The Supreme Court in State Bank of India v. Arvindra Electronics Pvt. Ltd. (4 November 2022) was concerned with the question whether a High Court, in exercise of its writ jurisdiction under Article 226 of the Constitution, can intervene in the terms of a one-time settlement (OTS) entered into between a defaulting borrower and a lending bank, for instance by extending the time period for payment under the OTS. The Supreme Court concluded that, on the facts and the circumstances of the case, such a power is unavailable to the High Court, as its exercise would have the effect of modifying the contract the between the parties without their unanimous consent.
The facts of the case are that the State Bank of India (SBI) offered an OTS to Arvindra Electronics, as its borrowing had turned into a non-performing asset. Arvindra defaulted under the OTS and sought an extension from SBI, to which the bank declined to accede. SBI subsequently offered other OTS options Arvindra, which it decided not to opt for. Arvindra instead approached the Punjab and Haryana High Court under Article 226 of the Constitution by means of a writ petition seeking an extension of the payment period under the OTS. The High Court granted an extension of six weeks to Arvindra, against which SBI preferred an appeal to the Supreme Court.
The Supreme Court was persuaded by the arguments of SBI that directing it ‘to reschedule the payment under OTS would tantamount to modification of the contract which can be done by mutual consent under Section 62 of the Indian Contract Act.’ It noted that such a rewriting of a contract between two parties is not permissible in exercise of writ jurisdiction under Article 226. In doing so, it relied on its earlier decision in Bijnor Urban Cooperative Bank Limited v. Meenal Agarwal (2021), where the Court had clarified that now borrower can claim OTS as a matter of right, that writ jurisdiction cannot be exercised against a bank to compel it to grant OTS, as such a scheme is entirely subject to eligibility criteria and guidelines issued from time to time.
Although the matter was decided largely on its fact, and on a narrow question, it clarifies the dynamics between a defaulting borrower and a lender (that happens to be ‘state’ under Article 12 of the Constitution). Where the lender does not accede to accommodations under contractual arrangements, the borrower cannot unilaterally resort to the High Court’s writ jurisdiction to alter those arrangements. In other words, public law remedies are unavailable as a means of disturbing the contractual framework the parties have agreed upon. It also has the effect of levelling the playing field, at least on the aspect of OTS, between public sector banks (that are subject to constitutional oversight) and private sector banks.