JUDGMENT
S.B. Sinha, J.
1. All these three appeals involving common questions of law were taken up for hearing together. The judgments and decrees dated 10th January, 1994 are impugned in these appeals.
2. Three suits were filed by the Appellant being suit No. 306/93, 308/ 93 and 309/93 for grant of a decree for sum of Rs. 53,10,74,550.64p., Rs. 10,37,25,686.74p. and Rs. 21,36,72.072.82P. respectively. For the purpose of disposal of these appeals, we would consider the fact from the record of Appeal No. 306 of 1993. Having regard to the certain purported admissions made by the Loanee an application was filed for passing a decree on admission as contemplated under Order XII Rule 6 of the Code of Civil Procedure, the details whereof are :
“Suit No. & Cause Title
Amount claimed in judgment upon Admission.
Amount Claimed in the Suit.
(1)
(2)
(3)
306 of 1993
U.B.I.
Vs.
BTW Industries Ltd.
10,61,33.000/-
53,10,74,550.64
308 of 1993
U.B.I.
Vs.
BTW Veneers Ltd.
7,79,05,724/-
10,37,25,686.74
309 of 1993
U.B.I.
Vs.
S.S. Industries Ltd.
12,50,65,360/-
21,38.72,072.82″
3. The learned trial Judge rejected the said contention but purported to have accepted the suggestions made by the defendants-respondents. Furthermore it was recorded that the defendants intended to pay the principal amount. The learned trial Judge noticed :–
“The respondents have submitted in course of argument and also by filing written notes that they are willing to submit to a decree for Rs. 61,72,05,000/- with such interest as Court may decide and the same may be allowed to be paid by instalments so as to enable the defendant to pay the money.
In the plaint of the three suits the plaintiff bank has claimed Rs. 84,86,72,310.20 with compound interest of 25% per annum. Now it is very difficult to ascertain what is the principal amount in the three suits.”
4. A suggestion was made that the learned Advocate General who, in the suits as also in these appeals was appearing for the Appellant be made an arbitrator for the purpose of determining the question of interest payable on the principal amount. The said suggestion was not accepted. The learned trial Judge, however, took upon himself the matter and upon taking recourse to certain methods of calculations held that the plaintiffs are entitled to a decree for the principal sum of Rs. 77,79,49.617.68P.
5. He, however, in exercise of his power conferred upon him under section 34 of the Code of Civil Procedure read with Order 20 Rule 11 thereof directed that the decretal amount would carry interest at the rate of 6% p.a. and the defendant shall pay the principal amount in instalments as laid down therein. By way of example in respect of Suit No. 306/93 it was directed.
‘The defendant will pay instalment at the rate of Rs. 1.20 crore per quarter, first of such quarter will be on or before 1.4.94 and so by the first day of each succeeding quarter till the entire decretal amount is paid off. The defendant will go on paying the said instalment together with interest on reducing balance. If the defendant fails to pay any two instalments, the plaintiff bank will execute the decretal amount then remaining due and in that event the balance decretal amount will carry interest (c) 16.5% per annum. Mr. Ukil, Special Officer, will continue until the entire payment is made and if the defendants make any default as stipulated therein, the special Officer will take possession of the assets charged. It is further ordered that the defendant company would be at liberty to take financial assistance from any other bank and/or financial institution by creating a second and/ or part passu charge of their assets; but if such financial assistance is taken that will be without prejudice to the Bank’s right.
So far as the Bank’s securities are concerned, the charge upon securities will remain the first charge so far as the plaintiff bank is concerned. Interim orders of injunction already passed as modified earlier and also by this order are made absolute.
The defendant shall pay cost of the suit and the application assessed at Rs. 20,000/- which will be paid along with the first instalment as the
Court-fee paid by the plaintiff bank is Rs. 10,000/-.
The application for injunction and Receiver and application for judgment upon admission and also the suit are disposed of accordingly.
