Canara Bank vs Marshall Cycle & Ors.
1998 Latest Caselaw 110 Del

ORDER

S.N. Kapoor, J.

1. I propose to deal herewith two interesting questions relating to interest.

(i) whether the defendants while admitting liability to pay the principal could be absolved from the liability to pay interest?; and

(ii) whether the defendants having undertaken to pay interest at 9% above the Reserve Bank of India rate with minimum of 12% per annum with monthly rests can dispute addition of unpaid interest to the principal for the calculation of further interest or say compound interest?

These questions arose in this suit for "recovery of a sum of Rs.2,72,470.98P with cost and interest at the rate of 19.5% per annum against the defendant jointly and severally". I also propose to dispose of I.A. 4557/97 as well as Suit No. 408/83.

2. The defendants have filed IA 4557/97 submitting that "decree for the original amount may be passed. The defendants submit that in the circumstances of the case interest from the date of the filing of the suit be not awarded to the plaintiff. The business of the defendant was completely ruined and closed. It is, therefore, prayed that in the circumstances of the case the court may pass a decree for Rs. 2,72,470.98 only.

3. The debt in this case relates to various credit facilities provided to the defendant in connection with commercial transaction. consequently, the rate of interest may exceed 6% per annum under Section 34(1) of the CPC but shall not exceed the contractual rate of interest of 9% above the Reserve Bank of India rate with minimum of 12% per annum with monthly rests.

4. I have heard the parties at length on these points alongwith other incidental points.

5.1 The learned counsel for the defendant submits that the defendant has suffered heavy losses; as such unable to pay interest claimed. The amount of Rs.2,72,470.98P admittedly includes compound interest. It is submitted that the plaintiff is entitled to interest only on the principal amount adjudged and the plaintiff is not entitled to interest on the entire amount claimed. It is also claimed that the interest at a rate higher than 6% is only in the discretion of the court. The defendants had filed the application under Section 151 CPC only to finish the controversy.

5.2 The learned counsel for the defendant relies on a judgement of Full Bench of Bombay High Court in United Bank of India Vs. Dalpat Gauri Shankar, and submits that views of this court in Syndicate Bank Vs. M/s West Bengal Cements Ltd. & Ors., AIR 1989 Delhi 107 were dissented to. It is submitted that this court should rely on the Full Bench of the Bombay High Court and not on the judgment of this court.

6.1 Sum and substance of the arguments of the learned counsel for the plaintiff is that since defendants have wilfully dragged the matter for more than 13 years with ulterior motives; the transaction being commercial, and the debt being secured by mortgage of properties, the defendants must not be allowed to take advantage of their own wrongs. The plaintiff is entitled to decree to the amount in suit with interest from the date of suit till realisation at the agreed rate of 19.5% per annum with cost. When the borrower has promised to pay a particular rate of interest and avail the credit and on default by borrower, it would be proper to grant interest at the contract rate from the date of suit till the date of realisation. To reduce or deny interest would be to penalise the creditor for approaching the court and encouraging the debtor to deliberately and unjustly prolonging the litigation. He also submits that ordinarily the future interest should be awarded at the contractual rate. Whenever contractual rate is refused in respect of commercial transactions by public financial institutions, there must be sufficient rationale and reason to award at a lower rate and the creditor must not be deprived of interest at the agreed rate unless equity warrants otherwise.

6.2 Learned counsel for the plaintiff on the other hand relies on the following judgments:

1. Vijaya Bank Vs. S. Bhathija & Anr.,

2. State Bank of travancore, Tirupur Branch Vs. K. Vinayachandran & Anr.,

3. Central Bank of India, Kutch Vs. M/s P.R. Garments Industries Pvt. Ltd., Surendra nagar & Ors.,

4. VijAya Bank & etc. Vs. Art. Trend Exports & etc.,

5. Renusagar Power Co. Ltd. Vs. General Electric Co.,

6. United Bank of India Vs. M/s Jorhat Fuel Briquetting Industry & Ors., AIR 1992 Gauhati 116

7. Syndicate Bank Vs. M/s West Bengal Cements Ltd. & Ors., AIR 1989 Delhi 107

8. Delhi State Industrial Development Corporation Vs. Anil Kashyap, 1995 AIHC 2520 (Delhi)

7.1 In so far as submission of calculating interest only on the principal amount adjudged (on the basis of the authority of United Bank of India vs. Dalpat Gauri Shankar, ) is concerned, I feel that proposition cannot be accepted for a number of reasons mentioned hereinafter.

7.2 Firstly our own High Court has held in Syndicate Bank v. M/s. W.B. Cements Ltd. AIR 1989 Delhi 107 (113) as under:

"The definition of the word principal sum as given in various dictionaries is not relevant for the purpose of adjudging principal sum under S. 34. It will depend upon contract between the parties. If the contention of the defendants is accepted the contracts to pay interest with rests will become meaningless...".

