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

Facts

1. The petitioner, Simco Rubber Product (P.) Ltd. is a private limited company with a factory in Sikandra Industrial Area, Agra, obtained a loan of INR 27 (twenty-seven) lakhs from the respondent Bank of India. The petitioner claimed financial difficulties soon after production began due to low market demand, resulting in an inability to generate profits and meet interest liabilities on the loan. 
2. Simco Rubber Products (P) Ltd. vs. Bank of India, the petitioner (Simco Rubber Products (P) Ltd.) claimed that its account at the Bank of India had fallen under the category of Non-Performing Asset (NPA) from 31-12-1997 to 31-03-2000 thereby it is entitled for cash credit facility. 
3. As the account had been classified as NPA for over two years, by 31-03-2000, the account became a “doubtful asset”. The petitioner thus claimed, by this classification the account became eligible for a one-time settlement under the Reserve Bank of India (RBI) guidelines. 
4. However, on 04-03-2003, the petitioner sent a letter to the bank’s Zonal Manager expressing his readiness to clear the outstanding dues, citing that the account met the criteria for NPA classification. Subsequently, on 08-03-2003, the Chief Manager of the respondent bank rejected the petitioner’s claim, stating that the account does not qualify for settlement under the RBI guidelines. 
5. The petitioner argued that the rejection provided no specific reasons and is arbitrary and contrary to the statutory nature of the RBI guidelines.
6. The petitioner claimed that the account met the RBI’s “Doubtful Asset Classification” criteria and that the bank’s denial was legally invalid. He argued that being a nationalized bank, the respondent was obligated to comply with the RBI’s guidelines, which the petitioner claimed were mandatory.
7. In response, the respondent bank stated that the petitioner was a wilful defaulter attempting to misuse the RBI guidelines for undue advantage. The bank contended that retrospective NPA declarations would set a dangerous precedent, allowing borrowers to evade repayment obligations. It also emphasized that the RBI guidelines were only directory, intended to recover funds from chronic NPAs, not wilful defaulters.
8. The bank further clarified that it had converted the overdue position of the petitioner’s cash credit account into a Working Capital Demand Loan (WCDL) in 1999, as a special concession based on the petitioner’s assurance to repay the dues. The petitioner had executed documents acknowledging the debt on 02-12-1999 and 31-01-2002. The bank argued that the transfer to WCDL was done to help the petitioner manage repayment, not as a formal reclassification of the account under the NPA guidelines.
9. The petitioner, however, contended that the bank’s rejection was unsupported by evidence and lacked transparency. The case revolved around the petitioner’s claim of entitlement to the one-time settlement and the bank’s assertion that the RBI guidelines did not apply, particularly to wilful defaulters.
10. The High Court of Allahabad dismissed the Writ petition filed by Simco Rubber Products against the Bank of India. The petitioner was seeking a writ of certiorari against the bank for refusal of a one-time settlement (OTS) and a writ of mandamus directing the bank to accept the OTS offer. 
11. Although, the dispute highlighted the tension between the petitioner’s interpretation of the RBI guidelines as mandatory and the bank’s view of them as discretionary and inapplicable to defaulters like the petitioner. The court was tasked with evaluating the competing claims in light of the guidelines’ intent and the bank’s fiduciary obligations.

Issues

The petitioner filed a writ petition seeking a writ of certiorari to challenge the Bank of India’s letter dated 08-03-2003, which rejected the petitioner’s request for a one-time settlement citing the Reserve Bank of India (RBI) guidelines. The petitioner also sought a writ of mandamus directing the bank to accept its one-time settlement offer dated 04-03-2003.

The petitioner focused and highlighted that the RBI had issued guidelines on 27-07-2000 for the recovery of Non-Performing Assets (NPAs) in public sector banks, which were later revised on 29-01-2003. The petitioner claimed that its account qualified under these guidelines, making it eligible for settlement. A copy of the RBI guidelines was submitted as Annexure 1 to the petition.

Law

The legal principles considered by the court includes.