So far as the application for appointments of Timber expert and the chartered accountant are concerned, there will be no order in this application in view of the decree passed in the suit.”
6. We are appalled to see the manner in which the matter has been disposed of.
7. The appellant herein had filed an application under Order 12 Rule 6 of the Code of Civil Procedure. Either the said application has to be allowed or rejected. The parties, in either event could take recourse to the remedies available to them in law.
8. However, the learned trial Judge while considering the suggestion made by the defendant had proceeded to dispose of the suit itself.
9. Order 12 Rule 6 contemplates that where admission of the claim has been made either by way of pleadings or otherwise, on a prayer made whether orally or in writing, the Court, may at any stage of the suit either on application of any party or of its own motion and without waiting for determination of any other question between the parties, make such order or give such judgment as it deems fit having regard to such admission.
10. By a letter dated 7.4.1993 the respondent admitted that it obtained loans and agreed to repay the outstanding amount by instalments and further agreed to pay the interest @17% p.a. with quarterly rests.
11. The relevant portion of the said letter reads thus :–
“We refer to your letter dated 02/04/93 calling upon the undersigned to meet the Chairman and Managing Director and the Executive Director of the Bank on 29/03/93 in connection with regularisation of our accounts. As the undersigned had gone out of station on that day, the meeting did not materials. However, the undersigned will meet the Chairman and Managing Director and the Executive Director on 10/03/ 93 as arranged.
We have been trying hard to mobilise additional funds from private sources to put in our accounts for adjustment of the excess over the sanctioned limit of the Cash Credit Facility. Unfortunately we have not met with success so far though there is promise of substantial fund coming to us in the near future. In the meantime, we appreciate your. anxiety to have the excess outstanding in our C/C account adjusted as quickly as possible, with this in view, we have to make the following suggestions -for your kind consideration.
Suggestion No. I
The excess outstanding in C/C account, which is caused by development of L/Cs, may be transferred to a Working Capital Term Loan Account which shall be repaid by instalments of not less than Rs. 75 lacs per month. Also, we shall try to provide funds for meeting the obligation under the outstanding L/Cs as and when they mature. Till the excess is fully adjusted, we shall not use any of the facilities granted in this account.
The payment shall be made out of sale proceeds of existing stock of timber and realisation of book debts after meeting our normal business expenses. The amount of repayment instalment will increase if the sale of Timber picks up or realisation of book debt becomes speedier. But, in no case, it will be less than Rs. 75 lacs per month. Our efforts to collect additional funds from private sources are continuing and we are hopeful that within a period of three years we shall adjust the excess outstanding
in full. We should like to mention here that our 100% EOU Granite Unit is all set for production and we have sufficient export orders in hand. As things stand at present, we shall be able to generate sufficient surplus funds, by executing the export orders from May 1993 and this money will be available for adjustment of the excess outstanding in the timber account over and above the repayment instalment identification.
We are prepared to create Part Passu Charge, in your favour, on our 100% EOU Granite Unit with IDBI who have granted NCD facility of Rs. 5 Cores. The present value of this unit is estimated around Rs. 35 cores. We will expect you, in return, to extend need-based financial help for export business of this unit.
Incidentally, the present rate of interest charged by you in this account at 25% p.a. is very high and we will request you to reduce it to 17% p.a.
Suggestion No. II.
If you feel transfer of the excess outstanding to a separate WCFL account is not feasible, the existing account may be continued, as it is. We will not draw any funds out of if, but, will make regular repayment at Rs. 75 lacs per month or more if the situation so permits. It shall be our endeavour to adjust the excess outstanding within a period of three years.
The security of our 100% EOU Granite Unit that we have offered under suggestion No. 1 shall apply to this case also on the same basis. Our request for reduction in the interest rate may please be considered favourably.
Considering the long and cordial relationship that we have had with you, we trust that you will give sympathetic consideration to the repayment programme suggested here. We feel confident that with your cooperation we shall be able to conduct our business operation smoothly and meet our obligations to the Bank fully.”
