2009 (7) TMI 1274 - SC - Indian Laws

Supreme Court Upholds RBI Guidelines on Settlements, Debt Recovery Tribunal Authority Affirmed

The Supreme Court held that the Reserve Bank of India (RBI) guidelines for one-time settlement are binding on public sector banks. The court affirmed the ... Power of Reserve Bank to determine policy in relation to advances and give binding directions to banking companies - Statutory force of Reserve Bank guidelines issued under the Banking Regulation Act - Non-discretionary and non-discriminatory character of one time settlement scheme and limits on Board of Directors' deviation - Jurisdiction of Debts Recovery Tribunal and Appellate Tribunal to enforce one time settlement in recovery proceedings - State action and Article 14 applicability to public sector banksPower of Reserve Bank to determine policy in relation to advances and give binding directions to banking companies - Statutory force of Reserve Bank guidelines issued under the Banking Regulation Act - Whether the Reserve Bank of India had statutory power to issue the one time settlement guidelines and whether those guidelines carried binding statutory force on public sector banks. - HELD THAT: - The Court examined Sections 21, 35A and 36 of the Banking Regulation Act, 1949 and held that the Reserve Bank is empowered to determine policy in relation to advances and give directions which banking companies are bound to follow; Sub-section (3) of Section 21 mandates compliance by banking companies. The Court relied on the Constitution Bench authority in Central Bank of India v. Ravindra to conclude that RBI directives carry statutory flavour and bind those within their net. The specific circular and letter of September 2005 formulated an OTS scheme for NPAs below the stated threshold and expressly directed uniform implementation by public sector banks; consequently the guidelines were binding on the respondent bank. (See paras 15-16, 18-19, 36-37, 46-48.) [Paras 19, 36, 46, 47, 48]The RBI possessed statutory power to issue the OTS guidelines and those guidelines were binding on the public sector bank.Non-discretionary and non-discriminatory character of one time settlement scheme and limits on Board of Directors' deviation - State action and Article 14 applicability to public sector banks - Whether the respondent bank could lawfully deviate from the RBI OTS guidelines by adopting a policy linking settlement amounts to security valuation and whether such deviation offended the non-discriminatory tenor of the guidelines and Article 14. - HELD THAT: - The RBI guidelines were framed as a 'non-discretionary' and 'non-discriminatory' mechanism for SME NPAs. The bank accepted and communicated the RBI scheme to the borrowers and thereafter sought to apply its own board-approved formula giving weight to security valuation (MRA = 70% of security value) to demand a higher settlement. The Court held that while minor deviations not touching the broad policy may be permissible, the Board of Directors cannot adopt a policy that is per se discriminatory and contrary to the non-discriminatory clause; a public sector bank is a State for Article 12 purposes and bound by Article 14. Applying these principles, the Court found violation of the equality clause in the RBI guidelines and Article 14 by the respondent bank. (See paras 18-19, 21-23, 31-33.) [Paras 21, 23, 31, 32, 33]The bank's board-adopted deviation, insofar as it produced discriminatory treatment contrary to the RBI's non-discretionary OTS scheme, was unlawful and violative of Article 14.Jurisdiction of Debts Recovery Tribunal and Appellate Tribunal to enforce one time settlement in recovery proceedings - Statutory force of Reserve Bank guidelines issued under the Banking Regulation Act - Whether the Appellate Tribunal had jurisdiction to direct the bank to implement the RBI one time settlement scheme in recovery proceedings and to consider the debtor's prayer for OTS. - HELD THAT: - The Court held that the Appellate Tribunal's jurisdiction is co-extensive with that of the original Tribunal and is concerned with recovery. Where an OTS scheme of RBI creates a binding framework for settlement of NPAs, the Tribunal and the Appellate Tribunal have jurisdiction to consider and enforce a debtor's plea for one time settlement in the course of recovery proceedings. Absence of a specifically framed prayer for enforcement in the memo of appeal did not preclude the Tribunal from considering the offer where the statutory scheme and submissions permitted enforcement of the RBI OTS regime. The Appellate Tribunal's directions to invite and consider OTS proposals were therefore within jurisdiction. (See paras 27-29, 46-48.) [Paras 28, 29, 46, 47, 48]The Appellate Tribunal had jurisdiction to direct implementation of the RBI OTS guidelines and to consider the debtor's settlement proposal in recovery proceedings.Enforceability of representations by the bank adopting RBI scheme in correspondences - Non-discretionary and non-discriminatory character of one time settlement scheme and limits on Board of Directors' deviation - Whether the bank's correspondence and prior adoption of the RBI scheme estopped it from later refusing to accept the appellants' bona fide OTS proposal made under those