JUDGMENT :
1. Heard learned Counsel for the appellants. Though the respondents are served, no one appeared on behalf of them when the matter was called out for final hearing.
2. Present first appeal arises out of the judgment and decree dated 14-12-1994 passed by the Civil Judge, Senior Division, Sangamner in Special Civil Suit NO. 3 of 1992. The appellants are the original defendant Nos. 1 to 3. Respondent No. 1 is the original plaintiff and respondent No. 2 is the original defendant No.4. The plaintiff filed Special Civil Suit No. 3 of 1992 against the defendants for declaration and damages of Rs.7,00,000/-. It is the case of the plaintiff that the plaintiff is Proprietor of the Small Scale Industry which is under the
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name and style "Wittson Enterprises" whose business is to manufacture corrugated paper boxes. Some time in the year 1983 the plaintiff approached defendant No. 1 for Small Scale Industry loan. At that time, the plaintiff was in need of capital of Rs.8,72,000/-. After following due process of law, defendant Nos. 1 to 3 on 03-12-1983 sanctioned loan amount of Rs. 5,00,000/-. Loan amount of Rs. 1,50,000/- was sanctioned for the building and Rs. 3,50,000/- was sanctioned for the machinery. As there was delay on the part of defendant Nos. 1 to 3 to release sanctioned loan, the plaintiff suffered heavy losses and therefore, he filed suit for injunction and damages. On the other hand, it is the case of the defendant Nos. 1 to 3 that the plaintiff failed and neglected to follow the terms and conditions of sanction of the loan and therefore they were constrained to stop releasing part of sanctioned loan. Further it is the case of defendant Nos. 1 to 3 that as the plaintiff failed and neglected to repay the loan
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amount on time, they issued notice calling upon the plaintiff to repay the entire outstanding amount. The plaintiff filed suit for injunction restraining the defendants from recovering the loan amount and interest thereon and from taking possession of their property. Said suit partly decreed by the Civil Judge, Senior Division, Sangamner on 14-12-1994 holding that the defendant Nos. 1 to 3 were not entitled to charge compound interest and penal interest. Operative part of the said judgment reads as under.
"The plaintiff's suit is partly allowed in following terms:-
The defendant Nos. 1 to 3 are hereby directed to hand over the possession of the factory site and machinery to the plaintiff within one month from the date of this order. It is hereby declared that the defendant Nos. 1 to 3 are not entitled to charge compound interest and penal interest. The defendant Nos. 1 to 3 are directed to charge simple interest at the rate of 13-1/2%
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p.a. which is the agreed rate from the date of disbursement of the loan till handing over the possession of the factory premises and machinery to the plaintiff.
The defendant Nos.1 to 3 are further directed to give loan account statement by charging the simple interest as above within one month from this order and do re-scheduling of the loan instalments so that each instalment inclusive of interest should Rs.5000/- per month and first instalment shall be due only after the re-scheduling of the loan instalments.
In case of default by the plaintiff in paying the first loan instalment and the interest, then the defendant Nos. 1 to 3 are at liberty to charge future compound interest and penal interest as per rules.
In the event of consecutive six defaults, committed by the plaintiff, in payment of loan instalments and interest instalment, even after the re- scheduling of the loan
instalments, the defendant Nos. 1 to 3 are at liberty to take the steps for realisation of outstanding loan amount as per the provisions in the M.S.F.C. Act or the laws.
Parties to bear their own costs.
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Decree be drawn accordingly."
3. Being aggrieved by the said judgment and decree dated 14-12-1994 passed by the Civil Judge, Senior Division, Sangamner, original defendant Nos.1 to 3 preferred present first appeal on several grounds. Learned Counsel appearing on behalf of the appellants submitted that though the first appeal filed on several grounds challenging the impugned judgment and decree passed by the trial Court, he is restricting his submissions in the present appeal only to the ground that they are entitled to charge compound interest and penal interest at agreed rate as per contract. In view of this statement made by the learned Counsel appearing on behalf of the defendant Nos. 1 to 3, it is not necessary to narrate other facts of the present case.
