Aboobacker vs Canara Bank and Others

P.A. Mohammed, J.—The common question that arises for decision in this batch of appeals is the rate of interest applicable to agricultural ''crop loans'' advanced by the Banks in respect of the periods prior to the suits, pendente lite and thereafter till realisation.

The Canara Bank Branch at Sultan''s Battery (hereinafter referred to as ''the Bank'') is the common Plaintiff in all the suits. The Bank filed the suits O.S. Nos. 88/89, 7/90, 125/89 and 126/89 for sale of the mortgaged properties before the Subordinate Judge''s Court, Sultan''s Battery against Defendants for recovery of the money due under the demand promissory note with interest at the rate of 14.5 per cent per annum compounded quarterly from the date of the suit till the date of realisation. The trial court decreed the suits also awarding interest and costs. As against those decrees the present appeals have been preferred by the assignees of the original Defendants.

The plaint, written statement, the documents etc., involved in A.S. No. 215/92 (O.S. No. 88 of 1989) are adopted by us as common for discussion of the point at issue hereafter except where special reference is required, inasmuch as the nature of the transaction and dispute between the parties are practically and substantially the same.

The Plaintiff a banking company constituted under the Companies (Acquisition and Transfer of Undertakings) Act, 1970 advanced loans to the original defedants in the aforesaid suits who had executed demand promissory notes (A-1) and hypothecation deeds of coffee crops (A-3) as securities for the repayment of the loan amount, interest, etc. They further undertook to repay the loan amount jointly and severally with interest at 12.5 per cent per annum and 2 per cent penal interest in case of default as per the memorandum of agreement for crop loans (A-2). The Defendants defaulted in repayment of the loan amount and in settlement of accounts. Therefore the Bank filed the above suits for recovery of the loan amount with interest from the Defendants. During the subsistence of the agreements for crop loans the original Defendants assigned the plaint schedule properties in favour of the supplemental Defendants. They filed written statements in the suits admitting that they are liable to pay the exact amount due from the original Defendants. Since the loans in question are agricultural crop loans, the Plaintiff is not entitled to demand interest at 14.5 per cent per annum. It is further contended that the Plaintiff was not entitled to claim compound interest and also the interest claimed in the plaint. However, the court below passed decrees directing the Defendants to pay the amount claimed in the suit with interest at 14.5 per cent per annum compounded quarterly from the date of the suits, O.S. Nos. 88/89, 7/90 and 125/89 till realisation of the decree amount. In O.S. No. 126/89 the court below awarded interest on the suit amount with interest at 6 per cent per annum from the date of the suit till realisation.

On behalf of the Appellants the learned Counsel raised the following contentions:

(1) That the award of interest at the rate of 14.5 per cent per annum for the period prior to the suit is illegal and it cannot at any rate exceed the contract rate of interest at 12.5 per cent per annum.

(2) That the levy of penal interest at the rate of 2 per cent per annum is unauthorised and illegal.

(3) That the interest applicable to the period (i) from the date of the suit till the passing of the decree and (ii) from the date of the decree till realisation, is only 6 per cent and not the contract rate.

(4) That the interest can be awarded only on the principal amount and not on the suit amount which includes the interest till the date of suit or in other words the Bank is not entitled to claim the compound interest, half-yearly or quarterly rests. The above contentions generally cover three specified periods namely, the period prior to the suit, the period from the date of the suit till passing of the decree and the period from the date of the decree till realisation.

While examining the above contentions, it is apt to reproduce the following clauses contained in Ext. A-2 agreement relating to the award of interest.

That the Bank shall be entitled to charge simple interest on the amount of the loan at the rate of 12.5 per cent per annum from the date of grant of loan or at such other rates, as the Bank may from time to time specify by notice in writing and further on stipulation that all dealings between the borrower and the Bank shall be governed by rules of business that are now in force or hereafter to come into force, subject however to the condition that the Bank shall be entitled to charge overdue interest as mentioned in Clause 4 and also to compound interest every quarter.

In the event of borrower/s default in payment of any one instalment or regularising or in clearing the amounts as per terms Stipulated shall be liable to pay interest at overdue rate of interest at 2 per cent per annum above the rate of interest charged on the loans/overdraft from the date of such default or irregularity till regularising or clearing the account in full as the case may be.

