Allowed

State Bank of India v. M/s Keethi Shoes (India) Pvt. L

DRAT11 Dec 2024REGULAR APPEAL/151/2018

Case brief

AI extract

What is this about?

The Appellate Tribunal allowed the bank's appeal against the DRT-Ii's order which reduced interest from the contractual rate to 6% simple interest. The Tribunal held that winding up of the debtor was not a valid ground for such reduction and ordered interest at the contractual rate with monthly rests until the date of the tribunal order and 6% simple interest thereafter.

What did the court decide?

Set aside the DRT-Ii order reducing interest to 6% simple interest; award the Appellant Bank interest at contractual rates with monthly rests from the date of original application (16.10.2017) up to t

State Bank of India versus M/s Keethi Shoes (India) Pvt. L — Banking and Recovery | DRAT (2024)

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IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT CHENNAI

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Dated the 11^th day of December, 2024

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PRESENT: HON’BLE MR. JUSTICE G. CHANDRASEKHARAN CHAIRPERSON

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RA 151/2018

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(arising out of OA 565/2015 on the file of DRT-II, Chennai)

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Between

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State Bank of India, SME Ekkattuthangal Branch, Rep. by its Chief Manager, No.5, J.N. Road, Guindy, Chennai 600 032.

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Presently migrated to SARB, State Bank of India, Red Cross Building, MontiethRoad, Egmore, Chennai 600 008.

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…..Appellant Bank

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And

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1. M/s Keerthi Shoes (India) Private Limited, Plot No.2A (SP, Thiru Vika Industrial Estate, Guindy, Chennai 600 032.

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Rep. by Official Liquidator, Madras High Court, No.29, Rajaji Salai, Chennai 1.

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2 M/s Keerthi Exports Private Limited, Represented by its Directors, Plot No.2A (SP, ThiruVika Industrial Estate, Guindy, Chennai 600 032.

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3. M/s Instyle Footwears (Chennai) Private Limited, Rep. by its Managing Director, Having office at: No.54/2, Paulwells Road, St. Thomas Mount, Chennai 600 015.

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4. Mr. S. Ramesh, S/o Late Mr. P.V. Sambandam, No.4/2, First Street, Abhiramapuram, Chennai 600 018.

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5. Mrs. Shanthi Ramesh, W/o Mr. Ramesh, No.4/2, First Street, Abhiramapuram, Chennai 600 018.

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6. Mr. S. Ganesh, S/o late Mr. P.V.Sambandam, No.6-AB, 4^th Block, Kences Enclave, No.1, Ramakrishna Street, T. Nagar, Chennai 600 017.

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7. Mr. S. Naresh, S/o Late Mr. P.V. Sambandam, No.19, Kandan Garden, 3^rd Floor, No.37, Ponniyamman Koil Street, Kotturpuram Chennai.

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8. Mrs. H. Sakkubai, W/o Late Mr. P.V.Sambandam, No.54/2, Paulwells Road, St.Thomas Mount, Chennai 600 015.

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9. M/s Sam Plastics & Film, Represented by its Proprietor, Mr. S. Ganesh, No.6-AB, 4^th Block, Kences Enclave, No.1, Ramakrishna Street, T. Nagar, Chennai 600 017.

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…..Respondents

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Counsel for appellant Bank : M/s M.L. Ganesh & Co.
: R1 is represented by
Official Liquidator
Counsel for R3, R4,R5, R6 & R8 : None
Counsel for R2, R7, R9 : M/s P. Jesus Moris Ravi

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ORDER

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This appeal is filed under Section 20 of RDDB & FI Act, 1993 against the order

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passed in OA 565/2015 by Ld. Presiding Officer, DRT-II, Chennai on 16.10.2017.

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Ld. Counsel for the appellant bank submitted that appellant bank filed original application under Section 19(1) of RDDB & FI Act, 1993 before DRT-II, Chennai for recovery of a sum of (i) Rs.3,22,48,222.88p towards Cash Credit Facility together with interest at 13.45% p.a. from the defendants 1,4,5 and 9 jointly and severally, (ii) Rs.25,04,631/- towards SME Credit Plus facility together with interest at 14.45% p.a. from the defendants 1,4,5 and 9 jointly and severally, (iii) Rs.1,33,591/- towards Term Loan together with interest at 13.85% p.a. from the defendants 1,4,5 and 9 jointly and severally (iv) Rs.24,45,506/- towards Cash Credit Facility together with interest at 13.20% p.a. from the 2^nd defendant, (v) Rs.64,74,816/- towards cash credit facility together with interest at 14.20% p.a.

