Allowed

State Bank of India v. Fashion Creation

DRT21 Jul 2026OA/639/2022

Case brief

AI extract

What is this about?

In an Original Application for recovery of dues, the Tribunal allowed the bank's claim against a partnership firm and its guarantors. The Court rejected capitalized penal interest per RBI guidelines but directed the payment of the balance along with reduced interest.

What did the court decide?

Defendants directed to pay Rs. 33,08,859/- (exclusive of capitalized penal interest) with future interest at 9.65% p.a. and liberty to sell hypothecated properties on default.

State Bank of India versus Fashion Creation — Execution and Attachment | DRT (2026)

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OA No. 639/2022

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Fair Order

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IN THE DEBTS RECOVERY TRIBUNAL AT MADURAI DATED THIS 21^st DAY OF JULY, 2026 PRESENT: SEEMA SINHA, [PR. DISTRICT & SESSIONS JUDGE – Retd] PRESIDING OFFICER

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OA No. 639/2022

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Between

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State Bank of India, SME Center, No. 2, Dr. Ambedkar Road, Madurai – 625 002. Rep. by its Chief Manager. --- Applicant Bank

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And

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M/s Fashion Creation,

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Through its Partners,

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Plot No 11/C1, Ground and 1^st Floor, Karpagam Nagar Main Road, Villapuram, Madurai – 625 012.

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Mrs. M. Kishore Jekhan,

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W/o Mr. Mohamed Basheer, No. 25, Santhosh Nagar 3^rd Street, Avaniyapuram,

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Madurai – 625 012.

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Mrs. S. Syed Ali Fathima, W/o Shahul Hameed,

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No. 5/34, Anna Nagar,

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Kulasekaram, Vendalicode, Kanyakumar District – 629 161. ---Defendants

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Counsel for the Applicant Bank : Mr. A. Rangarajan.

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Page 1 of 8

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OA No. 639/2022

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This Original Application was heard and fixed for passing final order before me in the presence of the above said Advocate for Applicant Bank and the Defendants having been set ex-parte and upon hearing the arguments of Counsel for Applicant Bank and upon perusing the material available on the records and having stood over for consideration till this day, this Tribunal delivered the following:

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JUDGEMENT

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1 . This Application has been filed under Sec.19 (1) of the "The Recovery of Debts due to Banks and Financial Institutions Act, 1993" now amended as The Recovery of Debts and Bankruptcy Act, 1993 by the Applicant Bank on 18.07.2022 to recover from the Defendants a sum of Rs. 33,08,859/with subsequent interest as under:-

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(i) Rs. 21,48,142/- as on 15.07.2022towards Cash Credit Loan (A/c No. 40022295092) with subsequent interest at the rate of 10.55 % p.a. with Monthly Rest with other charges and

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(ii) Rs. 11,60,717/- as on 15.07.2022 towards Term Loan (A/c No. 40023525377) with subsequent interest at the rate of 10.80 % p.a. with Monthly Rest along with other charges

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from the date of filing of Application till the date of realization with cost and by sale of hypothecated properties, more fully described in Schedules of the application.

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2 . The brief averments of the application filed by the Applicant Bank are as follows:-

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(i). The applicant bank submitted that the 1^st defendant is a partnership firm under the name and style of "M/s. Fashion Creation" dealing in Textile business at the above mentioned address. The defendants 2 and 3 are the partners of the said firm and they are looking after the business of the said Firm. Defendant Nos. 2 and 3 have been standing as continuing guarantors for the due repayment of the loan availed of by the 1^st defendant.

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(ii) The applicant Bank submitted that for running up of the partnership business, the defendants as partners availed of credit facilities from the applicant Bank. They have approached the applicant bank and applied for a Cash Credit facility to a Limit of Rs. 20,00,000/- and for a Term Loan of Rs. 11,00,000/-. The 1^st defendant agreed to hypothecate its stocks and receivables as primary security and the defendants 2 and 3

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Page 2 of 8

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OA No. 639/2022

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agreed to stand as continuing guarantors for the due repayment of the loan availed of by the 1^st defendant. The applicant Bank on the strength of the personal guarantee of defendants 2 and 3 and the hypothecation of stocks has sanctioned the above said Cash Credit limit of Rs. 20,00,000/- and a Term Loan of Rs. 11,00,000/- to the 1^st defendant. The 1^st defendant availed of the said facilities after executing the following documents in favour of the applicant Bank on 19.02.2021.

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a) Letter of Arrangement dt. 19.02.2021

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b) Agreement of Loan cum Hypothecation dt. 19.02.2021

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The defendants 2 & 3, as agreed, have executed a Guarantee Agreement dated 19.02.2021 guarantying the due repayment of the loan availed of by the 1^st defendant.

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(iii) The applicant Bank submitted that the 1^st defendant after availing of the said facilities has improved its business and earning profits. As per the Arrangement Letter dated 19.02.2021, signed and accepted by the defendants, the CC loan has to be repaid on demand with interest at the rate of 3% р.а. above SBAR, which was at 6.65% p.a. at the time of sanction and the then effective rate being at 9.65% p.a. with monthly rests and the Term loan has to be repaid in 81 monthly installments of Rs. 18,615/- and the last installments of Rs. 7,579/- together with interest, at the time of sanction, being at 9.65% per annum with monthly rests. The first installment commenced from 11.09.2021 and the last installment falling due on 11.01.2028. It is further agreed that the bank shall at any time and from time to time be entitled to vary the margin based on the Credit Risk Assessment of the borrower. The present rate of interest for CC account is at 10.55% p.a. and for Term loan at 10.80% p.a. at monthly rests.

