Bombay High Court Intervenes: Bank Held to its Promise in Loan Settlement Dispute.


09 April 2025 Banking Law >> Business & Commercial Law   |   Sarfaesi >> Corporate Law  

In a significant ruling of Urmiladevi Mahavirprasad Jain & Anr. VS Punjab National Bank & Ors., the Bombay High Court has come to the aid of two senior citizen partners who were allegedly made to believe they were fully discharged from loan liabilities by a bank, only to face continued recovery proceedings. The court, presided over by an unspecified bench, quashed orders passed by the Debt Recovery Appellate Tribunal (DRAT), Mumbai, which had directed the petitioners to make a pre-deposit as a condition for hearing their appeal.

The case revolves around a loan sanctioned in 2015 to a partnership firm, Vardhaman Enterprise, where the petitioners, Urmiladevi (62 years old) and Pannalal (97 years old), held a 40% share alongside the remaining partner, Renudevi (60%). Following the firm's account being declared a Non-Performing Asset (NPA) in October 2019, the respondent bank, referred to as ‘Respondent No. 1-Bank’ in the order, initiated recovery measures under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

Subsequently, the bank also filed an Original Application (O.A. No. 7 of 2020) before the Debt Recovery Tribunal-I (DRT) at Ahmedabad for the recovery of ?3,99,91,884/-. The petitioners and the other partner filed separate Securitisation Applications (S.A. Nos. 36 and 52 of 2020 respectively).

 

 

Amidst internal disputes between the partners, the petitioners, in a letter dated July 7, 2020, offered a settlement of ?1,60,00,000/- as a full and final resolution for their liabilities. This offer explicitly stated their expectation of property release and a "no due certificate" upon payment. Crucially, the offer also mentioned the withdrawal of cases against them, including the pending Original Application.

The Respondent No. 1-Bank accepted this proposal, issuing two sanction letters dated July 18 and July 20, 2020. These letters clearly stipulated that upon the entire payment of ?1.60 crore, the bank would withdraw the DRT suit specifically against the petitioners, while continuing recovery actions against the remaining obligants, including the firm and the other partner.

The petitioners duly paid the agreed amount, and the bank issued "No Dues Certificates" dated July 29 and August 4, 2020, explicitly stating that "Any due in bank on behalf of both partners of Shri Pannalal M. Jain And Urmila Jain... does not remain." Registered Release Deeds for the mortgaged properties were also executed in late July and early August 2020. Following this, the petitioners sold one of the properties. Their S.A. No. 36 of 2020 was also disposed of in September 2022.

However, contrary to the promises made in the sanction letters, the bank did not withdraw O.A. No. 7 of 2020 against the petitioners. When the petitioners brought the settlement to the attention of the Tribunal through a counter-affidavit in September 2022, the DRT, Ahmedabad, surprisingly allowed the Original Application on August 30, 2023, holding all defendants, including the petitioners, liable for ?2,39,91,884/-.

Aggrieved by this order, the petitioners initially approached the Gujarat High Court, which directed them to pursue the alternative remedy of appealing to the DRAT, Mumbai. Subsequently, the petitioners filed an appeal before DRAT, Mumbai, along with an application for waiver of the mandatory pre-deposit under Section 21 of the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act).

The DRAT, Mumbai, under the impugned order dated July 9, 2024, directed the petitioners to deposit ?60 lakhs in two installments. As the petitioners failed to comply, their appeal was dismissed on July 24, 2024. This led the petitioners to file a writ petition before the Mumbai High Court under Article 226 of the Constitution of India.

The Mumbai High Court, after hearing arguments from both sides, strongly criticized the bank's conduct. The court noted the undisputed payment of ?1.60 crore by the petitioners under a sanctioned settlement, the issuance of no-due certificates, and the execution of release deeds. The court also highlighted the bank's contradictory stance in separate proceedings against the other partner, where it acknowledged the petitioners' settlement offer.

The bench emphasized the "gross and shocking" nature of the bank's actions in leading the petitioners to believe they were fully discharged, only to later pursue the same claim against them. The court found merit in the petitioners' argument that they had a "legitimate expectation" that the bank would honor its promises after receiving the substantial settlement amount. The principles of promissory estoppel, arising from the sanction letters and no-due certificates, were also deemed significant for consideration on merits.

Relying on precedents from the Delhi High Court and a co-ordinate bench of the Mumbai High Court in similar cases, the court held that the petitioners should not be compelled to make a pre-deposit as a precondition for their appeal to be heard on its merits.

Consequently, the Mumbai High Court allowed the petition, quashing the DRAT's orders dated July 9 and July 24, 2024. The petitioners' appeal before DRAT, Mumbai, was restored, with a direction to the tribunal to hear the appeal on its merits in accordance with the law. The court explicitly kept all rival contentions on merits open for the DRAT to decide.

This ruling serves as a strong reminder to financial institutions to uphold their commitments made during settlement processes and underscores the judiciary's role in protecting the interests of borrowers who act in good faith based on such assurances.


Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002  

Section 25, Indian Partnership Act - 1932  

Section 45, Indian Partnership Act - 1932 

Section 49, Indian Partnership Act - 1932     

Indian Partnership Act, 1932