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Judgment
M.L. Dudhat, J.—The appellant has filed this appeal against the judgment and decree passed by the Civil Judge, Senior Division, Vasco-da-Gama dated February 25, 1987, in Special Civil Suit No. 23 of 1984. The appellant in this case is original defendant No. 2. Respondent No. 1, original plaintiff is Bank of Baroda, having its branch office in Goa. Respondent No. 2 is the original defendant No. 1 to whom the plaintiffs had advanced a loan of Rs. 56,000. The present appellant was joined as defendant No. 2 in the said suit as a surety to the aforesaid loan of Rs. 56,000 advanced by the plaintiffs to defendant No. 1. It was contended on behalf of the plaintiff-bank that defendant No. 1 had applied for a loan of Rs. 56,000 some time in the month of March, 1981, as he intended to purchase a Matador pick-up. The said loan was sanctioned by the plaintiff-bank and defendant No. 1 purchased the Matador pick-up on March 12, 1981. As per the terms of the agreement entered into between the plaintiffs and defendant No. 1, defendant No. 1 agreed to repay the aforesaid loan in 56 installments of Rs. 1,000 each. Defendant No. 1 also agreed to pay interest at the rate of 12.5 percent per annum to be compounded at quarterly rests. At the time of advance of the aforesaid amount of Rs. 56,000, defendant No. 1 also gave a promissory note promising therein to return the said amount of Rs. 56,000 with interest thereon as agreed upon. Defendant No. 1 also hypothecated to the plaintiff-bank the said Matador pick-up. In the aforesaid transaction entered into between the plaintiffs and defendant No. 1, defendant No. 2, the present appellant, gave a letter of guarantee dated March 12, 1981, guaranteeing the repayment due and payable to the plaintiffs at the foot of the aforesaid loan of Rs. 56,000 and also agreed, in the event of default on the part of defendant No. 1, to repay the amount due under the said loan personally. Since defendant No. 1 committed default, after giving notice, respondent No. 1/plaintiffs filed the suit for recovery of the amount of Rs. 60,338 with interest at the rate of 15 percent per annum with quarterly rests from the date of filing of the suit, i.e., from March 9, 1984, till actual realisation of the whole amount. The trial court, by its judgment, decreed the said suit and ordered the defendants jointly and severally to pay the amount of Rs. 60,338 together with further interest at the rate of 15 percent per annum with quarterly rests from March 9, 1984, onwards till the realisation of the entire amount. It is this part of the judgment and decree passed by the trial court which is challenged by the present appellant who is the guarantor in the present appeal.
Mr. Rebello, learned counsel appearing on behalf of the present appellant, contended that since as per the original agreement, the agreed rate of interest on the loan of Rs. 56,000 advanced by the plaintiffs to defendant No. 1 was 12.5 percent per annum even on the date of filing of the suit, the trial court erred in allowing interest at 15 percent on the amount due from defendant No. 1 to the plaintiff- bank. Secondly, it was also argued on the part of the appellant that, contrary to the provisions of the Civil Procedure Code, namely, section 34, the trial court has granted interest of 15 percent with quarterly rests from the date of the filing of the suit until the realisation of the said amount. According to learned counsel for the appellant, the trial court, in view of section 34 of the Civil Procedure Code, ought not to have granted interest with quarterly rests but ought to have granted interest only on the principal amount which was due at the time of filing of the suit at the rate of 12.5 percent per annum.
On the other hand, Mr.Aras, learned counsel appearing on behalf of respondent No. 1-bank contended that the trial court was right in awarding 15 percent interest as, according to him, defendant No. 1 as well as defendant No. 2 agreed to pay the interest as per the banking rules and regulations and, therefore, though the penalty of 2.5 percent per annum is not mentioned in the original agreement since the parties, i.e., defendants Nos. 1 and 2 agreed to follow the banking rules and regulations including the Reserve Bank Regulations, the trial court was right in awarding interest of 15 percent per annum.
As regards the direction of the trial court that the said interest is to be paid with quarterly rests from March 9, 1984, it was argued on behalf of respondent No. 1 that, since defendants Nos. 1 and 2 agreed to the said terms in the original agreement, the trial court was justified in awarding interest with quarterly rests from March 9, 1984.
