Adoption of Swiss Challenge Method by Punjab National Bank Deemed Legal and Non-Violative of Constitutional Rights
In a significant ruling, the Madras High Court has dismissed the writ petition filed by Reji Abraham challenging the public notice issued by Punjab National Bank (PNB) for the proposed transfer of loan exposure of M/s. Aban Offshore Limited through the Swiss Challenge Method. The Court confirmed that the adoption of this auction method does not infringe upon Articles 14, 19, and 21 of the Constitution of India, which are often invoked in cases concerning fundamental rights.
The case arose when PNB initiated proceedings against Aban Offshore Limited, a company engaged in offshore drilling, due to defaults in loan repayment. The bank had classified the company's loan account as a Non-Performing Asset (NPA) and proceeded with the insolvency petition under the Insolvency and Bankruptcy Code, 2016.
Reji Abraham, the petitioner and erstwhile Managing Director of Aban Offshore, argued that the Swiss Challenge Method used by PNB for auctioning the loan exposure was arbitrary and violated fundamental rights. The petitioner also contended that the bank's actions were illegal as they proceeded with the auction despite an appeal pending before the National Company Law Appellate Tribunal (NCLAT) and without complying with Reserve Bank of India (RBI) guidelines.
The court, however, upheld the bank's decision, emphasizing that the Swiss Challenge Method is a commercially prudent approach. It noted that the bank's rejection of a One Time Settlement (OTS) proposal by the corporate debtor was in line with existing policies and had been duly recorded by the NCLAT. The court further stated that the pendency of an appeal does not bar the bank from continuing with the auction process, especially when the OTS proposal has been rejected.
The judgment also referenced previous rulings, including decisions by the Supreme Court, supporting the legality of the Swiss Challenge Method as a non-violative process under Article 14. The Court reiterated that decisions made by financial institutions based on commercial considerations are generally immune from interference unless proven to be arbitrary or illegal.
With the auction process already concluded, the court declared the writ petition infructuous, thereby dismissing it without costs. This ruling underscores the judiciary's stance on upholding commercial discretion and procedural compliance in banking operations.
Bottom line:-
Adoption of Swiss Challenge Method by a bank for transfer of loan exposure is not violative of Article 14 of the Constitution of India. The pendency of an appeal before the NCLAT does not bar the bank from proceeding with such an auction, especially when the OTS proposal has been rejected and recorded by the NCLAT.
Statutory provision(s): Article 14 of the Constitution of India, Article 19 of the Constitution of India, Article 21 of the Constitution of India, Section 29A of the Insolvency and Bankruptcy Code, 2016, Reserve Bank of India (Commercial Banks - Resolution of Stressed Assets) Directions, 2025, Reserve Bank of India (Commercial Banks - Transfer and Distribution of Credit Risk) Directions, 2025
Reji Abraham v. Punjab National Bank, (Madras)(DB) : Law Finder Doc id # 2928403
