V. Venkataramiah Pillai and anr. Vs. P. V. Subramania Pillai and ors. - Court Judgment

Abdr Rahim, Offg. C.J.

1. In this appeal the only question is whether compound interest should not have been allowed on the debts due on the two promissory notes dated 1st October 1904. These two notes were executed for Rs. 14,500 and Rs. 15,000 respectively, payable with interest at 18 per cent., and on the dates of their execution two memoranda were drawn up by which it was stipulated, among other things, that in default of payment of interest each month, compound interest would be payable with monthly rests. The promissory notes themselves do not expressly provide that interest was payable every month. Exhibits H and J also contain other stipulations, among which is the stipulation that there will be an equitabe mortgage on certain properties of the executants of the promissory notes.

2. Mr. Justice Kumaraswami Sastri who tried the suit has disallowed compound interest, holding that the contract in this respect was brought about by undue influence. As I am clearly of opinion that the stipulation contained in the agreement Exhibits H and J as to the payment of compound interest is by way of penalty, I shall deal with it first, as it might become unnecessary that the question of undue influence should be gone into by us. The interest provided is at the rate of 18 per cent, per annum and as I have already mentioned, the money was also secured by equitable mortgage of immoveable property. It appears that about Rs. 20,000 has already been paid by the defendant and the decree given by the learned Judge is for Rs. 64,000, that is to say, the plaintiffs receive altogether Rs. 84,000 for Rs. 30,000 advanced by them. If compound interest at 18 per cent, be allowed as claimed by the appellants, that would increase the amount by another Rs. 62,000. Of course if they are entitled to receive compound interest according to the strict terms of the agreement, the mere fact that they have already received a large return for the money lent by them and their claim is for another very large sum, can make no difference.

3. The question is governed by Section 74 of the Contract Act. That Section has been considered in a number of cases and very fully by a recent Full Bench of this Court in Avathani Muthukrishnier v. Sankaralingam Pillai 18 Ind. Cas. 417. and also by Mr. Justice Mooker.iee, the learned Judge of the Calcutta High Court, in Khagaram Das v. Bam Sankar Das Pramanik 27 Ind. Cas. 815 : 19 C.W.N. 775. The addition of the words or if the contract contains any other stipulation by way of penalty' to Section 74 by the Indian Contract (Amendment) Act of 1899 has, undoubtedly, considerably enlarged the scope of that Section and it has the effect, as has been pointed out by more than one learned Judge, o getting rid of all subtle technicalities in the application of the equitable principle regulating the duty of the Court to relieve against penalties. It is stated by Mr. Justice Sundara Aiyar in the Full Bench case in Avathani Muthukrishnier v. Sankaralingam Pillai 18 Ind. Cas. 417 : 24 M. L.J. 135. that in cases of this character there are generally two contracts, one primary and the other subsidiary, and wherever the intention of the parties appears to be that the object of the subsidiary stipulation was to enforce or secure the performance of the primary contract, that subsidiary stipulation will be regarded as a penalty.

4. Mr. T. R. Ramachandrier, the learned Vakil for the appellants, has argued with great emphasis that no stipulation for payment of compound interest at the same rate as the original rate of interest should be treated as a penalty within the meaning of Section 74 and he contends that this proposition is laid down by the Privy Council in Sundar Koer v. Rai Sham Krishen 34 C.s 150.

5. As I read that decision, there is no such proposition to be found there. All that the Judicial Committee held in that case was that a stipulation to pay compound interest at a higher rate than what was originally agreed upon might be regarded as penalty. They do not say that in no case the stipulation to pay compound interest, if at the same rate, can be regarded as penalty. The exact point has been exhaustively dealt with by Mr. Justice Mookerjee in Khagaram Das v. Ram Sankar Das Pramanih (2) and I agree with him that having regard to the very general words of Section 74, the Court can treat any stipulation, the object of which is to secure the performance of the main contract between the parties, as a ^penalty and a stipulation for payment of compound interest may be, though it need not always be, by way of penalty. In this case the promissory notes provide for the payment only of simple interest at the rate of 18 per cent, It is by an agreement arrived at between the parties, on the same day separately, that payment of compound interest with monthly rests is stipulated for in default of payment each month of the simple interest mentioned in the promissory notes. I am of opinion that in this case, applying the test laid down in Avathani Muthukrishnier v. Sankaralingam Pillai (1) the contract evidenced by the promissory notes was the primary contract and the contract in Exhibits II and J was intended to be a subsidiary stipulation or contract the object of which was to secure the due performance of the principal contract. All that Section 74 says is: 'When a contract has been broken, if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled to receive reasonable compensation.' Here it is perfectly clear to my mind that, having regard to the rate of interest originally provided for, the stipulation providing for compound interest was by way of penalty. No doubt, as pointed out by Mr. Ramachandra Aiyar, compound interest means interest payable on the amount of interest which has not been paid. That is the substance of such a contract. But I fail to see why the stipulation for payment of interest on interest in default of regular payments of interest, as contemplated by the parties in this case, cannot be considered 'by way of penalty' within the meaning of Section 74 if the parties so intended it. I do not see any distinction in principle between such a case and a case where a higher rate of simple interest is provided for. Take another case; where compound interest is stipulated for in default of payment of interest regularly for one year, I fail to understand why such a stipulation must be excluded from the scope of Section 74. Nor do I see any difference in principle between such a case and this.