Mr.Rebello, in order to lend support to his argument, first referred to para 2 of the plaint filed by respondent No. 1-bank. In the said para, it has been contended that the loan advanced by the plaintiffs to defendant No. 1 for the purchase of a Matador pick-up was to be repaid in 56 equal installments of Rs. 1,000 each besides interest at the rate of 12.5 percent per annum to be compounded at quarterly rests. It was further contended on behalf of defendant No. 2 that, as per clause 3 of the hypothecation agreement, the borrower shall pay interest on the loan amount at the rate of 2.85 percent over the bank rate with a minimum of 11.85 percent per annum every month/or by quarterly payments on March 31, June 30, September 30, and December 31, in each year. In this particular clause, there is no reference to any penal interest to be paid by defendant No. 1 to the original plaintiffs in the event of default.
We have gone through all the terms of the hypothecation deed which is at exhibit P.W.-1/C, but there is no term or condition whereby the plaintiff-bank is entitled to any penal interest from defendant No. 1 in the event of default.
Mr.Aras, in reply to the aforesaid point on behalf of respondent No. 1, has drawn our attention to the terms and conditions of the guarantee agreement which is at exhibit P.W.-1/D dated March 12, 1981. According to the terms of the aforesaid agreement, defendant No. 2 as guarantor agreed to due payment and discharge on demand of all amounts due and payable to the plaintiff-bank by defendant No. 1 at any time and also of all bills, promissory notes or guarantees held by the bank bearing the principal''s signature in respect of the said facilities together with interest, banking and other charges and expenses that the bank may, in the course of its business, charge against the principal together with all relative interest, charges, costs and expenses.
After referring to the aforesaid conditions in the deed of guarantee, it was argued on behalf of the plaintiff-bank that defendant No. 2 has agreed and given a guarantee to make payment of all the amounts due under all bills, promissory notes and hypothecation deed in respect of the loan of Rs.56,000 advanced to defendant No. 1 by the plaintiff-bank. Further, according to Mr.Aras, learned counsel appearing on behalf of respondent No. 1 bank, defendant No. 1 also agreed to pay the whole amount and interest due from time to time as per the banking rules and regulations. Therefore, it was argued on behalf of the plaintiff-bank that, as per the banking rules and guidelines in the event of default, the plaintiff-bank was entitled to recover the penal interest of 2.5 percent per annum. In order to support his argument, learned counsel, Mr.Aras, also relied upon the Reserve Bank of India Guidelines (we may mention here that the aforesaid circular was not pointed out in the lower court and it was submitted to us during the course of the arguments when the appeal was being heard). The said guidelines are as under :
" The Reserve Bank enjoins on commercial banks that they should follow the guidelines suggested by the committee, which are broadly as follows :
(i) Circumstances under which penal rates of interest could be levied by banks and the justification for such levy.
Penal rate as is currently understood represents additional interest charged over and above normal interest rates, levied as a penalty for defaults of the borrower in complying with the terms on which credit facilities were sanctioned to him. The term ''defaults'' covers a wide range, such as default or delay in repayment of a term or demand loan or retirement of bills and non-compliance with or non- observance of other terms of sanction. Penal rates cannot be objected to in principle and will have to be accepted as a justifiable part of the interest rates policy of banks, as long as they are applied with selectivity and discrimination.
Broadly, the areas where banks may be justified in charging penal rates are :
(a) default in repayment of loans ;
(b) irregularities in cash credit accounts ;
(c) non-submission of stock statements and other financial data ;
(d) default in borrowing covenants ;
(e) non-payment/non-acceptance of demand/askance bills of exchange on presentation/due date ; and
(f) excess borrowings arising out of excess current assets (as recommended by the Tandon Committee).
Penal rate should not be regarded as a revenue-raising measure but rather as a measure to enforce discipline in the conduct of the account. The practice in some banks of charging penal rate in lieu of commitment charge is clearly not justified. Similarly, if a borrower does not comply with the insurance condition of the advance, the bank concerned, with its insurable interest, should be in a position to take out the cover at the cost of the borrower to repeated levy of penal rate which, in any case, cannot be a substitute for the insurance cover."
