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S.K Engineering Works (Regd.) G.T Road, Batala And Others v. New Bank Of India .
Structured Summary of the Opinion — J.V. Gupta, J.
Factual and Procedural Background
The Batala branch of the New Bank of India instituted a suit against defendants (M/s S.K. Engineering Works as defendant No.1 and defendants Nos.2–4 as partners) for recovery of amounts alleged to be due, originally stated as Rs. 6,87,908.86 in the plaint. The bank alleged that on August 21, 1976 it had agreed to advance credit facilities: a cash-credit hypothecation limit of Rs. 3,50,000 and a B.P. limit of Rs. 30,000, and a term loan of Rs. 1,50,000. Loan documents (promissory notes, letters of waiver, deeds of hypothecation, general lien agreements) were executed on that date. The cash-credit hypothecation account remained operative up to February 18, 1982.
As on February 15, 1982 the bank alleged outstanding sums of Rs. 5,62,768.85 in the cash-credit hypothecation account and Rs. 1,25,040.01 in the term loan account. On October 11, 1976 defendant No.4 (Shrimati Raj Kumari) created an equitable mortgage by depositing title deeds. The plaint also alleged subsequent balance confirmations and promises to pay quarterly interest, which defendants allegedly failed to honour.
In their written statement the defendants pleaded, inter alia, that the suit was barred under the provisions of Order II Rule 4, Code of Civil Procedure and that no details of pledged property or references to equitable mortgage documents were given. They also contended that their signatures on blank documents had been obtained and that contents were not explained, denying valid execution. Based on the pleadings, the trial Court framed several issues, tried the suit and decreed the plaintiff's claim (the trial Court decreed Rs. 6,87,008.86 with costs and awarded future interest at 12½% per annum from February 18, 1982).
Two Regular First Appeals were filed: No. 1205 of 1984 by the defendants (challenging the trial court judgment) and No. 1139 of 1984 by the plaintiff Bank (challenging the rate of future interest fixed by the trial court). This judgment disposes of both appeals.
Legal Issues Presented
- Whether the suit is barred under Order II Rule 4, Civil Procedure Code?
- Whether the suit is not properly valued for the purposes of court-fee and jurisdiction?
- Whether the plaintiff has locus standi to file the suit?
- Whether the plaintiff is entitled to the suit amount?
- Whether the defendant is a small scale industry and, if so, whether it is entitled to any reduced rate of interest?
- Whether the suit has been filed through a duly authorised person?
- Whether the suit is maintainable in the present form?
- Relief (as to decree and other reliefs sought).
Arguments of the Parties
Defendants' Arguments
- The suit was time-barred because the alleged acknowledgements (Exhibits PW4.A and PW4.B) were signed by only one partner and therefore did not extend limitation.
- The defendants had not raised this limitation plea in their written statement and no issue was framed regarding it at trial.
- The plaintiff Bank failed to produce necessary evidentiary proof; account-book entries alone could not fasten liability on the defendants—reliance was placed on Chandradhar v. Gauhati Bank.
- The suit was not maintainable because the plaintiff (pawnee) was in possession of pledged goods and, unless those goods were sold, the pawnee could not bring a suit for recovery (relying on Lalan/Lallan Prasad v. Rahmat Ali).
Plaintiff (Bank)'s Arguments
- The Bank contended it was entitled to future interest at contractual rates agreed between the parties under section 34 of the Code of Civil Procedure (as amended).
- The trial Court erred in awarding future interest at 12½% arbitrarily without providing reasons for not allowing the contractual rate.
