Court Cannot Intervene in Borrowing Arrangements Unless Compelling Reasons

The Kerala High Court, in the case of Binoy Paulose v. Union of India [2023 LiveLaw (Ker) 628], held that the court in exercise of its powers of writ jurisdiction under Article 226 cannot replace the wisdom and decisions of the Lender/Banker with respect to any borrowing arrangements, unless there are compelling reasons, like statutory violations, for the court to intervene.

In the instant case, the proprietor of a Cinema Complex had availed of a loan from the respondent, South Indian Bank for the purpose of renovating the theatre complex. With the intent of creating an equitable mortgage for the loan, the petitioner deposited the title deeds in respect of certain immovable property which included the theatre complex. On the petitioner’s default in repaying the loan, the loan account was classified as a Non-Performing Asset and proceedings were initiated against the petitioner under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the SARFAESI Act, 2002) by the respondent. Subsequently, the respondent bank obtained symbolic possession over the theatre complex and the other immovable property. In accordance with the judgement of the Kerala High Court in a case brought by the petitioner, a proposal for restructuring of the loan account was submitted before the respondent bank. This proposal was rejected by the bank which led to the present petition being brought before the court.

The petitioner submitted before the court that the rejection of the petitioner’s proposal by the bank was not done on sound reasoning and was in violation of the guidelines issued by the Reserve Bank of India. It was further contended that the bank had not considered the commercial viability of the unit managed by the petitioner.

The respondent bank argued that the petitioner’s proposal was rejected as it was not commercially viable, and the financial covenants of the petitioner were not in accordance with the MSME Rehabilitation and Restructuring policy of the bank. Further, it was submitted by the respondent that there were several financial impediments that prevented the petitioner’s account from being considered for restructuring and that the petitioner failed to meet most of the parameters for the restructuring of the loan. The respondent also claimed that the Reserve Bank of India or the Union of India could only provide broad guidelines and that any borrowing arrangement being a commercial contract between the lender and the borrower gives the lender, the respondent bank in this case, the liberty to assess the liability of a proposal based on the approved policy.

After consideration of the submission made by both parties, the Court observed that lending has always been at the discretion of the lending institutions and the Court in exercising its powers under Article 226 of the Constitution of India cannot replace the wisdom of the lender in the process of lending unless there are compelling reasons, like the gross violation of any rules or statutory provisions in this regard. Holding that the respondent had made no such violations and had duly considered all the inputs placed before it by the petitioner before rejecting the proposal, the writ petition was dismissed for lack of merit.