| SooperKanoon Citation | sooperkanoon.com/388161 |
| Subject | Banking |
| Court | Karnataka High Court |
| Decided On | Aug-21-2007 |
| Case Number | Writ Petition No. 6420/2006 |
| Judge | S. Abdul Nazeer, J. |
| Reported in | AIR2007Kant187; 2007(2)CTLJ399(Kar); ILR2008KAR1311; 2007(6)KarLJ624 |
| Acts | Indian Contract Act, 1872 - Sections 37; State Financial Corporations Act, 1951 - Sections 24, 25, 25(1) and 27; Post Office Recurring Deposit (Amendment) Rules, 1999 - Rule 9(A) |
| Appellant | Hotel Vrinda Prakash Represented by the Managing Partner Smt. Chitravrinda Shetty and Smt. Chitravri |
| Respondent | Karnataka State Financial Corporation Represented by Its Managing Director and Karnataka State Finan |
| Appellant Advocate | K.M. Nataraj. Adv. |
| Respondent Advocate | K.L. Srinivasa, Adv. |
S. Abdul Nazeer, J.
1. Petitioners had borrowed a loan of rupees one crore from the respondent - Corporation for the purpose of developing touring unit/Hotel in Karkala Town. In this connection, petitioners have entered into a Deed of Hypothecation dated 20.09.2003 providing for the terms and conditions of repayment of the loan. Petitioners made an application for foreclosure/prepayment of the loan account. The respondents sent a communication to the petitioners as per Annexure 'C' on 15.07.2005 stating that the foreclosure of the loan account is permissible upon repayment of equivalent two quarterly principle installments with the prior approval in writing of the Corporation and subject to the terms and conditions as may be stipulated by the Corporation in that behalf. It was further informed that payment of 2% of the premium on the advanced payment/foreclosure account is necessary. Petitioners have called in question the said communication at Annexure 'C' in this writ petition. Petitioners have also sought for a declaration that the decision to levy 2% premium on the advanced payment/foreclosure of the account is arbitrary and illegal and without jurisdiction and to quash the letter dated 30.05.2000 in No. KSFC BO 2005-06/638 as per Annexure 'A'. Petitioners have further sought for closure of the account without levy of any premium on the advanced payment/foreclosure of the account.
2. I have heard the learned Counsel for the parties.
3. Sri K.M. Nataraj, learned Counsel appearing for the petitioners would contend that the decision of the respondents to levy 2% penalty/premium on the advanced payment/foreclosure of the account is arbitrary and without jurisdiction. It is further contended that the respondents are not entitled to levy the penalty/premium for foreclosure of the account in the absence of any agreement to that effect and that the decision of the respondents to levy the premium/penalty is illegal and unauthorised.
4. On the other hand, learned Counsel appearing for the respondents - Corporation submits that the respondents lend money to the borrowers by availing finance from Small Industrial Development Bank of India, SIDBI and also from other financial institutions at high rate of interest. The loans sanctioned bear a fixed rate of interest and being a term loan are contracted to be repaid over a period of time. The interest rates charged to the borrower is fixed irrespective of the fact that no increase in the interest rates in general banking sector. In a failing interest regime, in the event of foreclosure of the loan, the same amount can be further lent on a lower rate of interest. In order to protect against this risk a foreclosure premium is charged on the premature closure of the loan to take care of the loss. He draws my attention to Clause 14 of the Hypothecation Deed dated 20.09.2003 wherein liberty was not reserved to the petitioners for repayment of the outstanding principal sum in full or in part before the due date or dates prescribed for payment of the dues except with the prior approval in writing of the Corporation and subject to such terms and conditions as may be stipulated by the Corporation in this behalf on its own discretion. He has also pointed out from the circular-Annexure 'R-2' wherein the Corporation has increased the prepayment/foreclosure premium from 1% to 2% on the outstanding loan balance amount. He has drawn my attention to Section 37 of the Indian Contract Act in this regard as also Section 25(1)(h) and Section 27 of the State Financial Corporations Act, 1951.
5. I have carefully considered the arguments of the learned Counsel made at the Bar and perused the materials placed on record.