- To support its position, the Bank relied on several authorities (cited in the judgment) that support awarding contractual rates in commercial transactions by banks/financial institutions.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Chandradhar v. Gauhati Bank | Relied upon by defendants to argue that absence of bank's evidentiary production (account details) prevents fastening liability based solely on bank entries. | The Court noted the defendants relied on this case but rejected the contention because the defendants had not raised the objection in the written statement, did not give evidence denying signatures, nor compelled the Bank to produce account details; thus the reliance was not persuasive. |
| Lalan (Lallan) Prasad v. Rahmat Ali | Relied upon by defendants to argue that a pawnee in possession must sell the goods before suing for the debt; questions the maintainability of a suit for recovery while in possession. | The Court explained that the cited Supreme Court observations do not support the defendants' contention: the pawnee may sue for debt while retaining goods so long as he can re-deliver them on redemption; absence of sale does not bar suit where right to sue on the debt exists. The Court found no merit in the defendants' reliance. |
| P.R.C. Industries Pvt. Ltd. (Division Bench of Gujarat High Court) | Stated principle that in commercial transactions by public financial institutions the contractual rate of interest should be the rule and departure is a rare exception. | The Court accepted this principle and applied it to hold that the Bank was entitled to contractual rates of future interest in commercial transactions. |
| Shree Bharat Laxmi Wool Store v. Punjab National Bank | Held that banks should be allowed interest at the contractual rate and not be limited to 6% per annum in commercial transactions. | The Court relied on this authority to support awarding contractual rate of future interest to the Bank. |
| State Bank of India v. Kashmir Art Printing Press, Sirsa | One of the authorities cited by the Bank on entitlement to contractual rate of interest in commercial transactions. | The Court relied on this and related authorities in forming the view that contractual rates apply to future interest in the present commercial loan context. |
| State Bank of India v. Quality Bread Factory (AIR 1983 P&H 244) | Authority cited for the proposition that contractual rates of interest govern future interest in commercial transactions. | The Court cited this authority as supporting the Bank's entitlement to contractual future interest and adopted that position for the decree. |
| Central Bank of India, Kutch v. P.R.G. Industries Pvt. Ltd., Surendranagar | One of the cases cited in support of awarding contractual rates of interest in commercial transactions by banks. | The Court treated this among the supporting authorities and applied the principle that contractual rates should govern future interest on decretal amounts arising from commercial loans. |
Court's Reasoning and Analysis
The Court proceeded in two parts: (A) the defendants' appeal and (B) the Bank's appeal on future interest.
(A) Analysis of Defendants' Contentions
- The Court examined the pleadings and noted that the defendants had not pleaded the limitation objection (that acknowledgements were signed by only one partner) in the written statement; consequently no issue on that point had been framed at trial. The Court emphasized that documents (Exhibits P.6, P.7 and P.11) expressly permitted one partner to sign on behalf of the partnership.
- The defendants failed to lead oral evidence: they did not appear in the witness-box to deny signatures on the documents, nor did they require the plaintiff to produce account details that had been admitted and confirmed by them later. Given these omissions, the Court found the defendants' contention about evidentiary deficiency to be without force.
- On the contention that the Bank's possession of pledged goods rendered the suit unmaintainable until sale, the Court observed (i) no such objection was taken in the written statement and (ii) the Supreme Court decision in Lalan/Lallan Prasad did not support the broad proposition urged by the defendants. The Court summarized the Supreme Court's point that a pawnee's right to sue on the debt can coexist with the pawnee retaining goods, because the pawner can redeem by payment prior to sale; only where the pawnee has put himself in a position unable to redeliver would a decree be impermissible. The Court saw no basis to hold the suit barred on this ground.
- On these bases the Court concluded there was no merit in the defendants' appeal and stated that the appeal filed on behalf of the defendants must be dismissed.
(B) Analysis of Bank's Contention on Future Interest
- The Court considered the proviso to section 34 of the Code of Civil Procedure (as amended by the Code of Civil Procedure (Amendment) Act, 1976), which permits further interest in commercial transactions to exceed 6% per annum but not to exceed the contractual rate of interest or, if none, the rate at which nationalised banks lend in commercial transactions.
- The Court relied upon the Division Bench decision in P.R.C. Industries Pvt. Ltd.'s case and the decision in Shree Bharat Laxmi Wool Store to adopt the principle that in commercial transactions involving public financial institutions the contractual rate of interest should ordinarily govern and departure from that is a rare exception.
- The Court then identified the contractual rates in the present case from the loan documents: 15½% per annum (with quarterly rests) for the cash-credit hypothecation account (Exhibit P.3) and 14% per annum (with quarterly rests) for the term loan (Exhibit P.9).
