Delhi High Court

The Vaish Coop Adarsh Bank Ltd. vs Pushpa Builder Ltd & Others on 10 September, 2008

Author: Sanjiv Khanna

18.
*     IN THE HIGH COURT OF DELHI AT NEW DELHI

+     EX.P. 180/1997

      THE VAISH COOP ADARSH BANK LTD. ... Decree Holder
                   Through Mr. Lalit Gupta, Advocate.

                   versus

      PUSHPA BUILDER LTD. & ORS.           ..... Judgment Debtors
                   Through Ms. Rekha Palli & Mr. Puran Singh,
                   Advocates for the judgment debtor No. 1.
                   Mr. Pradeep Gaur, Advocate for the objectors-
                   Mr. Darshan Singh, Mrs. Anita Jain, Mr. T.D.
                   Taneja & Mr. T. MIthal-G.P.A. of Capt.
                   Hemant Juneja.
                   Mr. P.A.S. Rao, Advocate for the objector-M/s
                   K.C. Software (P) Ltd. in E.A. No. 580/2002.

      CORAM:
      HON'BLE MR. JUSTICE SANJIV KHANNA

                  ORDER

% 10.09.2008

1. Learned counsel for the judgment debtor has handed over a

demand draft of Rs.15,00,000/- to the learned counsel for the

decree holder. The same has been accepted by the learned counsel

for the decree holder without prejudice to the rights and contentions

of his client.

2. The present execution petition has been filed by the Vaish

Cooperative Adarsh Bank Limited, the decree holder for execution of

the final decree dated 20th August, 1996. Earlier on the basis of an

application under Order XXIII, Rules 1 and 3 of the Code of Civil

Procedure, 1908 being I.A. No. 1798/1992, a preliminary decree for

recovery of Rs.23,37,177/- as on 31st December, 1991 along with

costs of Rs.22,688.75 and future interest @ 23% per annum from 1st

January, 1992 was passed. It was expressly stated in the preliminary

decree that the compromise application I.A. No. 1798/199 marked

Ex. C-1 shall form part of the decree. It was further directed that in

case of failure/default of the judgment debtor to pay three

consecutive installments, the decree holder shall be entitled to

execute the decree by sale of the mortgaged property, viz. plot No.

M-5, Greater Kailash II, New Delhi along with the building erected

thereon.

3. The dispute between the parties pertains to interpretation of the

decree as well as I.A. No. 1798/1992, Ex. C-1 and terms and

conditions on which the parties had compromised and settled the

matter. The terms of the compromise as recorded in I.A. No.

1798/1992, and which forms part of the decree, read as under:-

and 2 have arrived at a compromise and have settled the matter amicably out of court. It has been agreed between the plaintiff and defendants Nos. 1 and 2, as follows:-

(i) That the defendants Nos. 1 and 2 admit that as on 31 December, 1991 a sum of

Rs.23,37,177/- is due and payable by the defendants Nos. 1 and 2 to the plaintiff in the said loan account No. FS/95/II inclusive of interest due till 31.12.1991.

(ii) That besides the above said amount, costs of the present suit have been agreed to be paid by the defendants Nos. 1 and 2 to the extent of Rs.22,688.75 inclusive of court fee, counsel's fee and other expenses to the plaintiff. That the aforesaid amount of Rs.23,37,177/- shall carry future interest w.e.f. 01.01.1992 as per latest direction of the Reserve Bank of India from time to time and Delhi Cooperative Societies Rules, 1973, which at present is 23% p.a. (i.e. 20% minimum as per R.B.I. directives in force and 3% p.a. additional interest as per Delhi Cooperative Societies Rules, 1973) to be calculated on day to day basis and chargeable with quarterly rests, subject to change/s as per those directives.

(iii) That in view of the above admission, the plaintiff has acceded to the request of the defendants Nos. 1 and 2 to allow the defendants 1 and 2 to make the payment of the above said amounts in monthly instalments of Rs.50,000/- each payable latest by 15th of every succeeding month and first instalment payable latest by 15th of January, 1992 for which defendant No. 1 has already given a cheque to the plaintiff at the time of signing this application which the plaintiff acknowledges to have received. Out of the amounts so paid every month, firstly it will be adjusted towards interest and surplus, if any, will be adjusted towards principal and so on and so forth. It has further been agreed that after payment of 40 instalments as above mentioned whatsoever balance is remaining due, the same shall be payable by the defendants Nos. 1 and 2 in the next 8 months and the whole of the loan amount inclusive of

interest and costs shall be paid latest by the end of 48 months i.e. 31.12.1995.