4. With the assistance of learned Counsel
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appearing on behalf of the defendant Nos. 1 to 3, I have gone through Record and Proceedings. The learned Counsel appearing on behalf of the defendant Nos. 1 to 3 submitted that the trial Court erred in coming to the conclusion that they were not entitled to charge compound interest and penal interest as per contract. He further submitted that the trial Court erred in directing the defendant Nos. 1 to 3 to charge simple interest @ 13-1/2% p.a. on the outstanding amount of loan. Learned Counsel appearing on behalf of the defendant Nos. 1 to 3 relied on Exhibit-109 i.e. sanction letter dated 03-12-1983. He submitted that as per clause No. 2, they were entitled to charge interest @ 13-1/2% p.a. payable quarterly and 3% p.a. additional interest as may be decided by the Corporation. Clause-2 of the said document reads as under.
"clause-2 : Original/Additional loan. The rate of interest shall be 13-1/2
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per cent per annum payable quarterly on the total loan and the same shall be charged from the......
Date of disbursement of the instalment of the loan. The said rate is subject to variation as may be decided by the Corporation from time to time. In the event of default in payment of interest/principal/other dues an additional interest as may be decided by the Corporation upto the rate of 3% per annum shall be payable in addition to the said rate of 13-1/2 per cent per annum in respect of the defaulted amount for the defaulted period. Provided that in case you commit default in repayment of principal or payment of interest or other dues and withdraw your own funds invested in the unit and/or you make payment to other creditors in preference to Corporation and/or you act in contradiction with the terms and conditions of the loan and/or you make repayments of unsecured loans then in either or each such eventuality a further additional interest at the rate of 4 per cent per annum over and above the said additional interest upto 3 per cent shall be payable on defaulted amount for defaulted period."
5. Learned Counsel appearing on behalf of the defendant Nos. 1 to 3 submitted that as per terms and conditions of the contract, they are entitled to charge interest as well as penal interest if the borrower failed and neglected to
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repay the loan amount on time. He submitted that the trial Court erred in coming to the conclusion that the defendants were not entitled to charge compound interest as per agreed terms and conditions at the time of deciding Issue No. 5 in Para 24. In support of his submission, the learned Counsel appearing on behalf of the defendants relied on the judgment in the matter of M/s. Everest Industrial Corporation and others vs. Gujarat State Financial Corporation reported in (1987) 3 S.C.C. 597. In this case, Apex Court held that if a financial institution take action under State Financial Corporation Act, 1951 then as per Section 32 of the said Act, the financial institution is entitled to claim agreed interest. In that case, provision of Section 34 of the Code of Civil Procedure are not attracted. Head Note of the said judgment reads as under.
"State Financial Corporation Act, 1951 (63
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of 1951) - Section 32 - Rate of interest payable on the principal amount due under court's order passed under Section 32 - Held, would be as stipulated in the contract - Section 34 C.P.C. not attracted, order under Section 32 being not a 'decree' - Liability to pay contractual rate of interest cannot be disowned merely because of absence of direction for payment of interest in order under Section 32 - Civil
Procedure Code, 1908, Section 34.
State Financial
Corporation Act, 1951 (63 of 1951) - Section 31(1) - Nature of proceedings under.
Civil Procedure Code, 1908 - Section 34 and Order
34 Rules 6 and 11 - Applicability - Interest payable in mortgage suits - Order 34 Rule 11
applicable."