- Applying the cited authorities and the proviso to section 34, the Court held the Bank was entitled to future interest at the contractual rates on the sums found due (Rs. 5,62,768.85 and Rs. 1,25,040.01 respectively) from February 18, 1982 till realisation; the trial Court's award of 12½% was therefore improper.
- The Court also noted that the trial Court should have passed the decree in accordance with Order XXXIV Rule 4, Code of Civil Procedure.
Holding and Implications
Core Rulings:
- Regular First Appeal No. 1205 of 1984 (defendants' appeal) is dismissed — the Court found no merit in the defendants' objections regarding limitation, evidentiary deficiency, or maintainability on account of the Bank's possession of pledged goods.
- Regular First Appeal No. 1139 of 1984 (plaintiff Bank's appeal) is allowed with costs — the decree of the trial Court is modified to award contractual rates of future interest on the decretal amounts.
Consequential orders and direct effects on the parties:
- A preliminary decree is passed in favour of the plaintiff Bank for a sum specified in the judgment as Rs. 6,87,808.86 with costs (as stated in the judgment text).
- The Bank is entitled to future interest from February 18, 1982 until realisation at the contractual rates: 15½% per annum (with quarterly rests) on Rs. 5,62,768.85 (the C.C. hypothecation amount), and 14% per annum (with quarterly rests) on Rs. 1,25,040.01 (the term loan amount), as reflected in Exhibits P.3 and P.9 respectively.
- The defendants are granted three months' time to pay the decretal amount; failing payment, hypothecated/mortgaged properties will be sold. If proceeds are deficient, the defendants will be personally liable for the balance.
Broader legal implications: The opinion applies existing authorities to confirm that in commercial loans involving banks/public financial institutions the contractual rate of interest normally governs the rate of future interest awarded. The judgment does not announce a novel legal principle beyond applying these precedents to the facts; it modifies the trial decree accordingly.
R.M.S
Order accordingly.
J.V Gupta, J.:— This judgment will also dispose of R.F.A No. 1139 of 1984, as both these appeals have been filed against the judgment and decree of the Additional Senior Subordinate Judge, Batala dated February 7, 1984.
2. The Batala branch of the New Bank of India filed the suit against the defendants for the recovery of Rs. 6,87,908.86 on the allegations that defendant No. 1, i.e, M/s S.K Engineering Works (Regd.) G.T Road, Batala had at all material times been dealing with the plaintiff as a partnership firm comprising of defendants Nos. 2 to 4 as its partners. On August 21, 1976, the plaintiff Bank on the request of the defendants, agreed to grant advance to defendant No. 1 under various limits. A limit of Rs. 3,50,000/- under C.C hypothecation and Rs. 30,000/- under B.P limit was granted on that date. With respect to the hypothecation limit of Rs. 3,50,000/-, the defendants executed on August 21, 1976, the loaning documents such as promisory note, binding themselves jointly and severally for the payment of the amount of loan on demand by the plaintiff Bank with interest at the rate of 6½ per cent, above the Reserve Bank of India rate subject to a minimum of 15½ per cent., letter of waiver, deed of hypothecation of goods and general lien agreement. Similarly, with respect to the term loan of Rs. 1,50,000/-, the defendants executed promisory note, voucher showing receipt letter of waiver, deed of hypothecation and general lien agreement. The plaintiff Bank opened the cash credit hypothecation account on August 21, 1976, in the name of defendent No. 1 with an initial debit of Rs. 2.25 on account of stamp paper. This account had continued to be operative by the defendants up to the date of the suit, i.e, February 18, 1982. It was alleged that in this account, the plaintiff Bank was entitled to the recovery of a sum of Rs. 5,62,768.85 as on February 15, 1982. As regards the term loan, it was stated that a sum of Rs. 1,25,040.01 as on February 15, 1982 was outstanding against the defendants. On October 11, 1976, Shrimati Raj Kumari, defendant No. 4, created an equitable mortgage in favour of the plaintiff in respect of the factory, land, building and one ahata depositing her title deeds with the Bank. It was also pleaded that the defendants acknowledged their liability to pay the amounts due under the afore-said two accounts by signing and delivering the balance confirmations on different dates as detailed in the plaint. Besides, the defendants had also promised to clear the term loan by deposit of the quarterly interest of Rs. 12,500/-, but they failed to clear the dues despite repeated demands by the plaintiff Bank; hence the present suit. In the written statement, the defendants pleaded inter alia that the suit was barred under the provisions of Order II rule 4, Code of Civil Procedure and since no details of pledged property or reference to any document of equitable mortgage had been given, the suit was liable to be dismissed As regards the loaning documents, the plea of the defendants was that their signatures on the blank documents had been obtained and that the contents of the documents were never explained to them. As such, they denied the valid execution of those documents. They also denied the acknowledgements as alleged in the plaint. On the pleadings of the parties, the trial Court framed the following issue:
1. Whether the suit is barred under Order II rule 4, CPC?
2. Whether the suit is not properly vlaued for the purposes of Court-fee and jurisdiction?
3. Whether the plaintiff has locus standi to file the suit?
4. Whether the plaintiff is entitled to the suit amount?
4-A. Whether the defendant is a small scale industry? If so, whether it is entitled to any reduced rate of interest as claimed?
5. Whether the suit has been filed through a duly authorised person?
6. Whether the suit is not maintainable in the present form?
7. Relief.
Issues Nos. 1, 3, 4A and 5 were decided in favour of the plaintiff and against the defendants. On the most material issue No. 4, the trial Court found that a sum of Rs. 5,62,768.85 was due in the C.C hypothecation account and another sum of Rs. 1,25,040.01 due in the term loan account of the defendants on February 15, 1982. Issue No. 6 was also decided in favour of the plaintiff and against the defendants though there was no specific issue with regard to the bar of limitation, yet the trial Court found that the suit was within a period of three years from December 31, 1980 and, was, therefore, within limitation. As a result, the trial Court decreed the plaintiff's suit for the recovery of Rs. 6,87,008.86 with costs. It was further directed that the plaintiff shall be entitled to future interest at the rate of 12½ per cent, per annum on the decretal amount from February 18, 1982, till realisation. Dissatisfied with the said judgment and decree of the trial Court, Regular First Appeal No. 1205 of 1984 has been filed by the defendents whereas Regular First Appeal No. 1139 of 1984 has been filed by the plaintiff Bank.
3. The learned counsel for the defendants—appellants submitted that the suit was barred by time as the so-called acknowledgements, Exhibits PW4.A and PW4.B, were only signed by one partner and, therefore, it did not extend the limitation as such. Admittedly, no such plea was taken by the defendants in the written statement. Therefore, no issue as such was framed in this behalf. The reason is also quite obvious. In the documents, Exhibits P.6, P.7 and P.11, it was clearly provided that one of the partners could sign the documents on behalf of the partnership firm.
4. Faced with this situation, the learned counsel further contended that the plaintiff-Bank did not produce the necessary evidence and, therefore, no liability could be fastened on the basis of the entries in the account books maintained by the plaintiff Bank. In support of the contention, the learned counsel relied upon Chandradhar v. Gauhati Bank.1
5. From the pleadings of the parties, it is quite evident that no such plea was taken by the defendants and no such objection was ever raised by them during the trial of the suit. Not only that, the defendants did not appear in the witness-box to deny their signatures on the various documents executed by them. They even did not call upon the plaintiff. Bank to produce the details of the accounts which were duly confirmed and admitted by them later on. Under the circumstances, there it no force in this contention either.
6. The learned counsel then contended that the suit as such was not maintainable because the plaintiff Bank was also in possession of the goods pledged and unless these goods were sold, the suit as such could not be filed. In support of this contention, the learned counsel placed reliance on Lalan Prasad v. Rahmat Ali.2 I do not find any merit in this contention also.