(iv) That the plaintiff will not be entitled to file execution or make an application for sale of

and 2 pay the instalments regularly as above mentioned and will only be entitled to execute the Decree and apply for sale of the mortgaged property if defendants Nos. 1 and 2 make default in payment of three consecutive instalments and only in that eventuality the mortgaged property shall be liable to be sold. That the plaintiff will

however this compromise will not in any way impair the liability of defendant No. 2 as surety.

(v) In case the proceeds of the sale of the mortgaged property fall short of the decreetal amount, the balance can be recovered from the other assets of defendants Nos. 1 and 2."

4. A reading of the above terms show that there was no dispute

between the parties to the principal amount due and payable by the

judgment debtors as on 31st December, 1991 i.e. Rs.23,37,177/-.

The principal amount was inclusive of interest payable till 31st

December, 1991. There is also no dispute that the judgment debtors

were liable to pay Rs.22,688.75 towards Court fees, counsel's fees

and other expenses.

5. Clause 2(ii) stipulates that the judgment debtors shall pay future

interest on Rs.23,37,177/- with effect from 1st January, 1992 as per

the latest directions of the Reserve Bank of India from time to time

and Delhi Cooperative Societies Rules, 1973. It is admitted case of

the parties that no directions have been issued and the Delhi

Cooperative Societies Rules, 1973 do not prescribe interest rate

except that under the Rules the judgment debtor is liable to pay

additional interest @ 3% per annum. The question pertains to rate of

interest payable by the judgment debtors to the decree holder on

Rs.23,37,177/- with effect from 1st January, 1992 in terms of the

directions issued by the Reserve Bank of India from time to time. The

dispute is about the rate of interest and whether it can be

compounded.

6. It is admitted case of the parties that as per Reserve Bank of

India directive at the time when the decree was passed, interest was

payable @ 23% per annum i.e. 20% as per Reserve Bank of India

directive in force and 3% additional interest as per Delhi Cooperative

Societies Rules, 1973. Further interest was to be calculated on day-

to-day basis but chargeable with quarterly rests. The said directive

continued to be in force till 20th June, 1995, though interest rates

were reduced. Accordingly, in terms of the decree, the judgment

debtor will be liable to pay interest in terms of the directives, on day-

to-day basis but chargeable with quarterly rests for the period

between 1st January, 1992 till 20th June, 1995.

7. By circular dated 20th June, 1995, Reserve Bank of India

reviewed the existing lending rate structure for primary cooperative

banks and they were given freedom to determine their lending rates

subject to the prescription that the minimum lending rates shall be

13% per annum. Subsequently, by another circular dated 2nd March,

2002, Reserve Bank of India reduced the minimum lending rate to

12% per annum. By another circular dated 29th April, 2002,

cooperative banks were given complete freedom to fix lending rates

and Reserve Bank of India withdrew all directions with regard to

lending rates. These facts have been confirmed by the Reserve

Bank of India in their affidavit filed on 24th January, 2007 pursuant to

directions given by this Court.

8. Learned counsel for the decree holder submits that the

judgment debtors are liable to pay interest @ 20% per annum in spite

of the circulars dated 20th June, 1995 and thereafter, in terms of the

said decree. Interest it is stated has to be paid as per Reserve Bank

of India directive in force before circular dated 20th June, 1995. On

the other hand, it is the contention of the judgment debtors that they

should be charged minimum lending rates prescribed in the circulars

of the Reserve Bank of India. Another question, which arises for

consideration is whether the decree holder is entitled to compound

interest.

9. The decree holder has filed a computation chart, which shows

that they have calculated interest @ 22% per annum from 1st March,

1992 to 8th October, 1992 and gradually reduced the same to 18%

per annum till 30th June, 1995. However, with effect from 1st July,

1995 they have charged interest @ 20% per annum. For the purpose

of the present decree, interest charged by the decree holder with

quarterly rests at different rates as shown in the chart from 1st

January, 1992 till 30th June, 1995 is treated as correct. This is also

acceptable to the counsel for the judgment debtor Nos. 1 and 2.