From the above clauses of the agreement it is crystalline that the contract rate of interest is 12.5 per cent per annum and the Bank is entitled to charge simple interest on the amount of loan at that rate. However, a condition has been imposed that the Bank shall be entitled to charge overdue interest as provided in Clause (4) and also to compound interest every quarter. In order to attract Clause (4) there must be default on the part of the borrowers in payment of any one instalment or in regularising or clearing the amounts as per the terms stipulated and in the event of proof of default borrowers shall be liable to pay interest at the rate of 2 per cent per annum.

(1) The suit number, (2) the appeal number, (3) the date of the loan, (4) contract rate of interest, (5) penal interest, (6) amount decreed, (7) the interest awarded including the penal interest, and (8) the future interest awarded are tabulated hereunder for the sake of convenience.

O.S. number A.S. number Date of loan Contract rate of interest Penal interest Decree amount Interest awarded including penal interest Future interest

1 2 3 4 5 6 7 8

88/89 7/90 125/89 126/89 215/92 225/92 226/92 541/92 06-04-1984 06-04-1984 06-04-1984 21-05-1984 12.5% 12.5% 12.5% 12.5% 2% 2% 2% .... 60,605.40 1,13,816.15 82,262.75 58,478.08 14.5% 14.5% 14.5% 12.5% 14.5% (Compoun) 14.5% (Compoun) 14.5% (Compoun) 6%

Generally speaking interest prior to the date of suit is a matter of substantive law and interest pendente lite and thereafter till realisation is a matter of discretion of the court. Hence it is necessary to find out the law applicable to the relevant period. In this context, counsel for the Appellants pointed out that at the relevant period, Order XXXIV as amended by Act 104/1976 would apply. He added that during the period from the date of coming into force of the Act 104/1976 and till the introduction of the notification D1-22480/85 dated 16th December 1989 amending Chapter XXXIV, as far as the Kerala State is concerned, the provisions contained in Chapter XXXIV as amended by Act 104/76 would apply. In support of this submission, reliance was placed on the decision of the learned Single Judge (K.P. Radhakrishna Menon, J.) in State Bank of Travancore v. Balakrishnan 1990 (1) KLT 391. The learned Judge took note of the Statements of the law as propounded by the Supreme Court in Ganpat Giri Vs. Second Additional District Judge, Ballia and Others, and held that on the introduction of the new Order XXXIV by Act 10 of 1976 the old one whether in its original form or as amended by the State Legislature or the High Court would not be available to be pressed into service by a party to the litigation. In other words, the Code as amended by Act 104 of 1976 subject to some future amendment that may be made either by the State Legislature or the High Court would govern the proceeding before the civil courts. The counsel for the first Respondent Bank in this context invited our attention to a decision of a Division Bench of this Court in Rajendra Prasad v. South Indian Bank 1997 (2) KLT 458 wherein it was observed that the learned Single Judge in Balakrishnan''''s case 1990 (1) KLT 391 held that Order XXXIV as amended by the High Court stood repealed and considerable controversy was generated on this aspect and that apparently to settle that controversy Order XXXIV of the Code was again redrafted in terms of Section 122 of the CPC with effect from 20th November 1990. However, it is apposite to mention that the correctness of the said decision of the learned Single Judge is not in dispute. It still remains a good law and we have no reason to disagree with the view expressed therein.

In view of the decision in Balakrishnan''s case 1990 (1) KLT 391 Order XXXIV, Rule 11 contained in the Code of Civil Procedure, 1908 (Central) would apply in so far as the award of interest in mortgage suits. The said rule is as follows:

Payment of interest.-In any decree passed in a suit for foreclosure, sale or redemption, where interest is legally recoverable, the court may order payment of interest to the mortgagee as follows, namely:

(a) interest upto the date on or before which payment of the amount found or declared due is under the preliminary decree to be made by the mortgagor or other person redeeming the mortgage-

(i) on the principal amount found or declared due on the mortgage-at the rate payable on the principal, or, where no such rate is fixed, at such rate as the court deems reasonable,

* * * * * and (iii) on the amount adjudged due to the mortgagee for costs, charges and expenses properly incurred by the mortgagee in respect of the mortgage-security upto the date of the preliminary decree and added to the mortgage-money-at the rate agreed between the parties, or, failing such rate, at such rate not exceeding six per cent per annum as the court deems reasonable, and

(b) subsequent interest upto the date of realisation or actual payment on the aggregate of the principal sums specified in Clause (a) as calculated in accordance with that clause at such rate as the court deems reasonable.

