The Verdict On OTS Settlements: Judicial Insights Into Bank Obligations And Mortgage Release

The Kerala High Court, in a recent judgment by Justice Dinesh Kumar Singh, in the case filed by M/s. Sha Selections and M/s. Sha Fabrics against State Bank Of India[1], ruled that a bank cannot refuse to release mortgaged property after accepting payments under a One-Time Settlement (OTS) scheme, even if there is minor non-compliance (here minor non-compliance being borrower not making the second instalment payment under the One-Time Settlement (OTS) scheme within the stipulated time frame), unless the bank formally communicates such lapses to the borrower.

Facts & Issue

The case involved a petitioner, the proprietor of ‘M/s Sha Selections’ and ‘M/s Sha Fabrics,’ who had taken two loans from the State Bank of India (SBI) totalling ₹25 lakhs and ₹10 lakhs. The petitioner had mortgaged his residential property as collateral. Due to the economic downturn caused by the COVID-19 pandemic, he defaulted on his loan repayments, prompting the bank to initiate proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and file an Original Application with the Debt Recovery Tribunal (DRT-II) in Ernakulam.

The central issue in this case is whether the petitioner, who has paid the entire amount due under two One-Time Settlement (OTS) schemes offered by the State Bank of India (SBI), is entitled to the release of the title deeds for the mortgaged property despite allegedly not complying with the precise terms of the payment schedule, specifically the timely payment of the second installment.

Rule

The relevant rules for this case are based on the terms of the OTS schemes provided by SBI and general principles of contract and equity:

1. Contractual Terms: The OTS agreements specified the payment schedules and amounts required to settle the outstanding loans.
2. Acceptance of Payment: Once the bank accepts payments under the terms of a settlement scheme, it typically cannot later claim that the scheme has lapsed if it has not communicated any objection or non-compliance to the borrower.
3. Equitable Considerations: Courts generally uphold settlement agreements if the borrower has substantially complied with the payment terms, particularly if the bank has accepted late payments without prior objection.

When a person defaults on a loan, the relevant section of the SARFAESI Act comes into play i.e. Section 13(2)

Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).

This section allows the secured creditor (like a bank or financial institution) to issue a notice to the borrower demanding repayment of the loan within 60 days. The notice mentions the amount due and the intention to enforce the security interest.

Thereafter the borrower has the right to challenge the actions of the secured creditor by filing an appeal before the Debt Recovery Appellate Tribunal (DRAT) under Section 17 of the SARFAESI Act, within 45 days of the creditor’s action under Section 13(4) or approach the Court if they believe that the secured creditor’s actions are unjust.

Analysis

In the case, the petitioner, who had secured two loans from the State Bank of India (SBI) with residential property as collateral, defaulted on payments due to COVID-19-related financial strain. SBI offered a settlement under the “Rinn Samadhan 2021-22 Scheme” and “SBI OTS Scheme 2021,” specifying terms for payment. Despite minor delays in the second installment, the petitioner paid the total settlement amounts within the outer limits of the schemes. SBI accepted these payments but later claimed non-compliance due to the delay in the second installment. The court found that, since SBI accepted the payments without formal objection or communication of non-compliance, the petitioner had substantially fulfilled the settlement terms and was therefore entitled to the release of the title deeds. The bank’s refusal to release the deeds was deemed unjustified, and the court directed SBI to release them upon the payment of interest for the delayed installment.

The offer for the first loan included a total OTS amount of ₹28,66,712.40, with specific conditions, including an exemption from interest if the full amount was paid within 90 days. The second loan’s settlement was set at ₹7,50,000, with its own instalment requirements and interest conditions. The petitioner made the required payments within the outer time limit set by the OTS schemes. However, the bank claimed that the petitioner had defaulted on the timely payment of the second instalment, thereby disqualifying him from the benefits of the scheme. Despite accepting the payments, the bank did not notify the petitioner of any non-compliance or withdrawal from the scheme.

Conclusion

The petitioner is entitled to the release of the title deeds for the mortgaged property because:

• The petitioner paid the full amount as per the OTS schemes, within the outer limit specified.
• The bank’s acceptance of these payments, including the delayed installment, without any formal communication of non-compliance, means that the petitioner has substantially complied with the settlement terms.
• The bank must calculate and charge interest only for the delayed payment of the second installment and release the title deeds once the petitioner pays the calculated interest.

The court thus directed the bank to release the title documents upon payment of the interest for the delayed installment and found the bank’s refusal to release the deeds unjustified. The petition was allowed with no order as to costs.

[1] M/s. Sha Selections and M/s. Sha Fabrics v State Bank of India, W.P.(C) No. 43713/2023