6. The admitted facts are that the petitioners have availed financial assistance of rupees once crore from the respondents for developing the Tourism Development/Hotel at Karkala. A deed of Hypothecation was entered into between the petitioners and the respondents as per Annexure 'R1' on 20.09.2003 containing the terms and conditions of the loan transaction. The condition relating to repayment of the loan is as under:
(a) Shall repay to the Corporation the said term loan/principal sum of Rs. 1,00,000/- (Rupees One Crores only) hereinafter for brevity's sake called 'the said term loan/principal sum' in 84 monthly instalments as noted below:
First 25 monthly instalments of Rs. 90,000/ -
Next 23 monthly instalments of Rs. 1,10,000/-
Next 24 monthly instalments of Rs. 1,35,000/-
Last 12 monthly instalments of Rs. 1,65,000/-
the first of such instalments being paid on the 10th day of the 5th quarter from the date of the first release/disbursement to the said term loan/principal sum in terms of the sanction communication letter No. KSFC/U/BO/1998/03-04 dated 12.09.03 issued by the Corporation to the Borrower and such quarterly instalments and on such dates as may be fixed by the Corporation and to be communicated by the Corporation to the Borrower from time to time.
(b) Shall pay interest at the rate of 14.25% percent per annum on the said term loan/principal sum or the balance thereof remaining unpaid for the time being from the date thereof and shall be calculated and charged with quarterly rests, such interest to be paid on the 10th day of March, 10th day of June, 10th day of September, and 10th day of December in each year (IF SIDBI/IDBI) do not sanction refinance in this case, then the Corporation will charge the interest at 19.25% p.a. and enhanced rate of interest 21.75% p.a. in case of default of either Principal or interest or both, PROVIDED that in case any instalments of the said term loan/principal sum or interest or any instalment of interest or any other dues payable hereunder is not paid on the date on which it becomes due and payable all such instalments or term loan / principal / interest and other dues shall carry interest at 16.79% percent per annum computed from the due date to the date of payment upon footing of compound interest with rests taken or made quarterly on the days hereinbefore respectively provided for payment thereof.
7. The agreement states that the petitioners will not be at liberty to repay the outstanding principal amount in full or in part before the due date or dates prescribed for payment except with the prior approval of the Corporation and subject to the terms and conditions as may be stipulated by the Corporation. The said clause is as under:
The Borrowers will not be at liberty to repay the outstanding principal sum in full or in part before the due date or dates prescribed for payment in these presents except with the prior approval in writing of the Corporation and subject to such terms and conditions as may be stipulated by the Corporation in this behalf at its sole discretion.
8. The respondents have issued a Circular No. 761 dated 14.05.2005 (as per Annexure 'R2') which is in the nature of revised guidelines for prepayment/foreclosure of the loan account. The Circular states that the Corporation has been charging prepayment premium upto a maximum of 1% on the outstanding loan balance that is being prepaid/foreclosed. Despite charging the prepayment premium at 1%, the quantum of prepayments are increasing year after year. For the reasons set out in the Circular the Corporation has decided to increase prepayment/foreclosure premium from 1% to 2% on the outstanding loan balance with immediate effect.
9. Petitioners have filed a representation for prepayment of the amount. The respondents have issued notice as per Annexure 'A' stating that if there is any foreclosure of loan account, the borrower is required to pay 2% premium as per Annexures 'A' and 'A1'. This was followed by a letter by the Corporation at Annexure 'C' dated 15.07.2005 reiterating payment of 2% premium for foreclosure/prepayment of the loan account.
10. Having regard to the rival contentions of the parties two contentions arise for consideration in this writ petition. They are:
(i) Whether the respondents have authority to charge premium for prepayment/foreclosure of the loan account on the outstanding loan balance amount ?
(ii) If it is held that the respondents have such a power whether the petitioners are liable to pay 2% premium on the outstanding balance of the amount ?
11. Re. Point No. (i):
It is not in dispute that the Corporation borrows funds from the Small Industries Development Bank of India (SIDBI) and also from other financial institutions at the then prevailing interest rate and lends the same to the entrepreneurs. The loan sanctioned bear a fixed rate of interest and being a term loan are contracted to be repaid over a period of time. Likewise, the respondent - Corporation also makes commitment with its lenders. The interest rates charged to the borrower is fixed irrespective of whether there is an increase or decrease in interest rates in the general banking sector. In a falling interest regime, in the event of foreclosure of loan, the same amount can be further lent at a lower rate only. In order to protect against this risk, a foreclosure premium is charged on premature closure of the loan to take care of the loss. This has been the general practice adopted by all Banks and Financial Institutions. That is why the hypothecation deed itself contains a clause that borrowers will not be at liberty to repay the outstanding sum in full or in part before due date or dates prescribed for payment except with the prior approval of the Corporation and subject to such terms and conditions as may be stipulated by the Corporation in this behalf at its sole discretion. Petitioners have agreed for the said condition being incorporated in the hypothecation deed and they are bound by the same. There is no challenge to the said clause in the agreement. As per the said clause, the Corporation has the discretion to impose premium on the balance of loan amount.
