N. Savithri vs United Commercial Bank

Srinivasan, J. s

These two appeals arise out of the same suit, one filed by the plaintiff and the other by the defendant. For the sake of convenience, we refer to

the parties by the rank they held in the trial court.

Mr. G. N. Sam, the husband of the defendant, who was an industrialist got cash credit facilities from the United Commercial Bank Limited,

which is now known as UCO Bank. He had pledged 17,000 shares of his in Cambodia Mills Limited, which were valued at Rs. 10 per share on

the face of them. Mr. Sam died in 1961, without discharging the loan. He left as his heirs two daughters by his first wife, the defendant who was his

second wife and a son and a daughter by the defendant. The defendant borrowed loan from the bank and discharged the amounts due under the

loan account of her husband. That was in 1962. That loan account continued to subsist till November, 1963, when she got cash credit facilities for

a sum of Rs. 1,00,000 and pledged 2,150 shares of her in Coimbatore Spinning Weaving Company Limited. The face value of each share was Rs.

By obtaining the loan, she discharged her earlier loan account and continued to avail of the cash credit facility. The defendant was periodically

executing promissory notes and also signing confirmatory letters accepting the balance due as on such dates. Ultimately, a notice was issued by the

plaintiff in exhibit A-7 dated October 12, 1977, calling upon the defendant to pay the balance. As the defendant did not pay it, the suit was filed on

March 27, 1979, for recovery of a sum of Rs. 4,02,880.93 with interest at 17 per cent. per annum. According to the plaint, the amount due as on

December 26, 1978, was Rs. 3,86,672.43 and the interest thereon was Rs. 16,208.50.

The defendant raised in the main three contentions, viz., -

(1) The plaintiff-bank had not returned the shares pledged by her husband after the discharge of the husband''s debt. They had no right to keep the

same with them and in spite of several demands by the defendant they did not choose to return them. Consequently, they were liable to adjust the

value of those shares as in 1962 as against the amount due.

(2) The plaintiff bank failed to sell the shares of Coimbatore Spinning and Weaving Company Limited which were pledged by the defendant with

the plaintiff-bank when the sale price of such shares was high in the market. Even though notice was issued by the bank calling upon the defendant

to pay the amount and informing her that in default the shares will be sold, the bank had failed to take action pursuant to such notice. The shares

became worthless subsequently as the mills became sick and were taken over by the National Textile Corporation. Consequently, the defendant

was put to heavy loss. The plaintiff is bound to give credit to the value of such shares as against the amounts due under the loan account. If an

adjustment had been made under any one of the heads the entire debt would have been discharged and there will be no amount due to the plaintiff

under the suit transaction.

(3) The interest claimed by the plaintiff-bank was excessive and illegal as it was charging interest on interest. The actual principal lent to the

defendant was much less than Rs. 1,00,000 and she did not borrow any money subsequent to 1966. The plaintiff-bank was only adding interest

year after year and taking statements from the defendant. The defendant will not be liable to pay such interest claimed by the plaintiff-bank.

The trial court held that the defendant was not entitled to claim any adjustment of the value of the shares either in Cambodia Mills or in

Coimbatore Spinning and Weaving Mills Limited as she had not made any counter-claim or pleaded set-off. It was also pointed out that she had

not paid the necessary court-fee therefor. The trial court held that the defendant did not take action in proper time for the said relief and she could

not claim the same in the present suit. However, the trial court felt that the interest claimed by the plaintiff-bank was excessive and some

concession should be shown to the defendant in the matter of interest. Consequently, the trial court took the view that the plaintiff was entitled to

claim interest only at the rate of 3 1/2 per cent. over and above the Reserve Bank of India rate, with quarterly rests from July 1, 1966. The

balance, struck on that date was Rs. 98,866.96 and the trial court held that it would be the principal amount on which the interest could be claimed

by the plaintiff. Aggrieved by the said judgment and decree, the two appeals have been preferred in this court. While Appeal No. 730 of 1983 is

by the defendant, the other appeal, viz., Appeal No. 901 of 1985 is by the plaintiff.

