Mathew vs Kerala Financial Corporation Ltd.

Paripoornan, J.—The counter-petitioner in S. F. C. Act Petition No. 144 of 1981, District Court, Ernakulam, has filed this appeal against the order of the lower court dated October 10, 1983. The petitioner in the court below is the respondent herein. The petitioner, Kerala Financial Corporation, initiated action under Sections 29, 30 and 31 of the State Financial Corporations Act, 1951, and sought recovery of the principal and interest due from the respondent (appellant herein) on account of a loan of Rs. 2,53,000 advanced to the respondent by the Corporation by sale of machinery, etc., mentioned in the Schedule to the petition, which were hypothecated to the Corporation by way of security for repayment of the amount due from him. The Corporation sanctioned a loan of Rs. 2,60,000. The respondent has actually advanced ah amount of Rs. 2,42,697,94. The loan should be repaid in seventeen half-yearly instalments with 5,5% interest per annum. The petitioner-Corporation stated that the interest was liable to be varied after notice and it was so done from October 14, 1977. The interest was enhanced to 12% per annum. It was again reduced to 11% from January 1, 1980, and again enhanced to 12.5% from October 15, 1980. The respondent (appellant herein) defaulted in payment of the instalment due on March 10, 1978, and thereafter. So, the petition was filed by the Corporation seeking recovery of a sum of Rs. 3,89,955.66 as on January 1, 1981, with 12.5% interest per annum. The respondent filed a counter-statement disputing the correctness of the amount claimed in the petition. The main contention urged was that he took the loan from the Corporation only on the basis of a representation made by the Corporation that interest will be realised from him only at the rate of 5.5% per annum, that the Corporation is estopped from claiming any higher rate of interest as done at present and that the real amount due on proper calculation of interest will be as specified in the statement filed along with the counter.

The main controversy between the parties that was agitated "in the lower court was regarding the exact rate of interest that is liable to be paid by the respondent (appellant herein) to the Corporation. The Corporation mainly relied on Clauses 7 and 29 of exhibit A-1 hypothecation bond, executed by the respondent in favour of the Corporation on March 30, 1976, which permits the Corporation to charge a higher rate of interest after notice. The respondent in the petition (appellant herein) relied on the particular scheme under which the loan was sanctioned as specified in exhibit A-1 itself, exhibit B-3, the agreement between the Corporation and the Government regarding the subsidy receivable by the Corporation from the Government for loss of interest suffered by it by advancing loans at rates of interest lower than the normal rate to certain categories of loans, exhibits B-4 and B-5, publications of the Corporation and exhibits B-7, B-8 and B-9 and contended that the Corporation is incompetent to levy enhanced rate of interest in this case.

The court below adverted to exhibits A-1, B-1, B-2 and B-3 as also exhibit B-7 and held that, in so far as exhibit A-1 specifically provides for levying a higher rate of interest, the Corporation is not estopped or otherwise incompetent to realise a higher rate of interest and upheld the plea made by the Corporation. The respondent in the court below came up in appeal.

We heard counsel for the appellant, Mr. Chacko George, as also counsel for the respondent. The sole question argued before us was regarding the exact rate of interest liable to be paid by the appellant (respondent in the court below) to the Corporation. According to the Corporation, though exhibit A-1 provided for levy of 5.5% interest per annum for the loan advanced, the Corporation was competent to enhance the rate of interest in view of Clauses 7 and 29 of exhibit A-1. According to the appellant, the Corporation cannot charge a higher rate of interest in view of the nature of contract between the parties and exhibits B-3, B-4, B-5, B-8 and B-9.

We are primarily concerned with the relevant clauses in exhibit A-1, agreement entered into between the appellant and the Financial Corporation. Exhibit A-1 states that it is an article of agreement for loan under the "Technocrats Assistance Scheme" against the pledge of movable machinery. It further states in the preamble that the Corporation has agreed to grant a loan of Rs. 2,53,000 to the appellant under the "Technocrats Assistance Scheme". Clauses 7 and 29 of exhibit A-1 dated March 30, 1976, may be extracted in full, in order to understand the jural relationship between the parties :

"7. The borrower shall also pay interest at the rate of 5 1/2% (five and a half per cent.) per annum rising and falling therewith subject to enhancement as hereinafter provided calculated respectively on the daily balance of the amount due on the first day of January and the first day of July every year, the first of such payment of interest being made on the first day of July 1976 and shall pay compound interest at the rate aforesaid in default of payment of any instalment of simple interest on the date fixed for payment thereof.