The analysis of the above provision would reveal that under Clause (a) of Rule 11, the court may order payment of interest for the period prior to the suit on the principal amount at the rate payable, that is to say at the contract rate or where no such rate is fixed at such rate as the court may deem reasonable. The interest pendente lite on the suit amount shall be at the agreed rate between the parties or failing such rate, at such rate not exceeding six per cent per annum as the court may deem reasonable. In other words, the award of interest in mortgage suit at the contract rate prior to the suit and pendente lite is authorised. Under Clause (b) the court may order subsequent interest upto the date of realisation or actual payment, on the aggregate of principal sums as determined under Clause (a) at such rate as the court deems reasonable. From the above position it is crystalline that the courts have discretionary power to fix the rate of interest payable to the mortgagees except in cases where the contract rate or agreed rate is fixed. That evinces the award of interest pendente lite is mandatory, but the discretion is as to the rate of interest to be fixed by the courts.

Let us now examine what is the contract rate of interest agreed upon between the parties. Clause 3 of Ext. A-2 agreement provides that the Bank shall be entitled to charge simple interest on the amount of loan at the rate of 12.5 per cent per annum. The condition that the Bank shall be entitled to charge overdue interest as mentioned in Clause 4 does not ipso facto authorise the Bank to enhance the contract rate from 12.5 per cent to 14.5 per cent per annum. What is contained in Clause 4 is a penal interest which is leviable only in the event of mortgagor''s default. Thus the levy of interest at 2 per cent is attracted only when the default is established. Therefore the penal interest cannot be added to the contract rate of interest for the purpose of calculation. The contract rate of interest agreed upon between the parties in this case is only 12.5 per cent and hence the mortgagee-Bank is entitled to recover the interest only at that rate from the Appellants for the period prior to the suit. In this context it would be appropriate to observe that the interest on the principal amount prior to the date of the suit shall be at the rate provided by the mortgage unless the rate is penal in which case the court may award such interest as it deem proper. Likewise if the rate of interest is excessive and the transaction is substantially unfair the court has got power to reduce the rate of interest. In such cases the court would be guided by the provisions contained in Section 74 of the Indian Contract Act and Section 3 of the Usurious Loans Act, 1918. The contract rate of interest namely 12.5 per cent in this case appears to be reasonable. Hence the interest at such rate shall be awarded on the principal amount due on the mortgage. In this context it must be recalled that the word ''principal amount'' as used in subclause (a) means the principal money secured by the deed of mortgage and the interest which has accrued due before the suit cannot be regarded as ''principal''.

Next question is whether the award of penal interest by the court below is justified in law or in facts. What the court below did was to award interest at the rate of 14.5 per cent apparently adding 2 per cent penal interest to the 12.5 per cent contract rate. We have herein before found that unless the default is established, the penal interest under Clause 4 of the agreement cannot be levied. That means there must be sufficient pleading and proof as to the default. The allegations in the plaint in this regard are vague and insufficient. There is no finding by the court below that the mortgagors have committed any default attracting the levy of penal interest. The contention of the Appellants on the other hand is that the levy of 2 per cent penal interest can be made only in the event of default in payment of any one of the instalments by the borrowers. Clause 2 of Ext. A-2 agreement provides that borrowers agreed with the Bank to repay the principal sum on the due dates described in the Schedule B along with interest, commission, etc. As per Schedule B the payment of first instalment of Rs. 19,000/- is due only in the year 1994. The interest being payable along with the instalment in view of Clause 2 there cannot have any independent default in payment of the interest. In this context the counsel for the Bank submitted that levy of penal interest at the rate of 2 per cent had been waived by the Bank. However, the statement of accounts produced along with the plaint is unhelpful for us to examine this submission. In this connection it may be noted that the court has power to invoke the provisions of the Usurious Loans Act, 1918 and grant relief under that Act if the rate of interest provided in the mortgage deed is usurious or penal. We are of the view that the award of penal interest at 2 per cent by way of overdue rate of interest is liable to be deleted as being unauthorised and illegal.