There is no dispute that the defendant was periodically executing promissory notes and, signing confirmatory notes. The amount stated in the

confirmatory notes was never called in question. Exhibit A-12 is the earliest letter dated January 5, 1966. On the same date, exhibit A-19

promissory note was executed by the defendant for a sum of Rs. 1,00,000. Exhibit A-18 is the letter dated December 12, 1970, and the

corresponding promissory note is marked as exhibit A-20. Similarly, exhibit A-14 is the confirmatory letter dated October 13, 1973, and the

corresponding promissory note of the same date is marked as exhibit A-21. Exhibit A-16 is the confirmatory letter dated May 22, 1975, and the

corresponding promissory note of the same date is marked as exhibit A-28. Exhibit A-17 is the last of the confirmatory letters dated April 18,

1978, and the corresponding promissory note is exhibit A-22. The amount mentioned in exhibit A-22 is Rs. 3,45,000. The interest is stated to be

8 per cent. per annum over and above the Reserve Bank rate subject to a minimum rate of interest at 17 per cent. per annum, with quarterly rests.

Thus, the defendant has been executing promissory notes and giving confirmatory letters and she had not raised any objection to the correctness of

the figures found therein at any point of time. Even in the written statement, the correctness thereof is not questioned.

In that background, the three contentions raised by the defendant have to be considered. The shares in Cambodia Mills were deposited with the

plaintiff-bank by the defendant''s husband. No doubt, the loan was discharged by the defendant by borrowing money from the plaintiff-bank. But,

admittedly the defendant was not the only heir to her husband. There were four other persons who were entitled to have a share in the estate of the

deceased, Sam. Hence, the plaintiff-bank insisted upon production of a succession certificate by the defendant in order to enable her to get back

the shares in Cambodia Mills from the plaintiff-bank. PW-1 has deposed that as soon as the debt of the defendant''s husband was dis-charged,

she asked for return of the shares and the plaintiff-bank insisted upon the production of a succession certificate. According to him, the request of

the defendant as well as the reply of the plaintiff-bank were oral. That could have taken place in 1963 as soon as the debt of the defendant''s

husband as discharged. But, subsequently, the defendant had not taken any steps to ask for the return of the shares. For the first time, she had

written a letter in exhibit B-1, dated October 19, 1968, to the plaintiff-bank. She had requested the plaintiff-bank to return the shares. She had

stated that a guarantee would be furnished by herself and her brother, Mr. Raju. To this, the plaintiff-bank sent a reply under exhibit A.27, dated

October 24, 1968. The defendant was informed that the plaintiff bank had sought permission from their head office for delivery of the shares and

as soon as they hear from the head office, they would revert to the defendant. Thereafter, the defendant did not take any steps to write to the

plaintiff-bank for make a demand to the bank for the return of the shares. If really the defendant was interested in return of the shares she ought to

have taken steps to get them back from the plaintiff-bank. Even assuming that the bank was not right in keeping the shares with itself, the defendant

cannot claim any relief in this suit by adjustment of the value of the shares as against the amount claimed by the plaintiff-bank. The transaction in

which the shares were deposited as security was entirely different from the suit transaction. The present suit is based on loan advanced to the

defendant by the plaintiff after the discharge of the defendant''s husband''s debt and after his death. Any, action with reference to the shares

deposited as security for the husband''s debt should have been taken by the defendant independently and she cannot claim any set-off or make a

counter-claim in the present suit.

Learned counsel for the defendant contended that the plaintiff-bank was not entitled to claim a lien over the shares in Cambodia Mills Ltd. after

the discharge of the debt owed by Mr. Sam as they were given as security for a particular debt. Even, according to him, the debt owed by the

defendant was different and for the realisation of the debt owed by the defendant, the shares in Cambodia Mills Ltd. could not have been kept by

the plaintiff-hank as security. Reliance is placed on a judgment of the Bombay High Court in Cowasji Muncherji Banaji Vs. The Official Assignee

of Bombay, . Referring to the provisions of section 174 of the Contract Act, the Bench held that the articles pledged in connection with one

advance cannot be kept as security for a subsequent advance. There was a deed of pledge in that case by which subsequent advances were to be

secured on article X. The Bench held that subsequent advances were to be secured on article X. The Bench held that subsequent advances were

to be secured on article X and they cannot be said to be secured on article A, already pledged. There can be no doubt that the said proposition of

law holds good. But the said proposition does not apply to the facts of the present case. It is not the claim of the plaintiff that it is keeping the

shares in Cambodia Mills by way of security for the defendant''s loan. The plaintiff-bank insisted upon production of a succession certificate as the

defendant is admittedly not the only heir of her husband and there are four other legal heirs. The plaintiff, being an institution, and that too a

nationalised bank has to be careful in the matter of returning the shares. Unless the other legal heirs had expressed their consent for return of the

shares to the defendant, the plaintiff could not be blamed for not returning the shares.