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from the defendants 3 to 9 jointly and severally and (vi) Rs.25,45,863/- towards

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SME Credit Plus facility together with interest @ 15.20% p.a. from the

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defendants 3 to 9 jointly and severally totaling to Rs.4,63,52,629.88p with monthly rests from the date of OA till the date of realization together with costs and by sale of schedule mentioned properties.

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Ld. Counsel further submitted that Ld. Presiding Officer passed while passing the order in favour of the bank for recovery of money, reduced the rate of interest to 6% p.a.(simple) from the date of filing of OA till the date of realization of the amount instead of ordering interest at contractual rate. Aggrieved against this particular portion of the order reducing the interest rate from contractual rate of interest to 6% (simple), this appeal is filed.

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In support of his submission, Ld. Counsel for appellant placed reliance on the judgment of the Hon’ble Supreme Court of India in re, Jayant Verma others Vs.Union of India reported in AIR 2018 SC(1) 1079 wherein Hon’ble Supreme Court laid down the proposition as to the validity of Section 21(A) of Banking Regulation Act, 1949. Ld. Counsel also placed reliance on judgment of Hon’ble High Court of Madras in re.,Central Bank of India Vs.Ravindra and others reported in AIR 2001 SC 1395 wherein the Hon’ble High Court laid down the proposition as to the circumstances under which rate of interest may be reduced and not otherwise.

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None of the circumstances elicited in this judgment is available for the Ld. Presiding Officer to reduce the interest. There is no valid reason given in the order for reducing the interest rate from contractual rate of interest to 6% p.a.(simple). The only reason stated is since D1 company was wound up, awarding contractual interest will not meet the ends of justice, therefore, interest rate is reduced to 6% p.a. (simple). This is against the settled proposition of law.

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It is seen from records that this appeal is pending from the year 2018. There was no representation for respondents on 4.11.2024. However, Ld. Counsel appearing for the appellant bank was heard in full and the matter was adjourned to 6.11.2024 for respondents’ arguments, as last chance. On 6.11.2024 also, there was no representation for respondents and it was posted to 14.11.2024. There was also no representation for respondents, therefore, opportunity for respondents’ argument was closed and order was reserved.

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The simple issue involved in this appeal is whether reduction of interest from contractual rate to 6% p.a.(simple) from the date of application till date of realization is in tune with the legal propositions or not.

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Admittedly, loan transaction involved is a commercial transaction wherein interest rate for the loans advanced is stipulated in the loan agreement. There

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was no dispute with regard to availing of loan by the respondents and the interest rate claimed. Reduction of rate of interest from contractual rate to 6% p.a. (simple) merely for the reason that D1 company was wound up is not a valid reason. Appellant bank ought to have been awarded contractual rate of interest from the date of filing of application till the date of the order.

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A reading of the judgment of Hon’ble High Court of Madras in Central Bank of

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India Vs. Ravindra and others referred supra, would show the circumstances under which the rate of interest can be reduced, relevant portion of the judgment reads as follows.

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“48. We are, therefore, of the opinion that two-Judge Bench decision of this Court in Corporation Bank Vs. D.S. Gowda & Anr. of Baroda and three Judge Bench decision in Bank Vs. Jagannath Pigment & Chemicals & Ors. are correctly decided and are, therefore, affirmed. A creditor can charge interest from his debtor on periodical rests and also capitalise the same so as to make it a part of the principal. Such a course can be justified by stipulation in a contract voluntarily entered into between the parties or by a practice or usage well established in the world to which the parties belong. Such practice is to be found already in vogue in the field of banking business. Such contract or usage or practice can stand abrogated by legislation such as Usury Laws or Debt Relief Laws and so on.