That the Corporation shall, at any time, be entitled to give notice to the borrower of its intention to charge and may, thereafter, charge interest at such rate higher than the rate hereinbefore mentioned as the Corporation may specify."

At the time when exhibit A-1 agreement was entered into between the parties, the Corporation has entered into an agreement with the Government dated April 25, 1973, (exhibit B-3). It states that the Corporation is advancing loans to Small Scale Industrial Units in Kerala at concessional rates of interest on the undertaking of the Government to pay interest subsidy to the Corporation on such loans. It further states that the interest shall be charged from the Small Scale Industries Units only at the rates allowed for similar loans by the Government under the rules for the grant of loans to Small Scale Industries. Clause 5 of exhibit B-3 is important. It permits either party to terminate the agreement after notice to the other, but such termination will not affect the rights and liabilities of the parties in respect of interest subsidy on loans already sanctioned by the Corporation, whether disbursed in full or only in part before the date of termination. Clause 5 of exhibit B-3 is to the following effect:

"5. After March 31, 1974, either party to this agreement shall have the right to terminate the agreement after giving three months notice in writing to the other provided that such termination shall not affect the rights and liabilities of the parties in respect of interest subsidy payable thereafter also by the Government on loans already sanctioned by the Corporation whether disbursed in full or only in part before the date of termination".

Exhibit B-4 is the booklet issued by the Kerala Financial Corporation regarding its functioning. At page 5 of exhibit B-4, the amount of loan that an industrial concern can obtain from the Corporation is stated. In Clause 3, it is further stated that the Corporation has entered into an agreement with the Government of Kerala for distribution of loans to Small Scale Industrial Units up to Rs. 3,00,000 on subsidised rate of interest at 5.5% per annum. It further states that, in the case of small scale industries which are eligible for Government subsidy, the effective rate of interest will be only 5.5%. No doubt, the Corporation has the right to vary the rate of interest from time to time. Exhibit B-5 is issued by the Kerala Financial Corporation entitled the "Technocrats Assistance Scheme Rules" and Clause 6 states as follows :

"6. Rate of interest.--The rates of interest prescribed by the Corporation from time to time will apply. In the case of industries eligible for Government subsidy, the effective rate of interest will only be the subsidised rate".

Clause 12 of exhibit B-5 reads as follows :

"12. Any subsidy received from Government will be adjusted against the loan."

It is true that by exhibit B-7 communication dated July 13, 1977, exhibit B-8 resolution of the board dated July 15, 1977 and by exhibit B-9 communication dated September 29, 1977, the Corporation issued notice to the Government terminating the interest subsidy agreement executed between it and the Government of Kerala, evidenced by exhibit B-3 dated April 25, 1973. But in exhibits B-7 and B-9 notices, it has been made clear that the termination will not affect the rights and liabilities of the parties in respect of interest subsidy payable thereafter also by the Government on loans already sanctioned by the corporation whether disbursed in full or only in part before the date of termination. It is in pursuance of exhibits B/7 and B-9 that the Corporation sent a circular dated October 4, 1977 (exhibit B-10), to the appellant informing that the enhanced rate of interest would be payable on the amounts advanced to him as per exhibit A-1.

