RBI To Determine Bank's Knowledge Of Borrower's Account Balances, Application Of 'Right Of Recompense': Kerala High Court

The Kerala High Court recently held that the determination of whether the bank had knowledge of the amount remaining in the borrower's account at the time of granting the One Time Settlement, and whether the bank could therefore exercise the 'Right of Recompense,' is a matter to be decided by the bank itself.

‘Right of Recompense’ is a tool used by banks and financial institutions to recover the sacrifice they make on the debts for stressed assets. 

Justice Devan Ramachandran observed that any decision to be arrived at by the respondent Federal Bank would have to be edificed on proven factual circumstances, including, whether the Reserve Bank of India (RBI), was aware of the amount in question remaining in credit in the account of the petitioner at the time when One Time Settlement, and if not, whether it was kept away from their information by the latter through covert means. 

"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," the Court observed. 

The petitioner herein had availed a one-time settlement with the Federal Bank Ltd. and was granted it with the reservation of a "Right of Recompense".

The petitioner claims that the bank adjusted an amount of Rs. 33,14,485.66 from his account, despite the fact that he had fully honoured the One Time Settlement. He alleged that he had thus been constrained to assail the afore action before the Court previously. In the said decision, the Court directed the RBI to consider the petitioner's request and issue appropriate orders. 

The petitioner averred that the order passed subsequently by the RBI did not advert any of the germane aspects. Thus, he approached the Court challenging the same. 

The counsel for the petitioner submitted that at the time of offering the One Time Settlement, the Bank had information about the amount remaining in the petitioner's account and that it could not have thus, exercised the Right of Recompense. The counsel therefore sought the impugned order of the RBI to be set aside, as such vital aspects had not been considered while issuing the same. 

The counsel for the RBI however refuted the same and argued that when the petitioner himself was aware that the Bank had reserved to themselves the Right of Recompense, he could not stand in their way while adjusting the amount. 

On behalf of the respondent Bank, it was submitted that the One Time Settlement had been offered without being aware of the amount in the petitioner's account. The counsel averred that the sum was the margin money offered by the petitioner while availing a Bank Guarantee from his client and that the Bank was thus unaware of the amount remaining to the credit of the petitioner, in spite of due diligence. 

It was thus submitted that since substantial sacrifice had been made by the Bank, the latter was eligible to recover the available amount in the petitioner's account and adjust the same against the loan, since otherwise, it would amount to unjust enrichment. 

The central issue was whether the bank was justified in exercising the "Right of Recompense" for the reasons they stated.

The Court ascertained that the fundamental question that ought to have been considered by the RBI was as to whether the respondent Bank would be justified in exercising the ‘Right of Recompense’ for the reasons stated by them. 

"This aspect has not been considered by the 3rd respondent in any manner, except recording in Ext.P14 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 vital question, as to whether the information of this 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 not have been invoked by them thereafter, has not been considered in Ext.P14 at all," the Court observed. 

At this juncture, the counsel for the RBI sought liberty to be reserved to the RBI to reconsider the matter, adverting to the afore aspects, and added that the question of whether the Bank had exercised the ‘Right of Recompense’, would have to be determined by the said Authority in terms of law.

"I have no doubt that the afore suggestion of Sri.Millu Dandapani is the best available to the parties because, as rightly submitted by him, any decision to be arrived at by the 3rd respondent will have to be edificed on proven germane factual circumstances, including, whether 1st respondent – Bank was aware of the amount in question remaining in credit in the account of the petitioner at the time when One Time," the Court noted. 

The Court thus set aside the impugned order of the RBI and directed the said Authority to reconsider the matter and issue appropriate order thereon. 

Counsel for the Petitioner: Senior Advocate M. Ramesh Chander, Advocates Balu Tom, Bonny Benny, Govind G. Nair, and Bejoy Joseph P.J. 

Counsel for the Respondents: Standing Counsel for RBI Advocate Millu Dandapani, Standing Counsel for Federal Bank Advocate Sunil Shankar A., and Advocates Vidya Gangadharan, and Sandhra S. 

Citation: 2023 LiveLaw (Ker) 591

Case Title: Kurien E. Kalathil v. Federal Bank Ltd. & Ors. 

Case Number: WP(C) NO. 23209 OF 2022

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