10. As already stated above, with effect from 1st July, 1995,

Reserve Bank of India directions had only prescribed minimum rate of

interest, which too was 13% per annum. Minimum rate of interest

was substantially lower than the contractual rate of interest of 15%

per annum, when loan agreement was executed between the parties.

Learned counsel for the decree holder has not been able to justify

claim of interest @20% per annum on the basis of the Reserve Bank

of India directive dated 20th June, 1995. The use of the words "from

time to time" in Ex. C-1, the compromise application with reference to

the Reserve Bank of India directions shows that interest rate was

not static but fluctuating or floating and dependent upon Reserve

Bank of India directions. The decree holder was bound to follow

Reserve Bank of India directions on interest rates. In terms of the

directions of Reserve Bank of India, the decree holder had

themselves reduced rate of interest for the period after the decree till

June, 1995, which also establishes that the interest rate was to be

fluctuating or floating. However, after June, 1995, Reserve Bank of

India withdrew directions fixing specific interest rates and banks were

given liberty to fix interest rates in contracts, subject to the minimum

interest rate fixed by the Reserve Bank of India. The contractual rate

fixed by the parties in the agreement is applicable, if it is more than

the minimum interest rate fixed by the Reserve Bank of India.

Looking at the decree passed in the present case, I feel that the

contractual rate of interest, which is 15% per annum, is due and

payable by the judgment debtors to the decree holder after 1st July,

1995. In addition, the judgment debtor will be also liable to pay 3%

additional interest as prescribed under the Delhi Cooperative

Societies Rules, 1973. The effective rate of interest, therefore, will be

18% per annum with effect from 1st July, 1995 onwards. The said

rate of interest will continue till full payment is made. Payments made

will be adjusted and set off as per para 2 (iii) of I.A. No. 1798/1992.

11. On the question whether the interest can be compounded, I find

that the contractual terms did not provide for compounding of

interest. Only simple interest was payable to the decree holder by

the judgment debtors.

12. Learned counsel for the decree holder, however, relies upon

circulars dated 30th March, 2002 and 26th August, 2002 issued by the

Reserve Bank of India. Circular dated 30th March, 2002 stipulates

that with effect from 1st April, 2002, banks shall move over to charging

of interest on loans/advances at monthly rests, except in cases of

agricultural advances. In clause (iv) it is also stated that interest on

monthly rests will apply to new term loans and other loans for

longer/fixed periods. This circular, however, was superseded and

followed by another circular dated 26th August, 2002. By this

circular dated 26th August, 2002 banks were given option to

compound interest on monthly rests with effect from 1st April, 2002,

1st July, 2002 or 1st April, 2003. In addition, in paragraph 2(ii), it was

stipulated as under:-

"2.(ii) With effect from quarter beginning July 1, 2002, banks should ensure that the effective rate does not go up merely on account of the switchover to the system of charging /compounding interest at monthly rests and increase the burden on the borrowers.

Illustratively:

If a bank is charging in a borrower's account an interest rate of 12 percent with quarterly rests, the effective rate is 12.55 percent. If the bank charges in the same account an interest rate of 12 percent at monthly rests, the effective rate comes to 12.68 percent. Banks should, therefore, adjust the interest rate charged to the borrower in such a way that the effective interest rate to the borrower does not exceed 12.55 percent as hitherto. Thus, in the above example, banks should charge interest at 11.88 percent (and not 12 percent). If this is done, the effective rate, even after compounding at monthly rests, will be 12.55 percent. "

13. Thus, the effective rate of interest fixed in the contract would

remain unchanged in spite of switchover and charging of interest on

monthly rests. There was to be no increase of burden on the

borrowers. The said circular did not provide and stipulate that the

banks can compound interest on monthly rests so as to exceed the

contractual rate of interest already fixed between the parties. The

contractual rate of interest shall be decreased on account of

switchover to system of charging compound interest on monthly rests

in view of the condition that the total interest burden on the borrowers

should not exceed the contractual rate so fixed. In these

circumstances, I do not think that the decree holder bank is entitled to

claim interest over and above 18% per annum even with effect from