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During the course of hearing it was brought to our notice that in view of several Usury Laws and Debt Relief Laws in force in several States private money lending has almost come to an end and needy borrowers by and large depend on banking institutions for financial facilities, Several unhealthy practices heaving slowly penetrated into prevalence were pointed out. Banking is an organised institution and most of the banks press into service long running documents wherein the borrowers fill in the blanks, at times without caring to read what has been provided therein, and bind themselves by the stipulations articulated by best of legal brains. Borrowers

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other than those belonging to corporate sector, find themselves having unwittingly fallen into a trap and rendered themselves liable and obliged to pay interest the quantum whereof may at the end prove to be ruinous. At times the interest charged and capitalised is manifold than the amount actually advanced. Rule of damdupat does not apply. Penal interest, service charges and other over-heads are debited in the account of the borrower and capitalised of which debits the borrower may not even be aware. If the practice of charging interest on quarterly rests is upheld and given a judicial recognition, unscrupulous banks may resort to charging interest even on monthly rests and capitalising the same. Statements of Accounts supplied by banks to borrowers many a times do not contain particulars or details of debit entries and when written in hand are worse than medical prescriptions putting to test the eyes and wits of the borrowers. Instances of unscrupulous, unfair and unhealthy dealings can be multiplied though they cannot be generalised. Suffice it to observe that such issues shall have to be left open to be adjudicated upon in appropriate cases as and when actually arising for decision and we cannot venture into laying down law on such issues as do not arise for determination before us. However, we propose to place on record a few incidental observations, without which, we feel, our answer will not be complete and that we do as under:

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(1) Though interest can be capitalised on the analogy that the interest falling due on the accrued date and remaining unpaid, partakes the character of amount advanced on that date, yet penal interest, which is charged by way of penalty for non-payment, cannot be capitalised. Further interest, i.e. interest on interest, whether simple, compound or penal, cannot be claimed on the amount of penal interest. Penal interest cannot be capitalised. It will be opposed to public policy.

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(2) Novation, that is, a debtor entering into a fresh agreement with creditor undertaking payment of previously borrowed principal amount coaled with interest by treating the sum total as principal, any contract express or implied and an express acknowledgement of accounts, are best evidence of capitalisation. Acquiescence in the method of accounting a dopted by the creditor and brought to the knowledge of the debtor may also enable interest being converted into principal. A mere failure to protest is not acquiescence.

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(3) The prevalence of banking practice legitimatize 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

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the parties shall govern the substantive rights and obligations of the parties as to recovery and payment of interest.

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(4) Capitalisation method is founded on the principle that the borrower failed to make payment though he could have made and thereby rendered himself a defaulter. To hold an amount debited to the account of the borrower capitalised it should appear that the borrower had an opportunity of making 29-10-2024 (Page 22 of 24) www.manupatra.com Zonal Office Hyderabad the payment on the date of entry or within a reasonable time or period of grace from the date of debit entry or the amount falling due and thereby avoiding capitalisation. Any debit entry in the account of the borrower and claimed to have been capitalised so as to form an amalgam of the principal sum may be excluded on being shown to the satisfaction of the Court that such debit entry was not brought to the notice of the borrower and/or he did not have the opportunity of making payment before capitalisation and thereby excluding its capitalisation.

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(5) The power conferred by Section 21 and 35A of the Banking Regulation Act, 1935 is coupled with duty to act. Reserve Bank of India is prime banking institution of the country entrusted with a supervisory role over banking institution of the country entrusted with a supervisory role over banking and conferred with the authority of issuing binding directions, having statutory force, in the interest of public in general and preventing banking affairs from deterioration and prejudice as also to secure the proper management of any banking company generally. Reserve Bank of India is one of the watchdogs of finance and economy of the nation. It is, and it ought to be, aware of all relevant factors, including credit conditions as prevailing, which would invite its policy decisions. RBI has been issuing directions/circulars from time to time which, inter alia, deal with rate of interest which can be charged and the periods at the end of which rests can be struck down, interest calculated thereon and charged and capitalised. It should continue to issue such directives. Its circulars shall bind those who fall within the net of such directives. For such transaction which are not squarely governed by such circulars, the RBI directives may be treated as standards for the purpose of deciding whether the interest charged is excessive, usurious or opposed to public policy.

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(6) Agricultural borrowings are to be treated on a pedestal different from others. Charging and capitalisation of interest on agricultural loans cannot be

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permitted in India except on annual or six monthly rests depending on the rotation of crops in the area to which the agriculturist borrowers belong.

