Kiran Raj

In a significant judgement, the High Court of Judicature at Bombay delivered a judgment in a financial advisory dispute concerning the application of a success-based fee for the sale of non-performing assets (NPAs). The dispute revolved around the contractual interpretation of the fee structure agreed upon between the parties and the discretionary power of the defendant bank in choosing the applicable payment option. The judgment stated the legal standing of the contract provisions and the extent of the bank’s authority in exercising discretion over fee selection.

The plaintiff, Special Situation Advisors (India) Pvt. Ltd., a company engaged in financial advisory services, filed a suit against the defendant, Bank of India, seeking a money decree amounting to Rs.7,55,96,767/- with interest. The dispute stemmed from a mandate letter issued on July 1, 2017, through which the defendant engaged the plaintiff as a financial advisor for the sale of its NPAs to Asset Reconstruction Companies (ARCs), banks, and other financial institutions.

The engagement was based on a commercial bid submitted by the plaintiff, which included two success-fee structures:

1. Option A:50% success-based fee on cash received from the bidder (excluding Bank Security Receipts (SRs)).

2. Option B:0749% success-based fee on the total sale amount received from the bidder (including Bank SRs).

The plaintiff argued that, after March 2018, the defendant opted exclusively for a 100% cash sale of its NPAs and, as per the agreed contract terms, the applicable fee should have been calculated under Option A at the rate of 0.50%. The plaintiff alleged that despite this, the defendant arbitrarily applied Option B, significantly reducing the plaintiff’s due compensation.

The plaintiff contended that the discretion granted to the bank in choosing between the two fee options should have been exercised at the outset, at the time the NPAs were put up for sale, rather than retrospectively based on the final structure of the sale transaction. Additionally, the plaintiff asserted that transactions involving 100% cash realization required more effort and resources than transactions including SRs, justifying the higher fee structure prescribed under Option A.

The defendant bank opposed this claim, arguing that the discretion granted under the mandate letter permitted it to determine the applicable fee structure based on the final sale transaction rather than a pre-declared structure. The defendant further maintained that the mandate letter did not impose an obligation to opt for a specific fee structure based solely on the initial bid structure. It also pointed out that the scope of services provided by the plaintiff remained the same, regardless of the transaction type, negating the claim that additional effort was necessary for 100% cash sales.

The defendant also referred to the contractual clause that explicitly granted it the right to exercise its discretion in selecting either Option A or Option B, asserting that the contract did not distinguish between fee applicability based on effort but rather on final sale structure.

The court carefully examined the contract terms, particularly the scope of services rendered by the financial advisor and the discretionary clause embedded in the mandate letter. It observed:

"The bank, at its discretion, may choose option ‘a’ or ‘b’ payable on successful bids. The option will be exercised by the bank initially for the portfolio."

The key issue before the court was whether the bank’s discretion pertained to the manner of selling the NPAs or the determination of the fee structure. The court noted:

"The discretion vested in the bank under Clause III (2) of the mandate letter pertains to the manner in which the fees are to be paid to the financial advisor and does not govern the bank’s right to decide the mode of sale of its NPAs."

Further, the court addressed the plaintiff’s argument that 100% cash transactions involved greater effort and should be subject to a higher fee. It observed that the plaintiff failed to provide substantive evidence demonstrating that such transactions necessitated additional work compared to mixed (cash plus SR) transactions. The court stated:

"No material has been placed on record to establish that 100% cash sale transactions demand greater expertise or effort than cash plus SR transactions. The scope of work under the mandate letter remains consistent across transaction types."

The court stated that the contract clearly provided the bank with the discretion to determine the applicable fee at the conclusion of the transaction and that the plaintiff’s claim for a predetermined mandatory application of the higher fee in all 100% cash transactions was not supported by the contract’s terms. The court noted:

"The interpretation sought by the plaintiff would render the discretionary clause in the contract meaningless and contradict the express wording that allows the bank to exercise its choice at the stage of a successful bid."

Having considered the arguments of both parties and the documentary evidence, the court ruled in favor of the defendant, holding:

"The bank had the discretion to choose between Option A and Option B based on the final structure of the transaction. The plaintiff’s contention that the discretion was limited to the stage of bidding is not supported by the contractual language."

Consequently, the plaintiff’s claim for an additional Rs.7,55,96,767/- was denied, and the suit was dismissed.

Case Title: Special Situation Advisors (India) Pvt. Ltd. v. Bank of India
Case Number: Commercial Summary Suit No. 57 of 2022
Bench: Justice Sandeep V. Marne

[Read/Download order]