Interest; M/s. General Constructions No. 20 Vs. South Indian Bank [Kerala High Court, 29-08-2016]

Interest Act, 1978 – S. 3(3)(a)(i) – Interest per annum – Interest exceeded the principal sum – The stipulation as to interest on periodical rests and their capitalisation being incorporated in contracts is legitimate and prevalent in banking practice. Such stipulation incorporated in loan agreements voluntarily entered into are binding on the parties and govern the mutual right and obligation in the payment of interest. But that does not affect the jurisdiction of this court to award a lesser rate of interest when it is found that the component of interest is disproportionate to the component of the principal sum.

Civil Procedure Code, 1908 – S. 34 –Interest – Loan Agreement – It is essentially in the realm of discretion as regards the award of interest pendente lite and post decree. The discretion should be exercised ‘fairly, judiciously and for reasons and not in an arbitrary or fanciful manner’.The discretion could be exercised dehors the contract or notwithstanding the rates of interest conceded to in the loan agreements executed.

Civil Procedure Code, 1908 – S. 34 – Interest exceeded the principal sum – the main reason for the component of interest becoming disproportionate to the principal sum adjudged on the date of suit is the pendency of this appeal suit for long. This is eminently a fit case where the rates of interest have to be scaled down in exercise of the discretionary jurisdiction. An award of interest at an uniform rate of 9% per annum from the date of suit till realisation would subserve the ends of justice in the instant case.

Interest per annum


IN THE HIGH COURT OF KERALA AT ERNAKULAM

V.CHITAMBARESH & K.HARILAL, JJ.

A.S.No.757 of 1996

Dated this the 29th day of August, 2016

AGAINST THE JUDGMENT AND DECREE IN OS 244/1987 of I ADDL.SUB COURT,TRIVANDRUM DATED 31-01-1995

APPELLANTS/DEFENDANTS

M/S. GENERAL CONSTRUCTIONS NO. 20, VRINDAVAN HOUSING COMPOUND, PATTOM, THIRUVANANTHAPURAM AND OTHERS

BY ADVS. SRI.T.SETHUMADHAVAN (SR.) SRI.T.K.VIPINDAS SMT.P.K.PRIYA SMT.MONCY FRANCIS SRI.K.V.SREE VINAYAKAN

RESPONDENT/PLAINTIFF

THE SOUTH INDIAN BANK LIMITED, BRANCH AT SPENCER JUNCTION, THIRUVANANTHAPURAM.

BY ADV. SRI.S.V.BALAKRISHNA IYER (SR.) BY ADV. SRI.P.A.AUGUSTINE(AREEKATTEL)

J U D G M E N T

Chitambaresh, J.

The component of interest has become disproportionate to the component of the principal sum actually advanced more so because of the pendency of this Appeal Suit for 20 long years.

2. The appellants who are the partnership firm and its partners availed two overdraft facilities of 2,00,000/- each and a fully secured loan of 1,72,000/- from the respondent Bank. The agreed rates of interest for the two overdraft facilities were 17% per annum and 19.5% per annum and that for the fully secured loan was 19.5% per annum. The stipulation as regards the rates of interest were incorporated in the various loan documents evidenced by Exts.B6, B13, B31, B36 and B49. The court below has decreed the suit for a sum of 13,57,642/- which includes the sum of 5,72,000/- towards the principal and 7,85,642/- towards the interest. It is a conceded fact that the component of interest did exceed the component of the principal sum even on the date of the suit or the decree. The court below has awarded interest at the rate of 15% per annum from the date of suit and the amount now due under the decree has swelled upto a whopping sum of 59,66,653/-.

3. The only ground urged by the appellants is that the rate of interest is liable to be scaled down applying the dictum in

Central Bank of India v. Ravindra, 2002 (1) KLT 743 (SC)

The appellants relied on paragraph 55(8) of the judgment which inter alia reads as follows:-

“55(8) Award of interest pendente lite and postdecree is discretionary with the Court as it is essentially governed by Section 34 of the CPC dehors the contract between the parties. In a given case if the Court finds that in the principal sum adjudged on the date of the suit the component of interest is disproportionate with the component of the principal sum actually advanced the Court may exercise its discretion in awarding interest pendente lite and post-decree interest at a lower rate or may even decline awarding such interest. The discretion shall be exercised fairly, judiciously and for reasons and not in an arbitrary and fanciful manner.”

The appellants fervently pleaded that the rate of interest be scaled down to 9% per annum for the pre decretal period and 6% per annum for the post decretal period till realisation of the amounts.

4. The respondent Bank on the other hand relied on para 55(3) of Central Bank of India‘s case (supra) which reads as follows:-

“55(3) The prevalence of banking practice legitimatises stipulations as to interest on periodical rests and their capitalisation being incorporated in contracts. Such stipulations incorporated in contracts voluntarily entered into and binding on the parties all govern the substantive rights and obligations of the parties as to recovery and payment of interest.”

The respondent Bank asserted that it is legitimate to stipulate interest on periodical rests and their capitalisation being incorporated in contracts entered into by the parties. Such agreements clothe the Bank with the right to claim interest as agreed upon as per

Section 3(3)(a)(i) of the Interest Act, 1978

to which no exception can be taken. The respondent bank pointed out that even penal interest leviable at the rate of 2% per annum was not charged and that only the agreed rates of interest were claimed. The respondent bank contended that the property mortgaged by the appellants of extent 9 cents and 38 cents with a building thereon is sufficient to satisfy the decree.

5. We heard Mr.T.Sethumadhavan, Senior Advocate on behalf of the appellants and Mr.S.V.Balakrishna Iyer, Senior Advocate on behalf of the respondent bank.

6. The substantive right of the bank to claim interest at the agreed rates exceeding the current rate under the loan agreements as per Section 3 (3)(a)(i) of the Interest Act is beyond dispute. The stipulation as to interest on periodical rests and their capitalisation being incorporated in contracts is legitimate and prevalent in banking practice. Such stipulation incorporated in loan agreements voluntarily entered into are binding on the parties and govern the mutual right and obligation in the payment of interest. But that does not affect the jurisdiction of this court to award a lesser rate of interest when it is found that the component of interest is disproportionate to the component of the principal sum. It is essentially in the realm of discretion as regards the award of interest pendente lite and post decree in the context of