6. The appellants are, however, entitled to some reasonable compensation under Section 74. Having regard to the high rate of interest which is provided for by the promissory notes, I think that Rs. 100 would be ample and reasonable compensation. That amount will, therefore, be added to th3 decree passed by the learned Judge. Otherwise the appeal will be dismissed, I may mention that Dr. Pandalai, having regard to the view which we expressed as to the stipulation for compound interest being by way of penalty, did not raise the question of undue influence; and we have, therefore, thought it unnecessary to deal with it. The appellants must bear the costs of this appeal.

Seshagiri Aiyar, J.

7. I entirely agree with the judgment of the learned Officiating Chief Justice. I wish to add a few words, as a recent judgment of Sadasiva Aiyar, J., and myself has been quoted in support of the proposition contended for by Mr. T. R. Ramachandra Aiyar. To my mind, it is clear that there is no distinction on principle between a provision for compound interest at the same rate as the original rate of interest and a provision for a higher rate of interest than the original rate. Under Section 74 of the Contract Act the question in each case will be whether the stipulation is penal. The explanation to the Section seems to cover this case. It is there provided that a stipulation for increased interest from date of default may be a stipulation by: way of penalty. In the present case there is a provision in the promissory notes for payment at a particular rate of interest. The provision in the memoranda is that if this interest is not paid monthly, compound interest at 18 per cent, should be paid. This case, therefore, is covered by the explanation and consequently the provision to pay compound interest is penal. Very great reliance has been placed by the learned Vakil upon the decision in Sundar Koer v. Rat Sham Krishen (3); certain observations of the Judicial Committee have been quoted as deciding that if the rate of compound interest is the same as the original rate of interest it should not be regarded as a penalty. I do not think that the language employed by the Judicial Committee justifies the construction placed upon it. The observation commented upon is this: 'Compound interest is, in itself, perfectly legal, but compound interest at a rate exceeding the rate of interest on the principal moneys, being in excess of and outside the ordinary and usual stipulation, may well be regarded as in the nature of a penalty.' Lord Davey does not say that under no circumstances would compound interest at the same rate as simple interest be penal. The decision to which I was a party, namely Ghantasala Seetharamiah v. Tadepalli Pitchayya 28 Ind. Cas. 860., lays down 'that a provision for compound interest on default is not by itself penal, but a provision for compound interest at an appreciably higher rate than the rate mentioned as payable till default may be penal.' In that case the original rate was 93/16 per cent.; the compound interest was at 12 per cent, and yet we regarded that stipulation as penal. In the present case it is 18 per cent, compound interest. Applying the test which we applied to the case of Grhantasala Seetharamiah v. Tadepalli Pitchayya 28 Ind. Cas. 860. there can be no doubt that the stipulation is penal. As has been pointed out by the learned Chief Justice, this is not a case of simple loan for which there is no security. It is a loan which is secured upon immoveable property, and as held in Abdul Majid v. Ksherode Chandra Pal 19 C.W.N. 809. the Court might very well regard any stipulation, where there is security which secures more than 10 per cent, interest, as an exorbitant rate. One may not lay down definitely that whenever a secured debt is made payable with more than 10 per cent, interest, the stipulation will be penalty. But the observation of the learned Judges is entitled to great weight in construing contracts like the present one where interest at 18 per cent, with a stipulation to pay compound interest at the same rate is provided in favour of a person who has obtained security as well. The provision in the document to my mind is certainly penal. There may be cases where enhanced interest is secured in contemplation of a possible loss or damage; in that case it would not be penal, but where the object of the stipulation is to secure punctual payment, the provision would ordinarily be regarded as penal. That is the view taken by Mr. Justice Mookerjee in Khagaram Das v. Bam Sankar Das Pramanik (2). That is also the view taken by the Bombay High Court in Velchand Chhaganlal v. Flagg 13 Ind. Cas. 853. and in Allahabad in Kutub-ud-din Ahmad v. Bashir-ud-din 5 Ind. Cas. 665.The matter has been very fully considered, if I may say so with respect, in an exhaustive and lucid judgment of Mr. Justice Sadasiva Aiyar in Avathani Muthukrishnier v. Sankaralingam Pillai (1). The forcible language employed by the learned Judge that the Court should, as far as possible, try to save needy persons from the clutches of money-lenders and that it is in the interests of public policy that this protection should be afforded, has my full support. Under these circumstances, I agree with the Officiating Chief Justice that more than Its. 100 should not be given to the appellants as compensation. I also agree in