6. In any case, ration of this judgment is applicable if a financial institution takes action against the borrower under State
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Financial Corporation Act, 1951. In the present case, the defendant Nos. 1 to 3 have not taken any action under the State Financial Corporation Act, 1951. The plaintiff's suit was for injunction and damages. In that suit, the trial Court held that as the defendant Nos. 1 to 3 failed and neglected to provide loan facility from time to time to the plaintiff, the plaintiff suffered losses. Therefore, present authority is not applicable in the facts and circumstances of this case. Learned Counsel appearing on behalf of the defendant Nos. 1 to 3 also relied on the judgment in the matter of
Renusagar Power Co. Ltd. vs. General Electric Co. reported in A.I.R. 1994 S.C. 860. In this case, Apex Court held that it is common knowledge that provision is made for the payment of compound interest in contract for loan advanced by banks and financial institutions and the said contract is enforceable by the Court. It is clear that if there is a contract between
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the parties then they are entitled to recover compound interest, if there is no breach of contract. In the present case, defendant Nos. 1 to 3 failed and neglected to provide finance to the plaintiff as per terms and conditions of the contract. Though loan was sanctioned on 03-12-1983, the defendant Nos. 1 to 3 failed to disburse the loan amount for 3 to 4 years. During that period, the plaintiff invested his own money for purchasing 10 Gunthas land at village Dhandarfal and on construction of building to the tune of Rs.2,20,000/-. On 23-03-1984 the plaintiff had mortgaged said building to the defendants. On that day, loan amount of Rs. 1,50,000/- had been disbursed by the defendants to the plaintiff. Due to the unco-operative attitude of the defendants, the plaintiff was not able to purchase new machinery till the year 1987. The investment which had been made by the plaintiff remained idle for about four years causing heavy loss to the plaintiff. In such a case, financial
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institutions have no right to charge compound interest on loan.
7. It is to be noted that Section 24 of the State Financial Corporation Act, 1951 is very clear that financial corporations are not profit earning concerns, its approach should be public oriented, helpful to the unit without causing loss to the Corporation and its function should be on the business principle. The Corporations deal with the public money for the public benefit and approach should be public oriented helpful without causing loss to the Corporations. Section 24 of the said Act itself require the Corporation should discharge its function on business principles, due regard being had to the interest of industry, commerce and general public. Apex Court in the matter of
Mahesh Chandra vs Regional Manager, U.P. Financial Corporation and others, reported in A.I.R. 1993 S.C. 935, held in Para 6 and 15 as
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under.
"6. Corporations deal with public money for public benefit. The approach has to be public oriented, helpful to the loanee, without loss to the Corporation. S. 24 of the Act itself required the Board "to discharge its function on business principles, due regard being had to the interest of industry, commerce and general public". 'Business' is a word of wide import. It has no definite meaning. Its perceptions differ from private to public sector or from institutional financing to commercial banking. The financial corporations under the Act were visualised not as a profit earning concerns but an extended arm of a welfare State to harness business potential of the country to benefit the common man.
15. Section 29 confers very wide power on the Corporation to ensure prompt payment by arming it with effective measure to realise the arrears. But the simplicity of the language is not an index to enormous power stored in it. From notice to pay the arrears, it extends to taking over management and even possession with a right to transfer it by sale. Every wide power, the exercise of which has far-reaching repercussion, has
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inherent limitation on it. It should be exercised to effectuate the purpose of the Act. In legislations enacted for general benefit and common good the responsibility is far graver. It demands purposeful approach. The exercise of discretion should be objective. Test of reasonableness is more strict. The public functionaries should be duty conscious rather than power charged. Its actions and decisions which touch the common man have to be tested on the touchstone of fairness and justice. That which is not fair and just is unreasonable. And what is unreasonable is arbitrary. An arbitrary action is ultra vires. It does not become bonafide and in good faith merely because no personal gain or benefit to the person exercising discretion is established. An action is mala fide if it is contrary to the purpose for which it was authorised to be exercised. Dishonesty in discharge of duty vitiates the action without anything more. An action is bad even without proof of motive of dishonesty, if the authority is found to have acted contrary to the reason. Power under S. 29 of the Act to take possession of a defaulting unit and transfer it by sale requires the authority to act cautiously, honestly, fairly and reasonably. Default in payment of loan may attract S.
