Borrowers Have No Vested Right to Extension Under OTS: High Court Upholds Bank’s Power to Cancel and Auction Secured Assets
- REEDLAW
- Sep 11
- 3 min read
REEDLAW Legal News Network reports: In a significant ruling, the Allahabad High Court held that borrowers cannot claim a vested right to extension under a One Time Settlement (OTS). The Court clarified that once the 180-day period under the SOTS Scheme expires without compliance, the OTS automatically lapses, thereby entitling the Bank to cancel the settlement and lawfully proceed with auctioning secured assets.
The Division Bench of the Allahabad High Court, comprising Justice Shekhar B. Saraf and Justice Praveen Kumar Giri, while adjudicating a Civil Appeal, held that borrowers cannot assert a vested right to extension under a One Time Settlement. The Bench observed that failure to comply with the 180-day limit stipulated under the SOTS Scheme results in the lapse of the OTS, thereby empowering the Bank to cancel the settlement and lawfully auction secured assets without breaching borrower rights.
The writ petition was filed under Article 226 of the Constitution, challenging the cancellation of a One Time Settlement (OTS) offered by the respondent Bank and the subsequent auction of mortgaged properties. The petitioners, a registered company, had availed cash credit, overdraft, and term loan facilities in 2017, which were later classified as non-performing assets due to defaults. On 10 May 2023, the Bank sanctioned an OTS under the SOTS Scheme 2022-23, but the petitioners failed to adhere to its terms. Despite several communications from the Bank, the petitioners defaulted in payment, leading to the cancellation of the OTS and initiation of recovery proceedings, including the auction of mortgaged properties.
The petitioners contended that the OTS was still subsisting and argued that no time limit was prescribed in the sanction letter. They relied on several High Court decisions to claim that the Bank was bound to extend the repayment period under the OTS and that this Court had the jurisdiction to grant such relief. The Bank countered that the OTS was explicitly governed by Clauses 7.3 to 7.5 of the SOTS Scheme, which mandated repayment within 180 days, failing which the OTS would lapse automatically. The Bank also pointed out that third-party rights had already been created as one property was sold through auction, and a sale certificate had been issued.
The Court observed that the sanction letter dated 10 May 2023 specifically referred to the SOTS Scheme 2022-23, which clearly prescribed a maximum repayment period of 180 days. It held that the petitioners could not claim the OTS to be alive merely on the ground that the sanction letter did not reiterate the time frame. The plea that the Scheme was not within the knowledge of the petitioners was also rejected as untenable. The Court examined the judgments relied upon by the petitioners and distinguished them on facts, holding that none of them supported the contention that borrowers had a vested right to extension of the OTS repayment period.
It was further held that the petitioners failed to show any plausible reason for their non-compliance, and in light of the expiry of the OTS and the creation of third-party rights through auction sale, the Bank’s action could not be faulted. The Court found that the Bank acted bona fide and in accordance with law. Consequently, the writ petition was dismissed, upholding the cancellation of the OTS and the sale of secured assets.
Mr. Vijay Kumar Sharma, Advocate, represented the Petitioner.
Mr. Sanjai Singh, Advocate, appeared for Respondent Nos. 4 to 6/Bank.
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