12. Yet again by a letter dated 19th July, 1993 the defendant admitted having obtained the credit facilities and thereby agreed to pay outstanding amount by monthly instalment @ Rs. 75 lakhs and further agreed to pay the interest at the reduced rate of 17% p.a. By the said letter it further admitted to have obtained credit facilities in the name of BTW Vineers Ltd. and agreed to pay the outstanding amount by monthly instalments of Rs. 25 lakhs. Admission was also made as regard the rate of interest i.e. 17%
P.A. instead of the interest charged. Similarly S.S. Industries Ltd. agreed to repay the amount by instalment @ Rs. lakhs p.m. and requested the bank to reduce the interest to 17% p.a.
13. From the impugned judgment itself it appears that the learned
counsel for the respondent, inter alia agreed to the following :–
“(a) The Borrower obtained credit facilities in several accounts:
(b) The agreed rate of interest in Cash Credit Account was 16.5% per annum with quarterly rests;
(c) On Packing Credit Account the agreed rate of interest was 12.5% per annum as will appear from letter of September 26, 1991;
(d) On the Term Loan Account the agreed rate of interest was 15% per annum as will appear from the sanction letter;
As noticed hereinbefore, the learned counsel for the defendant had agreed to pay the principal amount and expressed his willingness to submit to the decree for a sum of Rs. 61,72,05,000/- in the following term :-
“Rs. 39,08,51,000 against BTW Industries Ltd.
Rs. 7,87,20,000 against BTW Vineers Ltd.
Rs. 14,76,34,000 against S.S. Industries Ltd.”
14. Despite the said submission, the learned trial Judge although noticed that it was difficult to ascertain as what was the principal amount if the borrowers submit to the decree for the said sum and with a view thereto adopted a method of calculation whereby from the claim of the bank, ,25% was deducted and the amount after such deduction as on 10.8.1993 was calculated at Rs. 63,65,04,232.65p. (84,86,72,310.20P-21,21,68,077.50P).
15. Having regard to the fact that the learned trial Judge was inclined to grant interest at the rate of 16.5% in stead of 25% after deducting the remaining amount of interest, the total amount of interest was found to be 16.5% p.a. on principal amount. After deduction of the 1/3rd value of the said amount, the balance amount was calculated at Rs. 7,07,32,692.52P.
16. From the claim amount the aforementioned interest was reduced so that rate of interest could be reduced to 16.5% p.a. and after such reduction the suit had been decreed.
17. It is true that section 34 of the Code of Civil Procedure provides for a discretion in the Court in the matter of grant of interest but such discretion is not absolute. While exercising such discretion, the Court would have to keep in mind the provisions of sections 21 and 21A of the Banking Regulation Act which read thus :–
Power of Reserve Bank to control advances by Banking Companies.-
(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest (or in the interests of depositors) (or banking policy) so to do, it may determine the policy in relation to advances to be followed by Banking Companies generally or by any Banking Company in particular, and when the policy has been so determined, all Banking Companies or the Banking Company concerned, as the case may be, shall be bound to follow the policy as so determined.
(2) Without prejudice to the generality of the power vested in the Reserve Bank under sub-section (1), the Reserve Bank may give directions to Banking Companies, either generally or to any Banking Company or group of Banking Companies in particular, as to,–
(a) the purposes for which advances may or may not be made;
(b) the margins to be maintained in respect of secured advances;
(c) the maximum amount of advances or other financial accommodation which, having regard to the paid up capital, reserves and deposits of a Banking Company and other relevant considerations, may be made by the Banking Company to any one company firm, association of persons or individual;
(d) the maximum amount upto which, having regard to the considerations referred to in clause (c), guarantees may be given by a Banking Company on behalf of any one company, firm, association of persons or individual; and
(e) the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.