As per the aforesaid guidelines, the bank can impose penal interest in case of default.
We have gone through the aforesaid guidelines. It is true that, as per the said guidelines, in order to inculcate discipline in banking business, the Reserve Bank principally accepted that, in the event of default, the bank can impose penalty over and above the normal interest. However, according to our opinion, with respect, the aforesaid guidelines are of no consequence in the facts and circumstances of the present appeal.
Mr.Rebello has not challenged the authority of the bank to charge 2.5 percent per annum as penalty in case of default, if the same is laid down as a condition in the original agreement. The challenge of defendant No. 2 in the present appeal to the said penalty is that, in the original agreement between the plaintiffs and defendant No. 1 (principal debtor), there is no clause giving authority to the bank to impose penal interest in the event of default. That being the position, the plaintiff-bank was not entitled to recover the amount of 2.5 percent as and by way of penalty because of the default committed by defendant No. 1. If the bank is not entitled to recover the aforesaid amount of penalty from the principal debtor, i.e., defendant No. 1, the liability of defendant No. 2, the present appellant, as a guarantor being co-extensive with that of the principal debtor, the plaintiff-bank is not entitled to recover the aforesaid amount of penalty charged by the bank on account of default.
In view of this factual position in this particular case, according to our opinion, the trial court was not right in granting penal interest of 2.5 percent per annum against defendants Nos. 1 and 2 while passing the said decree. According to our opinion, the plaintiff-bank is entitled to recover an amount due from defendant No. 1 under the agreement only at the rate of 12.5 percent per annum.
It was further argued on behalf of defendant No. 2 that the trial court erred in granting interest to the plaintiffs with quarterly rests from March 9, 1984, onwards until the realisation of the entire amount. It is true that, as per the agreement entered into between the plaintiffs and defendant No. 1, defendant No. 1 had agreed to pay the interest with quarterly rests and in fact that should be ordered in favour of plaintiff-bank till the date of filing of the suit, i.e., till March 9, 1984. However, after the date of filing the suit, how the interest is to be given is to be decided with reference to section 34 of Civil Procedure Code. Section 34 of CPC is as under :
"(1) Where and in so far as a decree is for the payment of money, the court may, in the decree, order interest at such rate as the court deems reasonable to be paid on the principal sum adjudged, from the date of the suit to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, with further interest at such rate not exceeding six percent per annum as the court deems reasonable on such principal sum, from the date of the decree to the date of payment, or to such earlier date as the court thinks fit :
Provided that where the liability in relation to the sum so adjudged had arisen out of a commercial transaction, the rate of such further interest may exceed six percent per annum, but shall not exceed the contractual rate of interest or where there is no contractual rate, the rate at which moneys are lent or advanced by nationalised banks in relation to commercial transactions."
After going through the aforesaid section 34 of the Civil Procedure Code, the court is supposed to order interest on the principal sum adjudged from the date of the suit to the date of the decree in addition to any interest adjudged on such principal for a period prior to the institution of the suit with further interest at such rate not exceeding 6 percent per annum. However, since the aforesaid transaction is a commercial transaction, the present case will come within the ambit of the proviso to section 34 and, therefore, in such a case, the rate of interest may exceed six percent per annum but shall not exceed the contractual rate of interest. This being the position at the time of passing the decree in the present case, the court has got discretion to award interest to the maximum extent at the rate of 12.5 percent per annum. However, the court erred in granting interest at 15 percent and that too with quarterly rests from March 9, 1984, and, therefore, to that extent, the said order is liable to be set aside.
In the light of the aforesaid discussion, we partly allow this appeal with no order as to costs and pass the following order :
Defendant No. 2, the present appellant to pay to the plaintiff-bank the principal amount due from defendant No. 1 from the date of advancing of the loan till the date of filing of the suit, i.e., till March 9, 1984, with interest of 12.5 percent per annum thereon with quarterly rests.
Defendant No. 2 to pay to the plaintiffs interest on the amount due on the date of filing of the suit, i.e., from March 9, 1984, which is inclusive of interest and with further interest thereon at the rate of 12.5 percent per annum from the date of filing of the suit till actual realisation.