As against the claim of the Bank for compound interest the counsel for the Appellants argued that the interest is payable on the principal amount due from the borrowers and not on the suit amount which necessarily includes the interest on the principal amount till then. A Division Bench of the Karnataka High Court in Bank of India v. Raosaheb Krishnarao (1980) 2 Kant I.J. 495 held thus:

Compound interest or the practice of quarterly or halfyearly rest is something strange to agricultural financing where the loans are either short-term, middle-term or long-term. Short-term financing is done for growing the annual crops. They are termed as ''crop loans''. Middle-term financing is done for improvements in the lands and the period would be about three years to five years. Long-term financing is given for clearing off of old debts and for the long-term investments. That being so, in agricultural financing, the question of the normal commercial banking conditions as In overdrafts would not come into play and the bank ''custom'' and habits which are usual in the case of commercial banking cannot be smuggled into agricultural financing.

K. Jagannatha Shetty, J. (as the learned Judge then was) in Bank of India Vs. Karnam Ranga Rao and Others, observed:

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.

The learned Judge further observed in paragraph 21 of the said decision thus:

To sum up the above discussion; the circulars/directive of the Reserve Bank direct that agricultural advances should not be treated on par with the commercial loans in the matter of application of the system of compounding interest. The farmers do not have any regular source of income other than sale proceeds of their crops is an acknowledged fact. They get income generally only once a year. They are, therefore, not in a position to pay interest at usual fixed intervals like monthly, quarterly and half yearly. Banks should not compound interest on current dues. Banks should not also charge interest with monthly, quarterly or half yearly rests on overdue loans. Perhaps, it may not be illegal to charge interest with yearly rests.

''Crop loans'' as also term loans exterded for agricultural development including irrigation, purchase of farms, equipments etc., are agricultural loans granted to the farmers. Since January 1980 guarantee cover has been extended to term loans granted to the farmers. When such protections are given for agricultural development, it is totally strange to have compound interest or the practice of quarterly or half yearly rests. The court below therefore acted illegally in awarding compound interest with half yearly or quarterly rests.

The question now remains to be considered is the award of interest pendente lite and the period thereafter till realisation of the decree amount. On behalf of the Appellants it was argued that the rate of interest ia such cases should not exceed 6 per cent. On the contrary the Respondent-Bank pointed out that the rate of interest would be at the contract rate and that the discretion had been conferred on the court only in the absence of such contract rate or agreed rate. The answer to this rival contentions will have to be found out only in view of the provisions contained in Rule 11(a)(iii) of Order XXXIV and the decided cases touching on the subject. On a reading of the said provision it would appear that the interest on the principal amount from the date of the suit upto the date of decree shall be at the rate provided by the mortgage. However, counsel for the Appellants submitted that the interest pendente lite shall be at 6 per cent ppr annum on the principal sum decreed. He has placed reliance on the decision of the Supreme Court in Soli Pestonji Majoo and Others Vs. Gangadhar Khomka, . In that case, the Supreme Court awarded interest on the principal sum due at the contractual rate till the date of the suit and simple interest at 6 per cent per annum on the principal sum adjudged from the date of the suit till the date of the preliminary decree. In order to come to that conclusion the Supreme Court relied on the decision of the Privy Council in AIR 1927 1 (Privy Council) and AIR 1940 20 (Federal Court) .

The learned Counsel also brought to our notice the recent decision of the Supreme Court in N.M. Veerappa Vs. Canara Bank and Others, . There it has been laid down that Section 34 of the CPC would apply to simple money decree and payment of interest pending such suits. It also observed that so far as mortgage suits are concerned, special provision in Order XXXIV, Rule 11 alone is applicable and not Section 34. In that case the Superme Court analysed the decision in Soli Pestonji Majoo and Others Vs. Gangadhar Khomka, with reference to the facts involved therein as also the decision of the Federal Court in AIR 1940 20 (Federal Court) and thereafter held:

Approving the above observations of the Federal Court, this Court held on facts, that the mortgagee should be granted interest on the principal sum at the contractual rate till date of suit and only simple interest at 6 per cent per annum on the principal sum adjudged from the date of suit till date of preliminary decree and again at same 6 per cent per annum from the date of preliminary docree till date of realisation.

The above observation is primarily based on the facts involved in Soli Pestonji Majoo and Others Vs. Gangadhar Khomka, . In this context it is apt to refer to paragraph 17 of the decision in N.M. Veerappa Vs. Canara Bank and Others, where the Supreme Court summarised the legal position under Order XXXIV, Rule 11 Code of Civil Procedure. The following observation contained therein is relevant for the present purpose.