29. But that alone is
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insufficient either to assume possession or to sell the property. Neither should be resorted to unless it is imperative. Even though no rules appear to have been framed nor any guidelines framed by the Corporation was placed, yet the basic philosophy enshrined in S. 24 has to be kept in mind. Rationale of action and motive in exercise of it has to be judged in the light of it. Lack of reasonableness or even fairness at either of the two stages renders the take over and transfer invalid. Unfortunately the Corporation was guilty of not acting in accordance with law either at the stage of take over or in transferring the unit. Admittedly the entire loan was not disbursed. Need of capital in the last stages cannot be doubted. If the Corporation refused to release the amount at a time when the unit is nearing completion or is ready to start functioning, then it falls short of capital and it is bound to land itself in trouble. This is what happened in this case. The partners did not co-operate and the Corporation without any explanation refused to release the full amount. Result was the appellant stood pressed on one hand from absence of capital and on the other by recovery proceedings. The Corporation, therefore, should honour their commitments of releasing entire loan timely except for very good
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reasons which should be intimated before hand to enable the unit holder to comply with shortcoming if any. In the absence of completion of it, the proceedings for recovery under S. 29 may not be justified. Similarly various situations may arise which may hamper start of the unit - delay in electric supply or delayed delivery of machinery vital for the functioning of the suit. Such difficulties do require rescheduling of payment of instalments because, if the unit, for reasons beyond the control of unit holder, could not start, then how will the amount be repaid.? Endeavour should be to adjust and accommodate as business considerations require the unit to function for benefit, both of the general public and the Corporation. It observe the process of taking over strictly. But if there is no option left out and the unit is taken over then its transfer require not only sincere effort but to act reasonably and fairly."
8. It is clear from the above mentioned authority that financial institutions should work in the interest of public at large. In the present case, the defendant Nos. 1 to 3 failed and neglected to provide and / or disburse the loan amount on time to the plaintiff and because
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of that the plaintiff lost his business and suffered heavy losses. It is to be noted that defendant Nos. 1 to 3 disbursed only Rs. 1,50,000/- to the plaintiff and debited plaintiff's account for miscellaneous expenses to the tune of Rs.85,543-67 ps. Till 27th October 1987 the plaintiff paid a sum of Rs. 82,745/- towards repayment of the loan amount to the defendant Nos. 1 to 3. It is clear from this fact that the defendant Nos. 1 to 3 disbursed loan amount of Rs. 1,50,000/- only and debited plaintiff's account towards expenses for Rs. 85,543-67 ps. This itself shows that instead of supporting Small Scale Industry, they took undue advantage of the plaintiff in the present case. In the present case, it is important to note that the trial Court directed the plaintiff to repay remaining amount of loan amount by instalment of Rs.5000/- per month. It is further observed by the trial Court that in the event of consecutive six defaults committed by the plaintiff in the payment of loan instalment
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and interest instalment even after re-scheduling of loan instalment, defendant Nos. 1 to 3 are at liberty to take steps for realisation of outstanding loan amount as per provisions in M.S.F.C. Act. Learned Counsel appearing on behalf of the defendant Nos. 1 to 3 is not able to place on record whether these defendants took any action against the original plaintiff as per liberty granted by the trial Court. This itself shows that these defendants are in default in recovering their loan amount from the plaintiff.
9. In any case, considering the facts and circumstances of the present case, defendant Nos. 1 to 3 failed to provide loan amount to the plaintiff on time and on that account, plaintiff suffered heavy losses in his business. The trial Court held that defendant Nos. 1 to 3 were not entitled to charge compound interest and penal interest and that they were entitled to charge simple interest @ 13-1/2% p.a. which was the agreed rate from the date of disbursement of
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the loan. In view of these facts, I do not find any substance in the present first appeal and no reason to interfere with the judgment and decree passed by the trial Court. Hence the appeal is dismissed. No order as to costs.
10. In view of the dismissal of the appeal, nothing survives in the Civil Application and same is rejected.
[ K.K. TATED, J.]
sut/JUL09/fa90.95