With reference to the shares in Coimbatore Spinning and Weaving Mills Limited, the plea in the written statement is that though the plaintiff had

issued a notice threatening the sale of the shares, it did not sell the shares. According to the defendant if the shares had been sold at that time, they

would have realised an amount which would have been sufficient for discharge of the entire debt. As the plaintiff failed to do so, it is contended that

the plaintiff is liable for the loss incurred by the defendant and the value of the shares as in 1973 shall be adjusted against the amount due by the

defendant. As regards the value of the shares, there is no specific plea in the written statement, excepting to state that the value should he adjusted.

The written statement does not state the value specifically.

The plea of the defendant is not sustainable for the simple reason that whenever the plaintiff-bank issued notices calling upon the defendant to

pay the amount due and threatening to sell away the shares in default, the defendant was sending replies requesting the bank not to take any action

as she was herself making arrangements to sell the shares and discharge the debt due. Exhibit A-2 is the letter dated December 9, 1970, written by

the defendant to the plaintiff. She acknowledged the receipt of the plaintiffs lawyer''s notice dated November 6, 1970. She stated that as early as in

1968 she had entered into an agreement for the sale of a large block of shares in Coimbatore Spinning and Weaving Mills Limited including the

pledged shares and hoped that the purchaser would implement the agreement promptly and enable her to redeem the shares pledged with the bank

on payment. It was further stated that owing to various factors that was delayed. She requested the plaintiff-bank to give some more time to make

arrangement for the clearing of the bank''s dues, which according to her was receiving her earnest attention. Exhibit B-4 is a notice dated May 12,

1973, by the plaintiff''s lawyer to the defendant. She was called upon to pay the amount due within two weeks from the receipt of the notice. She

was informed that if there was failure on her part, the plaintiff will sell the pledged shares in the open market by whatever means possible at her risk

and also initiate proceedings in court. The defendant sent a letter on June 4, 1973, marked as exhibit A-3. She acknowledged the receipt of the

lawyer''s notice and repeated the same version which she had given in exhibit A-2 reply. She requested the bank not to take any drastic steps and

she prayed for two months'' time to put forth a scheme for discharge of the debt. Exhibit A-4 is another letter by her dated August 1, 1973,

addressed to the manager of the plaintiff-bank. There again, she wanted further time till January, 1974, to discharge the debt. Exhibit A-5 is the

letter dated October 14, 1974, with a similar request. In that letter she had stated that she was paying interest regularly to the plaintiff and she had

paid about Rs. 10,000 between June 1973-74 towards interest. Exhibit A-6 is a letter dated October 8, 1976. That was in reply to a letter dated

September 17, 1976, sent by the bank. Once again she pleaded her inability to pay the amount and she prayed for further time to liquidate the

debt.

A perusal of the above letters shows that the defendant had definitely informed the plaintiff that she was also making arrangements for sale of

the shares and she had already entered into an agreement with a third party therefor. She wanted the bank not to take any drastic action and give

her some time. Thus, the defendant was stopping the plaintiff bank from taking any action. In these circumstances, she cannot now plead that the

bank failed to take action in time and thereby caused loss to her.

Reliance is placed on certain observations made by a single judge of this court in Kesarimal Vs. Gundabathula Suryanarayanmurthy and

Another, . In that case, the pawnee issued a notice calling upon the pawnor to make payment and threatened to sell the pledged jewels. However,

the pawnee did not sell the jewels though there was no payment. Subsequently, about two years later another notice was issued and the pledged

jewels were sold. The pawnor raised the contention that the pawnee should have sold the jewels immediately after the earlier notice when it would

have fetched a higher price and as a matter of fact the sale was held even though the pawnee claimed that the sale was held only two years later.