After referring to the cases of Jafar Hussain v. Bishambhar Nath, AIR 1937 All. 442 and Sigappiachi v. M.A.P.A. Palaniappa Chettiar, , this court took the following view: "...that under Order 34, Rule 11 a mortgagee is entitled to interest on the principal amount found or declared due on the mortgage. While interpreting the words 'on the principal amount found or declared due' the Division Bench of the Allahabad High Court held that the mortgagee is entitled to interest at the contract rate from the date of the suit till the date fixed for the payment. If the mortgage deed provides that interest will be calculated six monthly and if it was not paid then it would become a part of the principal then that agreement will have to be enforced...". "...It follows the argument that the interest under S. 34 can be awarded only on the original sum advanced is misconceived".

7.3 Secondly the above view find supports from the view expressed by the Privy Council and three other High Courts, namely, Allahabad, Madras and Gauhati High Courts. In P.C. Muthu Chettiar v. K.V. Meenakshi sundaram Ayyar & Ors. AIR 1928 P.C. 35, the Privy Council has held that, when default is once made on the occasion of the first rest, the debtor thenceforth pays interest not merely on the original debt he owed, but upon a composite debt including the original debt plus the added interest. If it be as compound interest the arrears has sunk into the principal. Following and relying upon the Privy Council and Delhi Judgment In United Bank of India Vs. M/s Jorhat Fuel Briquetting Industry & Ors. the Gauhati High Court held that the (unpaid) interest at monthly rests had sunk into the principal debt and becomes principal amount for the purpose of Order 34, Rule 11 and the defendant had lost all his rights to have interest separated from the principal.

7.4 Thirdly, in Renusagar Power Co. Ltd. v. General Electric Company, the question of compounding of interest was considered in the light of Section 3(3)(c) of the Interest Act, 1978. In para 93 of this judgment the Supreme Court observed thus: "Merely because in Section 3(3)(c) of the Interest Act, 1978 the court was precluded from awarding interest on interest does not mean that it is not permissible to award such interest under a contract or usage or under the statute. It is common knowledge that provision is made for the payment of compound interest in contracts for loans advanced by banks and financial institutions and the said contracts are enforced by courts. Hence, it cannot be said that award of interest on interest i.e. compound interest, is against the public policy of India. We are therefore, unable to accept the contention that award of interest on interest, i.e. compound interest is contrary to public policy of India..."

The moment compound interest is permitted, the accrued interest on non- payment becomes payable as principal. In Renusagar Power Co. Ltd. Vs. General Electric Co., ultimately the future interest at the rate of 18% was awarded on an amount which included compensating damages at the annual rate of 8% as the regular interest and delinquent interest until payment as is evident from a conjoint reading of para 14 and 146 of the judgment.

7.5 Fourthly, no doubt this very judgment was considered by the Full Bench in United Bank of India Vs. Dalpat Gauri Shankar, and was dissented to. With all due respect to the Hon'ble Judges of Bombay High Court I am not persuaded to say that the view taken by this court in this respect is erroneous and requires reconsideration. Consequently, the contention of the learned counsel for the defendant that the amount of interest should not be included in principal amount, has to be rejected.

8.1 Now I take the point of awarding pendente lite and future interest at a rate less than 19.5% on the amount of Rs. 2,72,470.98P. It appears that the preponderance of authority is in favour of the view that when the borrower has promised to pay a particular rate of interest and avail the credit and on default by borrower, when an action is commenced ending in a decree, the proper exercise of discretion would be to grant interest at the contract rate from the date of suit till the date of realisation. To reduce or deny interest would amount to penalising the creditor for approaching the Court and encouraging the debtor to deliberately and unjustly prolonging the litigation and this should be the ordinary rule. (See Vijaya Bank vs. S. Bhathija & Anr., , State Bank of Travancore vs. K. Vinayachandran & Anr., , Central Bank of India vs. M/s. P.R. Garments Industries Pvt. Ltd. and Vijay Bank & Etc. vs. Art. Trend Exports and Etc., .).

8.2 But the above said rule is certainly not absolute. The Kerala High Court in State Bank of Travancore vs. K. Vinayachandran & Anr. (supra) held that the Court may refuse to allow future interest at the contractual rate in exceptional circumstances for sufficient reasons. Gujarat High Court in Central Bank of India, Kutch v. M/s. P.R.Garments Industries Pvt. Ltd., Surendra nagar & Ors. also accepted the proposition that there could be a departure from the above said rule in a rare exceptional situation. Delhi High Court in Syndicate Bank vs. West Bengal Cements Ltd. & Ors. (supra) after noting the legislative history this Court has not treated the above said rule of contractual rate of interest as an absolute rule and observed as under:

"The defaulting borrower, in my opinion, cannot be given the benefit of reduced rate of interest as a matter of rule only because the bank had to resort to legal recourse on account of non-payment by the borrower except of course in exceptional circumstances. The existence of exceptional or special circumstances will depend on facts and circumstances of each case. One such illustration of exceptional or special circumstances can be where borrower made every sincere effort to pay but failed and grant of interest at contractual rate will render closure of his unit resulting in unemployment of large number of persons. Another such illustration can be the conduct of the creditor himself which may justify the grant of reduced rate of interest. It will not venture to lay down any broad proposition by multiplying these illustrations. Ultimately facts of each case will determine special or exceptional circumstances. No rigid or hard and fast rule can be laid down. In my opinion, in commercial transactions, grant of interest at the contractual rate ought to be the rule and grant of interest at reduced rate a rare exception. The same principles should be applied for determining the reasonable rate of pendente lite interest.