12. Section 37 of the Indian Contract Act, 1872 provides for the obligation of the parties to the contract. It states that the parties to a contract must either perform, or offer to perform their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. The petitioners having accepted the terms and conditions of the contract cannot now contend that the action of the respondent - Corporation in charging premium is illegal or unlawful.
13. Section 24 of the State Financial Corporations Act, 1951 states that the Board is discharging its function under the Act, shall act on business principles, due regard being had by it to the interests of industry, commerce and the general public. Section 25 of the State Financial Corporations Act, 1951 provides for business which Financial Corporation may transact. Sub-section (h) of Section 25(1) of the State Financial Corporations Act, 1951 states that Financial Corporation may, subject to the provisions of the said Act carry on and transact the business of granting loans or advances to, or subscribing to debentures of, an industrial concern, repayable within a period not exceeding twenty years from the date on which they are granted or subscribed to, as the case may be. Therefore, the granting of loans or advances is one of the business of the Corporation. As stated above, the Corporation borrows funds from the financial institutions at the prevailing rate of interest. If an account is prepaid/foreclosed when the interest rates are falling, the Corporation may have to suffer loss. To overcome this situation, if a premium is charged on the outstanding loan being prepaid, the same cannot be found fault with. I am of the considered view that the Corporation has the power and authority to levy prepayment/foreclosure premium.
14. Re. Point No. (ii):
Now, let me consider the second point with regard to the rate of prepayment/foreclosure premium the petitioners are liable to pay. Admittedly, petitioners have availed the financial assistance in September 2003 and the hypothecation deed was entered on 20.09.2003. When the petitioners availed the loan, the Corporation was charging prepayment premium upto a maximum of 1% on the outstanding loan account. By a Circular dated 14.05.2005 the said premium was increased to 2%. The question is whether the amended circular is applicable to the loan account of the petitioners. My answer to the said question is in the negative. Petitioners are governed by the Circular, which was in force when they availed the financial assistance. No doubt, Clause 14 states that foreclosure is subject to prior approval in writing of the Corporation and subject to such terms and conditions as may be stipulated by the Corporation in this behalf on its sole discretion. Though in the circular dated 14.5.2005, it has been mentioned that earlier circulars regarding payment of prepayment premiums have been withdrawn, I am of the view that the petitioners are governed by the circular, which was in force when they borrowed the loan from the Corporation. I am also of the view that Annexure-R2 circular cannot be retrospective in operation.
15. This Court in the case of Smt. Saraswati S. Kamath v. Union of India, Ministry of Finance, Department of Economic Affairs, New Delhi and Ors. reported in ILR 2002 KAR 575 was considering Rule 9(A) as amended by Post Office Recurring Deposit (Amendment) Rules, 1999. It has been held that the Rule making Authority does not have power to give retrospective operation to the Rules. Scheme as it existed at the time of making the Deposit permitted premature closure after one year and hence a rule providing otherwise cannot be made operative in respect of such earlier deposits when the said alteration has been brought about by subsequent amendment to the Rule. In the case of Union of India and Ors. v. Sudha Thejus and Ors. AIR 2001 KERALA 6, a Division Bench of Kerala High Court has held that amended Rule 9(A) is not retrospective.
16. Therefore, I am of the view that Corporation can only charge prepayment/foreclosure premium at 1% on the outstanding balance of loan amount and that the Circular dated 14.05.2005 has no application in so far as the petitioners are concerned.
17. In the result, I pass the following:
Order
I. It is hereby declared that petitioners are liable to pay 1% premium on the advanced payment/foreclosure of their loan account with the respondent-Corporation.
II. The respondent-Corporation is directed to close the loan account of the petitioners on payment of 1% premium on the outstanding loan balance amount being prepaid/foreclosed. If the petitioners have already paid 2% premium on the prepayment/foreclosure of their loan account, they are entitled for refund of 1% of the premium paid by them from the Corporation.
Writ petition is disposed of accordingly. No costs.