(3) Every Banking Company shall be bound to comply with any directions given to it under this section-
(21-A. Rates of interest charged by Banking Companies not to be subject to scrutiny by Courts. Notwithstanding anything contained in the Usurious Loans Act, 1918 (10 of 1918), or any other law relating to indebtedness in force in any state, a transaction between a Banking Company and its debtor shall be reopened by any Court on the ground that the rate of interest charged by the Banking Company in respect of such transaction is excessive.)”
18. In Vijaya Bank & etc. v. Art Trend Exports & etc. , a Division Bench of this Court has clearly held that reasons have to be assigned for not invoking the proviso appended to section 34
of the Code of Civil Procedure. It was held :–
18.1. There is another aspect of the matter, So far as Banking Companies are concerned, in view of section 21A of Banking Regulation Act. 1949, which we have quoted herein above, a transaction between a Banking Company and its debtor cannot be reopened by any Court on the ground that the rate of interest charged by the Company in respect of such transaction is excessive. Therefore, it follows that in the case of a Banking Company, a fortiori, its claim to interest at the agreed rate for the period prior to the suit cannot be ignored and the Court is bound to grant interest at the rate. The Court has no discretion in the matter.
18.2. The next question is whether the claimant is entitled to such interest at the agreed rate. A party is not entitled to claim such interest at such agreed rate for the period subsequent to suit as a matter of right and the Court is not bound to grant such interest at such rate. Even if it is mentioned in the agreement that interest is to be paid at the agreed rate till realisation. Reference may be made in this connection to Magniram Marari v. Dhowlal Roy (1890 ILR 569) (FB) (supra). However, in our opinion, the Court is not entitled to ignore the same totally merely because it is a matter of discretion. While considering the question as to the amount or rate of such interest though it is a matter of discretion of the Court, inasmuch as such discretion is to be exercised judicially, not only that the Court is entitled to take into consideration the agreement of the parties in this respect but it must take the same into consideration. The Court should generally adhere to the interest at the contract rate unless it is not considered to be equitable to do so. Reference may be made in this connection to Shiva Prasad Singh v.Prayagkumari Debee (supra). It is to be remembered that when a person has entered into an agreement for advancing some amount which provides for payment of interest at an agreed rate, merely because he has to file a suit to recover
the money, the Court should not ordinarily deprive him of the interim interest at such rate. Otherwise the situation would be that in respect of a person who is diligently making payments under and according to the agreement between the parties, will be paying the interest at the agreed rate whereas a person who deliberately fails to make payment of the his dues and against whom a suit for recovery of the same has to be filed, will get away with paying interest at a lower rate. Where the debtor is diligent and the creditor does not have to file a suit the debtor pays interest at the agreed rate. However, where the debtor is a defaulter and the creditor is compelled to file a suit there is no reason why such institution of the suit should deprive the creditor of interest at the agreed rate. However, we make it clear that we are not of the view that in all cases the interim interest must be granted at the agreed rate. What we are merely pointing out is that certainly the conduct of the parties must be taken into consideration. There may be various reasons which may be considered by the trial judge to justify the lesser rate of interest, reference may be made in this connection to the following also. K. Appa Rao v. V.L. Varadaraj (AIR 1981 Madras 94) (supra) United Bank of India v. M/s. P.R. Garments Industries Pvt. Ltd. (supra) and Jagannath Pigments & Chemicals v. Bank of Baroda (1989-65 Com Cas 393) (Bom) (supra).
18.3. This question assumes special importance where the plaintiff is a bank. It is a question of realisation of money advanced by a bank which is a public financial institution; it is a question of public money; it is a question of a bank carrying on the business of accepting deposits and lending money. It is the business of the bank to lend money on payment of interest. The rate of interest charged by a Banking Company depends on the direction by the Reserve Bank of India. In this context it may be pointed out that every Banking Company shall be bound to comply with any direction given to under section 21 of the Banking Regulation Act 1949 as to, inter alia. the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given. In this context reference may be made to a Division Bench judgment of this Court in the Bank of Rajasthan Ltd. v. S.K. Trading, reported in (1990)1 Cal LT 139 at page 148 (Para 29) (to which I was a party) which is set out hereinbelow.”