The pawnor, therefore, claimed that he is entitled to get the value of the jewels as prevailing at the time of the earlier notice. The subordinate judge

held against the pawnor on the plea that the sale should have taken place immediately after the earlier notice. However, he found in favour of the

pawnor with regard to the second plea and held that an amount which the sale would have fetched if it had taken place earlier should be credited

as against the debt. Aggrieved thereby, the pawnee filed the appeal. Referring to the provisions of section 176 of the Contract Act, the learned

judge held that it was not necessary for the pawnee to wait for any reasonable time after issuing the notice to the pawnor to call upon him to pay

the amount due to him. The right of the pawnee is to proceed with the sale immediately, according to the learned judge. But the learned judge also

found that there was no basis for the contention that the pawnee was bound to sell the jewels after issuing the notice. The learned judge rejected

that contention and held that it was not necessary for the pawnee to proceed with the sale as soon as the notice was issued by him. The relevant

observations are as follows (at page 1024) :

All these provisions show that the power of sale is one which is conferred on the pawnee to be exercised for his benefit according to his discretion

in order to realise the debt due to him for which the pledge is a standing security. In order to exercise the power of sale all that the pawnee need

do is to give reasonable notice of the intended sale. If he does so he requires no further authorisation or permission of the pawnor to effect the

actual sale.

It seems to me that though the case of a pawnee may be analogous to the case of an unpaid vendor of goods having a lien thereon for the damages

due to him, as regards the requirement of giving reasonable notice of sale, the analogy goes no further as the rights of an unpaid vendor and of a

secured creditor are essentially different. Section 176 does not say that the pawnee who gives notice of sale should sell within reasonable time

thereafter and I do not think that in the case of a pawnee such a further duty should be implied. If the contention of the defendant is upheld, and the

pawnee being bound to sell within a reasonable period after the expiry of the time given in his notice should be debited with the price which the

thing pledged would have fetched if sold then, it will follow that the pawner also would have no right thereafter to redeem the pledge-a view which

is clearly opposed to his rights as declared in section 177.

Far from helping the defendant, the above judgment is only against the contention put forward by her.

The provisions of section 176 of the Contract Act declare that if the pawnor makes default in payment of the debt at the stipulated time, the

pawnee may bring a suit against the pawnor upon the debt and retain the goods pledged as a collateral security or he may sell the thing pledged, on

giving the pawnor reasonable notice of the sale. The section does not enjoin the pawnee to sell the articles or goods pledged immediately after

issuing the notice. He may not sell the same, but he can proceed by initiating a suit. It is not open to the defendant to contend that once the notice is

issued by the bank the sale must follow immediately. Further, on the facts of this case, the defendant cannot raise the contention that the plaintiff

ought to have sold the shares in Coimbatore Spinning and Weaving Mills Limited immediately after issue of notice. We have already seen that even

as late as October 8, 1976, the defendant had been requesting the plaintiff not to take any action as threatened.

Apart from that as regard the shares in Cambodia Mills Limited as well as the shares in Coimbatore Spinning and Weaving Mills Limited, the

defendant is not entitled to get any relief in this proceeding as there is neither a plea for set-off nor a counter-claim. The defendant has not paid the

requisite court-fee. There is no question of equitable set-off or, adjustment as against the amount due to the plaintiff. A Division Bench of this court

has considered this question in Sri Sambu Films and Others Vs. Vijaya Pictures, . It is held that even in respect of equitable set-off, the court-fee

has to be paid by the defendant. In the present case, apart from making an offer to pay the requisite court-fee, the defendant has not paid any

court-fee nor has she set out even the amount which will have to be adjusted as against the amount claimed by the plaintiff.

We are left only with the question of interest. It is contended that the interest claimed by the plaintiff is excessive and illegal. There is no plea in

the written statement that the provisions of the Usurious Loans Act (10 of 1918) would apply to this case and the plaintiff is not entitled to recover

interest on interest. Apart from stating that the plaintiff has charged interest on interest and the claim of interest is illegal, the defendant has not set

out the legal basis for raising such a plea.