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(7) Any interest charged and/or capitalised in violation of RBI directives, as to rate of interest, or as to periods at which rests can be arrived at, shall be disallowed and/or excluded from capital sum and be treated only as interest and dealt with accordingly.

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(8) Award of interest pendente lite and post-decree is discretionary with the Court as it is essentially governed by Section 34 of the CPC de hors ? 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 or fanciful manner.

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In view of the law having been settled with this judgment, it is expected henceforth from the banks, bound by the directives of the Reserve Bank of India, to make an averment in the plaint that interest/compound interest has been charged at such rates, and capitalised at such periodical rests, as are permitted by, and do not run counter to, the directives of the Reserve Bank of India. A statement of account shall be filed in Court showing details and giving particulars of debit entries, and if 29-10-2024 (Page 23 of 24) www.manupatra.com Zonal Office Hyderabad debit entry relates to interest then setting out also the rate of, and the period for which, the interest has been charged, On the Court being prima facie satisfied, if a dispute is raised in that regard, of the permissibility of debits, the onus would be on the borrower to show why the amount of debit balance appearing at the foot of the account and claimed as principal sum cannot be so accepted and adjudged. This practice would narrow down the scope of controversy in suits filed by banking institutions and enable an expeditious disposal of the suits, the issues wherein are by and large capable of being determined by documentary evidence. RBI directives have not only statutory flavour, any contravention thereof or any default in compliance therewith is punishable under sub-section (4) of Section 46 of Banking Regulation Act, 1949. The Court can act on assumption that transactions or dealings have taken place and accounts maintained by banks in conformity with RBI directives.”

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Admittedly, no valid circumstances are available in the instant case for reducing the rate of interest from contractual rate to 6% p.a. (simple). Therefore, this Tribunal is of the view that order of Ld. Presiding Officer with regard to reduction of rate of interest to 6% p.a. (simple) is liable to be set aside and appellant bank is entitled for contractual rate of interest for the respective amounts due in all six loan accounts viz. (i) Rs.3,22,48,222.88p towards Cash Credit Facility together with interest at 13.45% p.a. from the defendants 1,4, 5 and 9 jointly and severally, (ii) Rs.25,04,631/- towards SME Credit Plus facility together with interest at 14.45% p.a. from the defendants 1,4, 5 and 9 jointly and severally, (iii) Rs.1,33,591/- towards Term Loan together with interest at 13.85% p.a. from the defendants 1,4, 5 and 9 jointly and severally (iv) Rs.24,45,506/- towards Cash Credit Facility together with interest at 13.20% p.a. from the 2^nd defendant and (v) Rs.64,74,816/- towards cash credit facility together with interest at 14.20% p.a. from defendants 3 to 9 jointly and severally and (vi) Rs.25,45,863/- towards SME Credit Plus facility together with interest @ 15.20% p.a. from the defendants 3 to 9 jointly and severally totaling to Rs.4,63,52,629.88p, with monthly rests from the date of OA till the date of order i.e., 16.10.2017 and at 6% p.a. (simple) from the date of order till the date of realization.

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In the result , Order of Ld. Presiding Officer, DRT-II, Chennai dated 16.10.2017 is set aside with regard to reduction of interest from contractual rate of interest to

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6% p.a. (simple) and it is ordered that appellant bank is entitled for interest at contractual rate with monthly rests for the respective amounts due in all the six loan accounts as referred above, from the date of application till the date of the order i.e., 16.10.2017 and at 6% p.a.(simple) from the date of the order till the date of realization.

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Appeal RA 151/2018 is disposed of accordingly.

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Parties are directed to bear their own costs. Pending IAs, if any stand closed.

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[Dictated to Steno(SN), transcribed by him, corrected, signed and pronounced by me in open court, this 11^th December, 2024)

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Sd/-

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(JUSTICE G. CHANDRASEKHARAN) CHAIRPERSON

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State Bank of India v. M/s Keethi Shoes (India) Pvt. L

Case brief

What is this about?

What did the court decide?

State Bank of India v. M/s Keethi Shoes (India) Pvt. L

Case brief

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What the court decided

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