Kerala HC Directs RBI To Decide Whether Bank Was Aware Of Borrower’s Account Balance While Granting One Time Settlement To Validly Exercise Right To Recompense

RBI in the impugned order had recorded that when a ‘Right of Recompense’ was reserved by the Bank in their favour, they were justified in adjusting the amount remaining in credit in the account of the petitioner thereafter. However, the bench was of the opinion that the question that RBI should have adjudicated upon was whether the information of the amount being in credit in the account of the petitioner, was available to the Bank at the time when the One Time Settlement was granted; and whether, therefore, the ‘Right of Recompense’ could have been invoked by them thereafter.

‘Right of Recompense’ is a tool by which the Banks and Financial Institutions that take large haircuts on the debts for stressed assets, during resolution can recover the sacrifice they make, in due course of time.

Justice Devan Ramachandran observed, “This is crucial because, the Right of Recompense can be exercised only in certain specific circumstances, as is well established in law; and until the 3rd respondent assesses these, a decision, akin to the one recorded in Ext.P14, could not have been taken, especially because it concludes that no “regulatory intervention” by the Reserve Bank is warranted. Since the Reserve Bank of India is an Authority vested with statutory powers to intervene in the regulatory ambit of Banks, under Section 35(a) of the Banking Regulation Act…”.

Therefore, the bench further observed, “In the afore circumstances, I allow this writ petition and set side Ext.P14; with a consequential direction to the 3rd respondent to reconsider the matter, adverting to the directions in Ext.P8 judgment and after hearing the parties again, assessing all their rival contentions - including the ones recorded above; thus culminating in an appropriate order and necessary action thereon, as expeditiously as is possible, but not later than four months from the date of receipt of a copy of this judgment. I make it clear that my observations in this judgment are not intended to trammel or fetter the rights of the 3rd respondent in any manner whatsoever; and that they have been recorded only to guide me to the conclusion herein and for no other”.

Senior Advocate M.Ramesh Chander appeared for the petitioner Advocate Sunil Shankar A appeared for the respondent.

In the pertinent matter, the petitioner had applied for a One Time Settlement with the 1st respondent – Federal Bank Ltd., which was allowed, reserving to themselves a ‘Right of Recompense’, however, subsequently, the Bank adjusted an amount of Rs.33,14,485.66, which was lying in his account even at the time when the afore One Time Settlement was granted by them, in spite of the fact that the same had been honoured by him fully; and therefore, that he had no other option, but to assail such action legally, which finally led to Ext.P8 judgment, whereby, a learned Judge of this Court directed the 3rd respondent to consider his complaint - produced therewith as Ext.P21, and to issue an appropriate order. He alleges that, however, Ext.P14 order has now been issued by the 3rd respondent, without adverting to any of the germane aspects; and resultantly, that he has been constrained to approach this Court against the same.

The petitioner thus argued that reserving of the ‘Right of Recompense’ by the Bank to themselves in the One Time Settlement is one thing, while their entitlement to exercise the same is another. However, at the time when the One Time Settlement was offered to him, the afore said amount was remaining in his account and that it was fully available to the Bank’s information.

He further asserted that the One Time Settlement offer was granted by the Bank adverting to this, and therefore, they could not have then exercised their ‘Right of Recompense’ against the said sum, as if he had suppressed such information. Contented that it was further argued that these such aspects have not been considered by the 3rd respondent, while issuing Ext.P14; and thus prayed it be set aside.

On the other hand, the Reserve Bank of India submitted that when the petitioner himself was aware that the Bank had reserved to themselves the ‘Right of Recompense’, he thus cannot stand in the way of them adjusting the amount available in his account.

While the bank had submitted that it had made the One Time Settlement Offer in favour of the petitioner, being unaware of the fact that an amount of Rs.33,14,485.66 was available in his account. Further that this sum was, in fact, the margin money offered by the petitioner, while availing a Bank Guarantee from the bank. Therefore, in spite of due diligence, they were not aware of this amount remaining to the credit of the petitioner, thus causing them to offer a figure for settlement of the account with substantial sacrifice.

Cause Title: Kurien E Kalathil v. The Federal Bank Ltd [Neutral Citation: 2023/KER/62293]