19. The Karnataka High Court in Vijaya Bank v. S. Bhathija & Anr., also having regard to the provisions of Banking Regulations Act as referred to hereinbefore, held :–
Thus the following position emerges in regard to interest chargeable by Banks :
(a) Banks are entitled to interest at contract rates, subject to the ceiling or limitations placed by the Reserve Bank of India in its circulars/ directives.
(b) Whenever the contract provides for compounding of interest, either specifically or impliedly by use of the words “with rests”, the Banks are entitled to compound interest, except in the case of agricultural advances;
(c) The Courts can only examine whether the rates of interest claimed is excessive or not with reference to the directives of Reserve Bank
of India. The Courts cannot reduce the contract rate of interest either under the provisions of Usurious Loans Act or any other law relating to indebtedness or principles of equity;
(d) Normally in regard to Bank claims, the Courts should award current interest (from the date of suit to date of decree) and future interest (from the date of decree to date of realisation) under section 34 of the Code of Civil Procedure, at the contract rates. ‘Contract rate of interest’ but refers also to compounding of interest, Thus if contract provides for quarterly rests (except in the case of agricultural advances). If the Courts want to reduce the rate of interest, either current or future, such reduction should be supported by reasons.”
20. Yet again in Corporation Bank v. D.S. Gowda & Anr., , it was held :–
“The learned counsel for the Bank, however, invoked section 21-A of the Banking Regulation Act introduced by Act No. 1 of 1984. We have already extracted the said provision in the earlier part of this judgment. Under the said provision a transaction between a Banking Company and its debtor is not liable to be reopened by any Court on the ground that the rate of interest charged by the Banking Company in respect of such transaction is excessive, the provisions of the Usurious Loans Act, 1918 and similar State laws notwithstanding. In Krishna Reddy v. Canara Bank it was observed as under ;
“The mandate of this section is that Courts cannot reopen the account relating to a transaction between a Banking Company and its customer on the ground that the rate of interest charged, in the opinion of the Courts, is excessive or unreasonable. The Courts, in other words, cannot exercise jurisdiction under the Usurious Loans Act or any other law relating to indebtedness for the purpose of giving relief to any party. This appears to be the intent of the legislature in enacting the Banking Laws (Amendment) Act, 1983.
Section 21-A has, however, no bearing on the jurisdiction of Courts to give relief to an aggrieved part when it is established that the bank in a particular case has charged interest in excess of the limit prescribed by the Reserve Bank of India.”
21. Therefore, according to the High Court if, in any case, it is shown that the Bank was claiming interest in excess of that permitted by the circular/direction of the Reserve Bank the Court could give relief to the aggrieved party notwithstanding section 21-A to the extent of interest charged in excess of the rate prescribed by the Reserve Bank. A distinction must be drawn between Court’s interference on the premise that the interest charged is excessive and Court’s interference on the premise that the interest charged is in contravention of the circulars/directions issued by the Reserve Bank. These circulars/directions having been issued under sections 21/35-A of the Banking Regulation Act would have statutory flavour. In the judgment impugned in this case the Division Bench of the High Court summed up this :
This Courts cannot reopen any account maintained by banks relating to transaction with its customers on the ground that the rate of interest charged, in the opinion of the Courts, is excessive or unreasonable. Section 21-A of the Banking Regulation Act is a restraint on such power of Courts, However, in any case, if it is proved that the interest charged by banks on the loans advanced is not in conformity with the rate prescribed by the Reserve Bank then the Court could disallow such excess interest and give relief to the parry notwithstanding the provisions of section 21-A. Banks are bound to follow the directives or circulars issued by the Reserve Bank prescribing the structure of interest to be charged on loans and any interest charged by Banks in excess of the prescribed limit would be illegal and void. Banks cannot charge compound interest with quarterly rests on agricultural advances.”