In Simco Rubber Product (P.) Ltd. vs Bank of India (26 August 2003), the Allahabad High Court ruled on the petitioner’s request for a writ to compel the Bank to accept its one-time settlement proposal. The petitioner had failed to demonstrate a legal right to demand such a settlement, as no statute or rule with the force of law required the UPFC (Uttar Pradesh Financial Corporation) to accept the borrower’s terms for settlement. The Court highlighted that settlements are voluntary agreements, and a court cannot mandate such a process. The Court further explained that under the State Financial Corporation Act, the Financial Corporation has discretion over whether to proceed with loan recovery under Sections 29 or Section 31, or to consider a settlement. Factors influencing this discretion include the public interest, the financial situation of the borrower, and the condition of the industrial unit. The decision to enter into a settlement depends on whether it is in the best interest of both the borrower and the Corporation. The Court emphasized that determining the best course of action for loan recovery, such as opting for settlement or other recovery methods, requires expertise and knowledge that the courts do not possess. The Court also noted that compelling a settlement on the terms proposed by the borrower could set a precedent for profit-making businesses seeking to reduce their liabilities. Consequently, the Court ruled that it could not intervene in the UPFC’s discretion to accept or reject a one-time settlement.

Petitioner’s Argument

The petitioner alleged that its cash credit facility had fallen under the category of Non-Performing Asset (NPA) from 31-12-1997 to 31-3-2000. By 31-3-2000, the account became a “doubtful asset” as it had been classified as NPA for over two years. The petitioner claimed that this classification made it eligible for a one-time settlement under the Reserve Bank of India (RBI) guidelines.

Respondent’s Argument

The respondent stated that the petitioner was a wilful defaulter attempting to misuse the RBI guidelines for undue advantage. The bank contended that retrospective NPA declarations would set a dangerous precedent, allowing borrowers to evade repayment obligations. It also emphasized that the RBI guidelines were only directory, intended to recover funds from chronic NPAs, not wilful defaulters.

The bank further clarified that it had converted the overdue position of the petitioner’s cash credit account into a Working Capital Demand Loan (WCDL) in 1999, as a special concession based on the petitioner’s assurance to repay the dues. The petitioner had executed documents acknowledging the debt on 02-12-1999 and 31-01-2002. The bank argued that the transfer to WCDL was done to help the petitioner manage repayment, not as a formal reclassification of the account under the NPA guidelines.

Analysis

The court meticulously examined the evidence presented by both parties, focusing on the following aspects,

In the Simco Rubber Product (P.) Ltd. vs Bank of India case (26 August 2003), the Allahabad High Court held that a one-time settlement is a voluntary compromise between the parties, requiring mutual consent. Since the Bank did not consent to the settlement proposal made by the petitioner, the Court ruled that the petitioner could not insist on it.

The Court further clarified that a one-time settlement, akin to rescheduling a loan, is solely within the discretion of the lender (the Bank or financial institution) and cannot be imposed by the Court. It explained that a writ of certiorari or mandamus could not be issued to compel a bank to accept a settlement offer or reschedule a loan, as such decisions fall within the discretion of the financial institution, not the judiciary. RBI guidelines on Non-Performing Assets (NPAs) cannot be used by wilful defaulters to claim OTS. Simco Rubber was found to have wilfully defaulted on its loans and diverted funds.

The Court cited the principles of mandamus from legal texts and Supreme Court rulings, emphasizing that it can only be issued when there is a statutory duty to act, which was not the case here. The petitioner’s claim, based on a contractual obligation to repay the loan, did not constitute a legal right for the Court to enforce the settlement terms.

Thus, the petitioner’s request for a writ of mandamus to compel the Bank to accept the one-time settlement proposal was rejected.

Conclusion

The court dismissed the writ petition and did not enforce it because OTS can not be claimed as a matter of right from the bank. It could be concluded that the court can not direct OTS as it will mean that the court is directing to rescheduling of the loan. It is to be noted that when a creditor is enforcing a liability upon the debtor, the debtor has no legal right to claim that the claim has to be settled on a favourable term as proposed by the debtor where the claim of the creditor is reduced.