order of Single Judge. the Division Bench referred to clause 2.1 of the One Time Settlement, 2020 Scheme dealing with “Cases not eligible to be covered under the scheme”. The Bench was of the opinion that there was no bar for considering cases where proceedings under the SARFAESI Act have been initiated and auction of the property is underway; hence, the respondent could not have been held not eligible under the One Time Settlement Scheme. The Division Bench dismissed the appeal filed by the Bank. Against the order of Division Bench, the bank filed the present appeal before the Supreme Court.

The appellant submitted the following before the Supreme Court-

• Not only the Single Judge fell in error in allowing the writ petition of the respondent, the Division Bench equally erred in the exercise of its jurisdiction in dismissing the writ appeal of the appellants.
• The One Time Settlement, 2020 Scheme cannot be enforced under Article 226 of the Constitution unless all terms and conditions are satisfied.
• There was no such public duty which the appellants failed to discharge having noted the conduct of the respondent in failing to clear his debt despite having been granted sufficient opportunities.
• Except the up-front payment of Rs.50 lakhs the respondent did not pay any money to the bank.
• All factors were objectively considered and the application of the respondent for One Time Settlement was rightly rejected.

The bank, therefore, sought for the dismissal of the appeal and allowed to conduct the auction of the remaining 6 properties.

The respondent submitted the following before the Supreme Court-

• There is no infirmity in the impugned judgment and order warranting interference.
• The decision to accept or reject a One Time Settlement proposal must be reasoned, based on scheme eligibility, and in compliance with the principles of natural justice.
• The Single Judge and the Division Bench only directed the bank to consider the One Time Settlement Scheme
• Rejection of the respondent’s application without due consideration or opportunity of hearing is wholly arbitrary, given the fact that the respondent had already deposited about Rs.1.5 crore in good faith.
• The appellants should not now be permitted to argue beyond the question framed by this Court for adjudication.
• The appellant suppressed the findings of the DRT setting aside the notice and sale certificate before the Supreme Court.
• The respondent is an operational creditor of ICOMM Tele Limited which under went insolvency and the respondent got only Rs.9.63 lakhs which is a ground for nonpayment of the dues to the bank.

The Supreme Court considered the submissions made by both the parties. The Supreme Court framed the question to decide in the present appeal is as to whether the High Court erred in its interference with the said order of rejection of the respondent’s application under the One Time Settlement 2020 Scheme and directing reconsideration thereof.

The Supreme Court observed that every borrower in default, to have his application under the OTS 2020 Scheme considered, was required to apply together with an up-front payment of 5% of the OTS amount. The manner of calculation of the OTS amount was provided in clause 3A (v) of the Scheme. For wilful defaulters, payment of 15% was required. It has not been argued before the Supreme Court that the respondent falls in the category of a ‘wilful defaulter’; however, it is certainly a defaulter.

The Supreme Court further observed that the respondent’s application was incomplete since it did not pay upfront amount. Therefore, it did not have any right in law to claim that such application should be processed. The respondent faltered in not adhering to the express terms of such scheme by not depositing 5% of the outstanding dues as up-front payment, thereby rendering its application disentitled to be processed even, far less deserving a favourable consideration.

The Supreme Court allowed the appeal filed by the State Bank of India. The Supreme Court further directed the bank to proceed in accordance with law for enforcement of the security interest. At the same time, we also grant the respondent an opportunity to submit a fresh proposal for OTS but not under the OTS 2020 Scheme. If the terms and conditions put forth by the respondent are found reasonable, workable and acceptable, the appellants may take such decision on it as deemed fit and proper in the circumstances.