It is argued that the defendant has been made to suffer a heavy loss because of the retention of Cambodia Mills Limited shares by the plaintiff

and the failure of the plaintiff to sell the shares in Coimbatore Spinning and Weaving Mills Limited at a time when the shares were selling at a higher

price, the plaintiff must be made to reduce the rate of interest or there should be sufficient concession or reduction in the rate of interest. In fact, the

trial judge has been persuaded to take such a view in his judgment after holding that the defendant is not entitled to claim set-off or adjustment.

Further, the trial judge proceeded to hold that the defendant was entitled to some concession. There is no legal basis for such a view. The law does

not permit to bring about a different contract between the parties than what was agreed to. As seen already, the defendant has been repeatedly

executing promissory notes and giving confirmatory letters to the plaintiff-bank. None of them has been challenged. The genuineness of documents

is admitted. In the face of such documents, it is not open to the defendant to claim any concession in the matter of interest charged. The last of such

letters in exhibit A-17 and the corresponding promissory note is exhibit A-22. We have already stated that in exhibit A-22 promissory note a sum

of Rs. 3,45,000 was shown by way of principal and interest thereon was fixed at 8 per cent. over and above the Reserve Bank rate. The minimum

rate of interest has also been specified as 17 per cent. per annum in the said promissory note. The plaintiff has claimed interest only at the rate of

17 per cent. per annum in the plaint.

The question whether the provisions of the Usurious Loans Act can be invoked by persons who have borrowed money from nationalised

banks or banks governed by the Banking Regulation Act, 1949, has been considered by this court in Indian Bank, Tiruvannamalai Vs. V.A.

Balasubramania Gurukal, . A Division Bench has discussed the matter in detail and held that the provisions of the Usurious Loans Act cannot be

invoked as against loan transactions with nationalised bank. It is worthwhile extracting the following passages from that judgment (at page 52 of 56

Comp Cas)

The avowed object of the Banking Regulation Act, 1949, is to consolidate and amend the law relating to banking and thereunder provision is

made for the regulation and control by the Reserve Bank of India of the carrying on of the business of banking by banking companies including the

rates of interest on advances by banks. Any contravention on the part of the banks to charge interest at the rates specified u/s 21(2)(e) is made

punishable u/s 46(4) of the Banking Act, 1949. The primary object of the Usurious Loans Act is to confer on the court to afford relief to a debtor,

if the court has believe that a particular transaction between the parties is substantially unfair. No particular rate of interest, as reasonable interest

excessive interest, has been prescribed in the Usurious Loans Act and the reasonableness or otherwise of the rate of interest in any given case to

be decided and determined in the light of the statutory provisions contained therein. In other wards, the provisions of the Usurious Loans Act do

not in any manner control or regulate the charging of rates of interest, but are intended merely to afford relief from a claim for excessive interest in

cases where the transaction is considered to be substantially unfair. It is obvious that the spheres of operation of these two enactments are very

different, in that, one is concerned with the control and regulation of the business of banking including the rate of interest on advances to be made

by the banking companies, while the other is intended to secure relief from excessive claims for interest sought to be enforced through courts.

On a consideration of the diverse scope of the operation of the provisions of these enactments, we are of the view that the provisions of the

Banking Regulation Act, 1949, alone regulate the rate of interest on advances by nationalised banks and that there is no inconsistency between its

provisions and the provisions of the Usurious Loans Act. The contention of learned counsel for the petitioner in this regard, has, therefore, to be

negatived. Equally, the contention of learned counsel for the respondents that the provisions of the Usurious Loans Act will prevail over the

provisions of the Banking Regulation Act, 1949, has also to be rejected.

In order to claim the benefits of the Usurious Loans Act the borrower must establish that the interest payable on the loan is excessive and that the

transaction between the parties thereto is substantially unfair. No hard and fast rule can be laid down as regards the excessive nature of interest and

each case has to be decided on its own merits taking into account a variety of circumstances such as the security obtained by the creditor for the

advance of the account, the pecuniary position of the debtor, the rate of interest prevailing at the time as well as the advantage the debtor would

derive from the loan.

After the above said judgment was rendered, the Banking Regulation Act, 1949 was amended by the Central Act 1 of the 1984. By the said

Act, section 21A was introduced. That section reads as follows :

21A. 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 relating to indebtedness in force in any State, a transaction between a banking company and

its debtor shall not 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.