The court has also power to award from date of suit under Order 34, Rule 11(a)(iii) a rate of interest on costs, charges and expenses as per the contract rate or failing such rate, at a rate not exceeding 6 per cent. This is the position of the discretionary power of the court, from date of suit up-to-date fixed in the preliminary decree as the date for payment,

What is revealed from the above observation is that the discretionary power of the court can be exercised only in the absence of contract rate and if the contract rate is available such rate shall be awarded for the period from the date of the suit till the passing of the decree. But at the same time if the rate of interest is penal and usurious, the court has discretionary power to fix the reasonable rate of interest depending on the facts of each case. We say so because it has been laid down that the word ''may'' in the main part of Order 34, Rule 11 governs all sub-clauses of Order 34, Rule 11. As far as the present case is concerned, we have already found that the contract rate is reasonable and therefore the mortgagee-Bank is entitled to have the interest at the rate of 12 per cent from the date of the suit till the passing of the decree.

Now, we will pass on to the interest payable for the period from the date of the decree till realisation of decree amount. This question has to be decided in view of the provisions contained in Rule 11(b) of Order 34. The award of interest under this provision is totally dependent on the discretionary power of the court. The words ''such rate as the court deems reasonable'' make the power judiciously exercisable. In this context the following observation of the Supreme Court in N.M. Veerappa Vs. Canara Bank and Others, is most relevant.

Again under Order 34, Rule 11(b) so far as the period after tha date fixed for payment is concerned, the Court, even if it wants to exercise its discretion to award interest up-to-date of realisation or actual payment, on the aggregate sums specified in Clause (a) of Order 34, Rule 11, could award interest at such rate as it deemed reasonable.

The interest after the decree till payment can be awarded only on the aggregate of the principal sum specified in Clause (a) as calculated in accordance with that clause. The Supreme Court in Soli Pestonji Manjoo''s case AIR l969 S.C. 600 awarded simple interest at 6 per cent per annum on the principal sum from the date ot the decree till the date of realisation. In this case we feel that the award of simple interest at 6 per cent per annum on the principal amount in respect of the period from the date of tha decree till realisation would be reasonable. Therefore the award of interest in excess of 6 per cent in this regard by the court below is liable to be set aside.

The counsel for the Respondent-Bank advanced an argument that in the absence of Order 34, Rule 11 in the CPC (Kerala) at the relevant time, the principles regarding the payment of interest contained in Section 34 would be accepted. He specifically refers to the proviso to the said section which deals with commercial transaction. In view of the said proviso the rate of such further interest may exceed six per cent per annum but shall not exceed the contractual rate of interest or where there is no contractual rate, the rate at which the moneys are lent or advanced by the nationalised Banks in relation to commcrcial transactions, we cannot agree to this plea for different reasons. Firstly we have already held that during the relevant period, the provisions contained in Order 34, Rule 11 CPC (Central) would apply. Secondly as observed by the Supreme Court in N.M. Veerappa Vs. Canara Bank and Others, Section 34 of the CPC would apply to simple money decrees and not mortgage suits. Thirdly in the present suit this Court is dealing with agricultural crop loan transaction and not commercial transactions as envisaged under the proviso to Section 34 of the Code. Lastly when there is special provision in Order 34, Rule 11 governing mortgage suits, general provision contained in Section 34 cannot be pressed into service.

In view of what is said above, the judgments and Decrees passed by the court below are required to be modified as below.

(1) The interest at the contract rate of 12.5 per cent per annum on the principal sum due under the loan agreement is awarded to the Respondent-Bank in all four suits described above.

(2) The interest at the rate of 12.5 per cent per annum on the principal sum is awarded for the period prior to the suits and from the date of the suit till the passing of the decree in O.S. Nos. 88/89, 7/90 and 125/89.

(3) The award of penal interest at the rate of 2 per cent per annum on the principal sum is deleted in O.S. Nos. 88/89, 7/90 and 125/89.

(4) The interest at the rate of 6 per cent per annum is awarded on the principal sum for the period from the date of the decree till realisation in O.S. Nos. 88/89, 7/90, 125/89 and 126/89.

(5) The award of compound interest with half-yearly or quarterly rests is deleted in O.S. Nos. 88/89, 7/90 and 125/89.

In the result, the appeals are partly allowed. The Appellants are entitled to proportionate costs in these