8.3 The Supreme Court considered the prevailing rate of interest on bank loans and credit facilities relevant while deciding question of reducing the agreed rate of interest in Shrenik Jhaveri vs. A.K. Menon & Ors. (1997) 10 SCC 472. The Court reduced the rate of interest from 30% to 24% per annum after taking into consideration the submissions made, the facts of that case, and the prevailing rate of interest on bank loans and credit facilities.

9.1 Now in the light of above legal position, the question of existence of the special circumstances for reducing rate of interest below the rate of 19.5% from the date of filing of the suit till realisation is required to be examined. In the application, no special circumstance has been mentioned. However, the oral submission is that the plaintiff suffered heavy losses and had to close down their business. But, in any case, that the defendants did retain the money of the bank and the amount was not available for the purpose of bank's own business. Taking into consideration the submission of the learned counsel for the plaintiff the above normal rule and virtual absence of any special circumstance to justify reduction in interest and prevailing rate on bank loans and credit facilities, it is difficult to accept that interest at the rate of 19.5% should not be allowed on the sum of Rs. 2,72,470/98P.

9.2 Claiming rate of interest at 19.5% per annum with monthly rest can neither be said to be unjust enrichment in view of the agreement and undertaking to pay accordingly nor it could be said to be contrary to the public policy of India. (See Renu Sagar Power Company Ltd. vs. General Electric Company, .

9.3 Interest claimed is not 36% per annum compoundable every month to consider the claim as unconscionable.It is not a case of claiming exorbitant rate of interest. The plaintiff is just claiming 19.5% interest with monthly rest. It is not even agreed rate of interest of 30% which should be reduced to 24% as has been done in Shrenik Jhaveri (supra) on the basis of facts of that case and prevailing rate of bank loans and credit facilities. But seeing the present practice of bank charging interest at quarterly rests, it is desirable to award interest at the rate of 19.5% per annum with quarterly rests instead of monthly rests.

10. One of the pleas in written submissions taken by learned counsel for the defendant is that the suit of the plaintiff is not maintainable since it has not been filed and signed by duly authorised persons. I think it would have been better if after filing present application, such a plea was not taken. However, following observation of Supreme Court in United Bank of India vs. Naresh Kumar & Ors. is an appropriate answer:

9 In cases like the present where suits are instituted or defended on behalf of a public corporation, public interest should not be permitted to be defeated on a mere technicality. Procedural defects which do not go to the root of the matter should not be permitted to defeat a just cause. There is sufficient power in the Courts, under the Code of Civil Procedure, to ensure that injustice is not done to any party who has a just case. As far as possible a substantive right should not be allowed to be defeated on account of a procedural irregularity which is curable.

11. In view of the above submissions made in the application the suit is decreed for recovery of Rs. 2,72,470.98P with pendente lite and interest at 19.5% per annum with quarterly rests till realisation against all the defendants who are jointly and severally liable to pay the same. In case the amount is not paid within two months, following mortgaged properties mentioned in para 8, namely, (1) property bearing municipal No. 31, admeas uring 1963 sq. yds. situated in Industrial Area, Najafgarh Road, New Delhi in the revenue estate of Basai Darapur, bounded on the North by Najafgarh Road, South by plot No. 29; East by plot No. 30 and West by plot 32 with all its lands, buildings, fittings, fixtures, installations, rights of ways, paths, passages, hereditaments etc., (2)Property bearing No. 1-49, situated in the colony known as Kirti Nagar, New Delhi admeasuring 966.66 sq. yds, situated in village Basai Darapur, Najafgarh Road, Delhi; bounded on the North by plot No. 50; South by Plot No. 48; East by service road and West by road, acquired under deed registered as No. 9259 in Addl. book I, Vol. 1167 at pp. 129-133 dt. 8th October, 1964 with all its lands, buildings, fittings, fixtures, installations, rights of ways, paths, passages, hereditaments etc.; (3) property bearing No. C-67, admeasuring 766.94 sq. yds. situated in the colony known as Kirti Nagar, in the revenue estate of Basai Darapur, Delhi, bounded on the North by road; South by service road, East by Plot No. C-66 and West by plot No. C-68, acquired under deed registered as No. 2987 in Addl. book I, Vol 1262 at pp. 5-9 dt. 25.3.65 with all its lands, buildings, fittings, fixtures, installations, rights of ways, paths, passages, hereditaments etc. may be sold in auction and the proceeds be firstly appropriated towards expenses incurred, insurance and other incidental charges and thereafter towards the principal amount. In case there is any shortfall, the unpaid amount shall be recoverable jointly and severally from the defendants 1 to 5, being partners are otherwise also personally liable. The plaintiff is also entitled to the costs of the suit.