22. We are in respectful agreement with the above interpretation placed on section 21-A of the Banking Regulation Act. We must, however, clarify that we should not be understood to be expressing any opinion whatsoever on the. question whether section 21-A would debar the Courts from interfering if the circulars /directives issued by the Reserve Bank do not fix the maxima and leave it to the discretion of the banks to determine the rate of interest above the minimum fixed. To put it differently if under Reserve Bank circulars/directives the minimum rate of interest fixed, say 12.5% without a ceiling, leaving it to the discretion of each bank to a fix a higher rate of interest at its sweet will above 12.5%, a question may arise whether the interest fixed by the bank is excessive and unconscionable and whether in such situation section 21-A would debar the Court from reducing the rate of interest to a reasonable limit. We do not express any opinion on this question as the same does not arise in the present case. But if the Reserve Bank was fixed the maximum rate of interest in exercise of the powers conferred by sections 21/35-A of the Banking Regulation Act, section 21-A would be attracted and the transaction would not be liable to be reopened on the ground that the rate of interest fixed is excessive even though not exceeding the celling date mined by the Reserve Bank. In the case of agricultural loans/advances the position has been made amply clear by the circulars referred to earlier which do not permit banks to charge compound interest with quarterly rests. In such cases as observed earlier the interest be fixed with annual rests coinciding with the time when the farmer is fluid and if thereafter the farmer fails to pay the interest it would be open to compound the interest on the crop loan or instalments upon the term loans becoming overdue. In view of the above we do not see any flaw in the reasoning of the High Court so far as this appeal is concerned. We therefore, must dismiss the appeal.”
23. Having regard to the fact of the matter we are of the opinion that the learned trial Judge erred in law in reducing the rate of interest to 6% despite the fact that the defendants-respondents accepted the rate of interest at 17%.
24. Although the tenor of the judgment under appeal shows that the learned trial Judge proceeded on the basis as if the suggestion made on behalf of the defendants-respondents was accepted by the judgment under Appeal does not spell out the same expressly. In any even, as the impugned-
judgment and decree had not been passed on consent nor the learned trial Judge having been appointed as an Arbitrator in terms of section 21 of the Arbitration Act, 1940, -the impugned judgment must be considered on its own merits.
25. As indicated hereinbefore, the learned trial Judge could have proceeded to pass a judgment on admission or refused to do so in which event, a contested decree could have been passed. The hybrid procedure adopted by the learned trial Judge is not contemplated in law. The suit was not ready for hearing and, thus, a judgment on contest could not have been passed. A judgment can only be passed either on admission or on contest except in a case where the learned Court itself is appointed as an Arbitrator. Thus, both in law as also on principle the impugned judgment cannot be sustained, which is set aside accordingly. Any action taken pursuant thereto, will be considered afresh by the appropriate bench. Similarly if the Appellant herein has received any amount for the respondent, due adjustment therefor shall be granted. It will be open to the appropriate bench to consider the matter afresh as to whether a judgment on admission can be passed or not. If it is held that such, a judgment cannot be passed on admission it will be open to it to take up the matter for hearing and/or pass such appropriate order as it may seem fit and proper.
26. It further appears that the learned trial Judge has not taken into consideration the fact that the amount in question was sought to be repaid by the defendants-respondents themselves instalments to the following effect :
(a) Rs. 75 lakhs for BTW Vineers Ltd.,
(b) Rs. 1 crore 50 lakhs for BTW Industries Ltd: and
(c) Rs. 55 lakhs for S. S. Industries per month.
For the reasons aforementioned these appeals are allowed and the judgment and decree passed by the learned trial Judge are set aside with the aforementioned observations and directions. However, in the facts and circumstances of this case there will be no order as to costs.
H. Banerji, J.
1. I agree.
2. Appeals allowed