That section came into force on February 15, 1984. Obviously, the principle underlined in the decision of the Division Bench has been

accepted by the Legislature and the section has been introduced in the Banking Regulation Act. After the introduction of the said section, it is not

open to contend that she is entitled to any concession in the rate of interest, or that she is entitled to reopen the transaction before April 16, 1978,

and get relegated to the prevailed on January 5, 1966. What the trial court has done is to treat the amount due as on January 5, 1966, as the

principal amount and grant interest. That is not sustainable in view of the provisions of section 21A of the Banking Regulation Act.

The question was raised once again before another Division Bench of this court in Veythataramaian v. Overseas Bank [1989] 2 LW 6.

Reliance was placed before the Bench on a judgment of the Karnataka High Court in D.S. Gowda Vs. Corporation Bank, in which the said High

Court had dissented from the view taken by this court in the case of Indian Bank, Tiruvannamalai Vs. V.A. Balasubramania Gurukal, . Reference

was also made to the judgment of the Andhra Pradesh High Court in Medikonda Satyanarayana and Another Vs. Andhra Bank Ltd., Eluru, , in

which it was held that section 21A of the Banking Regulation Act would not govern the agricultural debtors. The Division Bench found that both

the judgments were not applicable to the case before them and it was not necessary for them to consider whether the conflict between the view

taken by this court and that of the Karnataka High Court should be resolved by a reference to a larger Bench. In that case it was found that the

parties were not agriculturists and the provisions of the Usurious Loans Act were not applicable.

In K. Appa Rao (Decd.) and others Vs. State Bank of Hyderabad, , an attempt was made once again for getting a reference made to a larger

Bench on this question. The Division Bench which dealt with that case held on the facts that there was no need for any reference to a larger Bench,

though they expressed their opinion that the judgment in Indian Bank, Tiruvannamalai Vs. V.A. Balasubramania Gurukal, , may require a second

look. As seen from the contents of the judgment, the Division Bench did not take into account the provisions of section 21A of the Banking

Regulation Act. On the facts, they found that the parties were not agriculturists and the provisions of the Usurious Loans Act were not applicable.

Thus, the ruling in Indian Bank, Tiruvannamalai Vs. V.A. Balasubramania Gurukal, , continues to hold the field. We do not find any reason to

differ from the ratio laid down in that judgment. In the present case there is no plea that the parties are agriculturists. But the evidence makes it

clear that the defendant is an industrialist, owning textile mills. Hence, the defendant is not entitled to claim the benefits of the Usurious Loans Act.

There is no warrant or justification for reducing the rate of interest.

The only question that has to be considered is as to whether the rate of Interest should be different for the periods subsequent to the date of

plaint. Incidentally, it must be mentioned that the trial court did not award any interest subsequent to the date of suit. Obviously, it is an oversight on

the part of the trial court. Neither the judgment nor the decree makes reference to the interest subsequent to the date of suit. The defendant was

made liable for interest only up to the date of suit. That is obviously an error. Hence, the plaintiff will he entitled to a decree for a sum of Rs.

4,02,880.93 as prayed for in the plaint. The only question that has to he decided relates to the interest which should be awarded to the plaintiff

subsequent to the date of plaint. No doubt, section 34 of the Civil Procedure Code, 1908, enables the court to grant interest exceeding 6 per cent.

but not exceeding the contractual rate with reference to commercial transactions. We are of the view that it will be reasonable to grant interest

subsequent to the date of suit at the rate of 12 per cent. per annum on the principal amount. The principal amount is Rs. 3,45,000.

Thus, there will be a decree in substitution of the decree passed by the trial court in favour of the plaintiff for a sum of Rs. 4,02,880.93 plus

interest at the rate of 12 per cent. per annum from the date of suit till date of realisation on Rs. 3,45,000. The plaintiff will have its costs in A.S.

No. 901 of 1985. There will be no order as to costs in A.S. No. 730 of 1983.

In the result, appeal, A.S. No. 730 of 1983 is dismissed. No costs. Appeal, A.S. No. 901 of 1985 is allowed with costs as indicated above.