guidelines. - HELD THAT: - The record showed repeated communications from the bank advising the borrowers to avail themselves of the RBI OTS scheme (letters dated 24.11.2005, 1.12.2005 and 01.03.2006) and inviting proposals; the appellants' OTS proposal was framed bona fide within the RBI parameters. The Court treated these representations as relevant in holding that the bank, having accepted and applied the RBI scheme in correspondence, could not turn around to treat the appellants discriminatorily by invoking its own board-policy to demand a larger sum. This reinforced the conclusion that the bank's conduct was unlawful. (See paras 21-25, 35-36.) [Paras 23, 24, 25, 35, 36]The bank's prior adoption and communication of the RBI OTS scheme estopped it from rejecting the appellants' bona fide OTS proposal and relying on a discriminatory board policy.Final Conclusion: The impugned judgment of the High Court setting aside the Appellate Tribunal's directions was unsustainable. The Reserve Bank's OTS guidelines issued under the Banking Regulation Act were held to have statutory force and to bind the public sector bank; the bank's discriminatory deviation was unlawful and the Appellate Tribunal was competent to direct implementation of the OTS scheme. The appeals are allowed and the High Court order is set aside, without costs. Issues Involved:1. Source of power of the Reserve Bank of India (RBI) to issue circulars and guidelines regarding one-time settlement.2. Validity and applicability of the RBI guidelines for one-time settlement.3. Jurisdiction and authority of the Debt Recovery Appellate Tribunal (DRAT) to enforce RBI guidelines.4. Non-disclosure and suppression of facts by the appellants.5. Binding nature of RBI guidelines on public sector banks.Issue-wise Detailed Analysis:1. Source of Power of the RBI to Issue Circulars and Guidelines:The judgment delves into the statutory authority of the RBI to issue guidelines under Section 21 and 35A of the Banking Regulation Act, 1949. The RBI, being a statutory authority, exercises supervisory power over scheduled banks, including issuing guidelines for banking operations. Section 21 empowers the RBI to determine policies related to advances, which banks are bound to follow. The court highlighted that the RBI's guidelines have a statutory flavor and are binding on all public sector banks.2. Validity and Applicability of the RBI Guidelines for One-Time Settlement:The court examined the guidelines issued by the RBI for one-time settlement of non-performing assets (NPAs) below Rs. 10 crore. These guidelines were intended to provide a simplified, non-discretionary, and non-discriminatory mechanism for settlement. The court noted that the respondent bank, being a public sector bank, was bound by these guidelines. The guidelines mandated uniform implementation by all public sector banks and stipulated specific terms for settlement amounts and payment schedules.3. Jurisdiction and Authority of the DRAT to Enforce RBI Guidelines:The court affirmed the jurisdiction of the DRAT to enforce RBI guidelines. It was noted that the DRAT, in its order, directed the respondent bank to settle the case of the appellants as per the RBI guidelines. The court emphasized that the DRAT's jurisdiction is co-extensive with that of the Debt Recovery Tribunal (DRT) and includes the authority to consider the applicability of RBI guidelines in the settlement process. The court rejected the contention that the DRAT lacked jurisdiction to declare the bank's guidelines as nullity, stating that the DRAT had the requisite jurisdiction to enforce RBI guidelines.4. Non-disclosure and Suppression of Facts by the Appellants:The court addressed the issue of non-disclosure and suppression of facts by the appellants in their writ petition before the High Court. While the High Court dismissed the writ petition on grounds of suppression, the Supreme Court held that such suppression did not preclude the appellants from approaching the DRAT. The court cited the principle that suppression must be of material fact to disentitle a party from obtaining discretionary relief. The court concluded that the appellants' subsequent approach to the DRAT was permissible.5. Binding Nature of RBI Guidelines on Public Sector Banks:The court underscored the binding nature of RBI guidelines on public sector banks. It referred to the Constitution Bench judgment in Central Bank of India v. Ravindra, which held that RBI directives have statutory force and are binding on banks. The court reiterated that public sector banks, being 'State' under Article 12 of the Constitution, are obligated to follow RBI guidelines. The court rejected the respondent bank's deviation from the guidelines, stating that such deviation violated the non-discriminatory clause of the RBI guidelines and Article 14 of the Constitution.Conclusion:The Supreme Court set aside the impugned judgment of the High Court and allowed the appeals. It held that the RBI guidelines for one-time settlement are binding on public sector banks and that the DRAT had the authority to enforce these guidelines. The court emphasized the non-discriminatory and statutory nature of the RBI guidelines and directed the respondent bank to settle the case of the appellants as per these guidelines.