7. In the first place, no such objection was taken in the written statement. Moreover the Supreme Court decision in Lallan Prasad's case (supra) does not support the contention raised by the learned counsel. Rather it was observed by the Supreme Court in paragraph 17 of the judgment in the above-said case that once the pawnee by virtue of his right under section 176 sells the goods the right of the pawner to redeem them is of course extinguished. But as aforesaid the pawnee is bound to apply the sale proceeds towards satisfaction of the debt and pay the surplus, if any, to the pawner. So long, however, the sale does not take place the pawner to entitled to redeem the goods on payment of the debt. It follows, therefore, that where a pownee files a suit for recovery of debt, though he is entitled to retain the goods he is bound to return them on payment of the debt. The right to sue on the debt assumes that he is in a position to redeliver the goods on payment of the debt and, therefore, if he has put himself in a position where he is not able to redeliver the goods he cannot obtain a decree.
8. No other contention has been raised in the appeal filed on behalf of the defendant.
9. Consequently, the appeal filed on behalf of the defendants is liable to be dismissed.
10. As regards the appeal filed on behalf of the plaintiff Bank, it has been contended by the learned counsel that the Bank was entitled to future interest at the contractual rates, as agreed between the parties, under section 34 of the Code of Civil Procedure. Besides, argued the learned counsel, the trial Court has not given any reasons for not allowing the said rate of future interest. The future interest at the rate of 12½ per cent, per annum has been allowed by it arbitraily. In support of the contention, the learned counsel relied upon State Bank of India v. Kashmir Art Printing Press, Sirsa . 1981 83 PLR 300.; Shree Bharat Laxmi Wool Store v. Punjab National Bank . 1982 84 PLR 472.; State Bank of India v. Quality Bread Factory . AIR 1983 P&H 244. and Central Bank of India, Kutch v. P.R.G Industries Pvt. Ltd., Surendranagar.6
11. After hearning the learned counsel for the parties, I find force in the contention raised by the learned counsel for the appellant.
12. Proviso to section 34 has been added by virtue of the Code of Civil Procedure (Amendment) Act, 1976 which reads as under:
“Provided that where the liability in relation to the sum so adjudged had arisen out of commercial transaction, 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 moneys are lent or advanced by nationalised banks in relation to commercial transactions.”
13. It has been held by the Division Bench of the Gujarat High Court in P.R.C Industries Pvt. Ltd.'s case (supra), that in commercial transactions by public financial institutions, the contractual rate of interest should be the rule and departure a rare exception. Hence in such cases granting of lesser rate of interest is ordinarily ruled out. Similar view was taken in Shree Bharat Laxmi Wool Store's case (supra), wherein it was held that the Banks should have allowed interest at the contractual rate and not at the rate of 6 per cent, per annum. In this view of the matter, the Bank was entitled to the contractual rate of interest. In the present case, the contractual rate is provided at the rate of 15½ per cent, per annum with quarterly rests as regards the C.C hypothecation account vide, Exhibit P.3 and so far as the term loan of Rs. 1,50,000/- is concerned, it is provided at the rate of 14 per cent, per annum with quarterly rests vide Ex. P.9 Thus, the Bank will be entitled to the future interest on the two amounts as found due according to the contractual rate between the parties. In other words, on the sum of Rs. 5,62,768.85, the plaintiff Bank will be entitled to the future interest at the rate of 15½ per annum with quarterly rests and on the balance amount, the future interest will be at the rate of 14 per cent, with quarterly rests. It is not disputed that the trial Court should have passed the decree in accordance with the provisions of Order XXXIV rule 4, Code of Civil Procedure.
14. As a result of the above discussion, Regular First Appeal No. 1205 of 1984 fails and is dismissed with no order as to costs whereas Regular First Appeal No. 1139 of 1984 filed by the plaintiff Bank is allowed with costs. The decree of the trial Court is modified accordingly. A preliminary decree is passed in favour of the plaintiff Bank for a sum of Rs. 6,87,808.86 with costs. The plaintiff shall be entitled to the future interest at the contractual rates as held in the earlier part of this judgment on the decretal amount from February 18, 1982 till realisation. The defendants are granted time to pay the said decretal amount within three months; failing which the properties hypothecated mortgaged with the plaintiff Bank will be sold and in case of deficiency in realising the decretal amount with interest, the defendants will be personally liable for the payment of the balance amount.
R.M.S
Order accordingly.
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