It is evident from exhibit A-1 that the loan was sanctioned under the "Technocrats Assistance Scheme". As per exhibit B-5, which contains the rules regarding the "Technocrats Assistance Scheme", the effective rate of interest payable by the borrower will be the subsidised rate. Exhibit B-4 states that the subsidised rate of interest will be only 5 1/2% per annum. The court below has itself accepted the plea of the appellant that it took the loan only on the basis of exhibits B-4 and B-5 and that exhibit A-1 agreement was entered into bearing in mind exhibits B-4 and B-5. At the time when the parties entered into exhibit A-1 agreement, they should have exhibits B-4 and B-5, obviously in mind. Exhibit A-1 itself specifies that the loan is under the "Technocrats Assistance Scheme". Exhibit B-3, dated April 24, 1973, which was in force at the time of exhibit A-1 (contract entered into between the Corporation and the Government) also envisaged that the advance of loan by the Corporation to the Small Scale Industrial Units was at the rate prescribed by the Government. Indeed, exhibit B-4 refers to exhibit B-3 agreement. Even though exhibit B-3 reserves a right to either party to terminate the agreement after giving three months notice, it is specifically stated in Clause 5 thereof that it will not affect the rights and liabilities of the parties in respect of interest subsidy payable thereafter also by the Government on loans already sanctioned by the Corporation whether disbursed in full or only in part before the date of termination. So, even if it was open to the Corporation to terminate exhibit B-3 agreement, it will preserve its right to get interest subsidy on loans already advanced whether disbursed in full or only in part. The Corporation did terminate the agreement, as evidenced by exhibits B-7 and B-9. It was only in accordance with Clause 5 of exhibit B-3. It is in the light of exhibits B-4, B-5, B-3, B-7 and B-9 that we have to understand the scope of Clauses 7 and 29 of exhibit A-1 and the consequential circular, exhibit B-10, dated October 4, 1977, issued by the Corporation to the appellant. Though exhibit A-1 does not, in terms, refer to exhibits B-4 and B-5, we are of the view that the parties to exhibit A-1 agreement entered into the bargain only on the basis of exhibits B-4 and B-5. However wide the language of Clauses 7 and 29 of exhibit A-1 may be, they should be read along with Clause 6 of exhibit B-5 and the relevant--clauses regarding the rate of interest appearing at pages 6 and 6 of exhibit B-4 regarding the loans to Small Scale Industrial Units. It is also evident that exhibit B-4, at page 5, Clause 3, refers to the agreement the Corporation had entered into with the Government. The said agreement is exhibit B-3, Clause 5 of exhibit B-3 reserves the right of the Corporation to get subsidy once the loan was advanced either in full or in part, even though either party to exhibit B3 can terminate the agreement. We should, for the purpose of understanding the scope and nature of Clauses 7 and 29 of exhibit A-1, bear in mind the crucial clause in exhibit B-5 (Clause 6 at pages 5 and 6 of exhibit B4) and Clause 5 in exhibit B-3. Reading these clauses together, we have absolutely no doubt in our mind that the Financial Corporation was, incompetent to invoke Clauses 7 and 29 of exhibit A-1 and in charging a higher rate of interest on the appellant, since the loan, was advanced to the appellant earlier to exhibits B-7 and B-9, In this view, exhibit B-10 circular sent by the Corporation to the appellant intimating that, with effect from October 4, 1977, the appellant should pay a higher rate of interest is ineffective and unauthorised. The court below was swayed by Clauses 7 and 29 of exhibit A-1. No doubt the court below referred to exhibits 0-4 and B-5 and casually referred to exhibit B-7. But, the court below ignored and failed, to give effect to the crucial clauses in exhibits B-4 and B-5, exhibit B-3, exhibits B-7 and B-9. The relevant clauses which we have referred to in exhibits B-4, B-5, B-3, B-7 and B-9 really explain or clarify the effect of Clauses 7 and 29 of exhibit A-1. The court below was- in error in giving effect to Clauses 7 and 29 of exhibit A-1 without importing the relevant and material clauses in exhibits B-4 and B-5 as part of exhibit A-1 and in failing to give effect to the relevant terms in exhibits B-3, B-7 and B-9.

For these reasons, we set aside the order passed by the court below dated October 10, 1983, in State Financial Corporations Act Petition No. 144 of 1981. We hold that the: petitioner in State Financial Corporations Act Petition No. 144 of 1981 was not authorised to charge interest at rates higher than 5.5% per annum in the instant transaction.

This appeal is allowed. The matter is remitted to the court below to recompute the amount due to the Corporation in the light of this judgment and take further steps in the petition.

The matter is posted in the lower court for appearance of parties on September 19, 1988.