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(iv) The applicant bank submitted that the 1^st defendant has been doing business with the help of the loan availed of by it and thereby earning profits. It is further submitted that from the beginning the 1" defendant is irregular in conducting the loan account and failed to comply with the terms and conditions as agreed to. Whenever the officials of the bank contacted and requested the defendants to pay the loan amount and regularize/close the loan account, the defendants made several promises and agreed to settle the loan amount within a short period. But they have not settled the loan account. Hence the applicant Bank sent a notice dated 05.04.2022 to the defendants. But there is no response from the defendants. The defendants did not operate the loan account properly and became defaulters. Hence, the Applicant bank is constrained to file this application for recovery of the dues from the defendants.

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Page 3 of 8

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OA No. 639/2022

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(v) As per the guarantee agreement, if the 1^st defendant failed to honour its commitment of repaying the loan and defaults it and then the defendants 2 and 3 are liable to settle the loan due as per the terms of the agreement. The liabilities of the guarantors are coextensive with that of the principle debtor. Now the 1 defendant failed to settle the loan account and hence the guarantors have to settle the loan liability of the 1^st defendant. They are liable to settle the loan personally as well as from their assets.

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(vi) As per statement of account for CC account in A/c. No. 40022295092, a sum of Rs. 21,48,142/- as on 15.07.2022 is found to be due and payable by the defendants with a subsequent interest at the rate of 10.55% p.a. along with other charges and expenses. For Term Loan account in A/c. No. 40023525377, a sum of Rs. 11,60,717/- as on 15.07.2022 is found to be due and payable by the defendants with a subsequent interest at the rate of 10.80% p.a. along with other charges and expenses. Thus, in total, the defendants have to pay, a sum of Rs. 33,08,859/- as on 15.07.2022 together with subsequent interest.

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(vii) The applicant bank submitted that it has a right to recover the balance dues under the Credit limit which is stated in the statement of account duly certified as required under the Bankers Books Evidence Act and the same includes the interest due on the said facilities and other expenses till the date of filing the present application and is shown as debt due to the applicant from the defendants.

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(viii) The applicant bank submitted that the bank is entitled to recover pendent lite and future interest at contractual rate of interest and other contingent charges, like insurance etc., recoverable from the defendants and other costs and expenses incidental to the application. The above sum shall have to be paid by the defendants with future interest at the applicable contractual rate of interest till the actual payment thereof.

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(ix) The cause of action for this application arose on 19.02.2021 when the defendants executed loan documents to the applicant Bank, On 05.04.2022 when the applicant bank sent a notice to the defendants; On various dates when the defendants promised to settle the loan account and on all other subsequent dates when the applicant made demand to the defendants in Madurai District where the suit transaction took place within the jurisdiction of this Tribunal.

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Amount due as on 15.07.2022 Rs. 33,08,859/-

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Page 4 of 8

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OA No. 639/2022

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(x) Despite repeated demands and reminders, made by the Applicant Bank, the Defendants have failed and neglected to repay and adjust their liability. Hence, the Applicant Bank has filed the OA for recovery of a sum of Rs. 33,08,859/- with subsequent interest as under:-

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(i) Rs. 21,48,142/- as on 15.07.2022towards Cash Credit Loan (A/c No. 40022295092) with subsequent interest at the rate of 10.55 % p.a. with Monthly Rest with other charges and

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(ii) Rs. 11,60,717/- as on 15.07.2022 towards Term Loan (A/c No. 40023525377) with subsequent interest at the rate of 10.80 % p.a. with Monthly Rest along with other charges

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from the date of filing of Application till the date of realization with cost.

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The Applicant Bank has submitted the following documents in support its claim in the OA, which are as follows:

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S. No.	Date	Description of document	Exhibits
1.	19.02.2021	Letter of Arrangement	Ex. No. A-01
2.	19.02.2021	Agreement of Loan cum Hypothecation	Ex. No. A-02
3.	19.02.2021	Guarantee Agreement	Ex. No. A-03
4.	05.04.2022	Notices sent to the defendants	Ex. No. A-04
5.	30.04.2022	Demand Notice under Sec. 13 (2) of SARFAESI Act, 2002	Ex. No. A-05
6.	----	Statement of Accounts with Certificate	Ex. No. A-06

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SCHEDULE OF PROPERTIES

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Stocks and Machineries

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3 . On the other hand, Notices were issued to Defendants and since from the beginning of the case, there was no representation on behalf of the Defendants. Hence, Defendants were set ex-parte.

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4. Now the main point for consideration before me is as to whether the Applicant has been able to prove his case on his own leg?

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5. Having gone through the affidavit of the applicant and the documents filed by them and also considering the submission of the counsel for the Applicant, I find that the Applicant Bank, in order to prove its claim, has filed Proof Affidavit executed by one Mr. Vijayakumar , who is the Chief Manager of the Applicant Bank.

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Page 5 of 8

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OA No. 639/2022

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He has stated in his affidavit that the defendants have availed Cash Credit Loan and Term Loan from the Applicant Bank, but they failed to pay the outstanding loan amount, hence he has filed the case. The applicant bank has also filed the documents given by the defendants at the time of sanctioning the loan amount, which have been marked as Exhibits Nos. A-01 to A-06 in support of its claim in the OA.

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The Letter of Arrangement dated 19.02.2021 submitted by defendants has been marked as Ex. No. A-01. Defendants have executed the Agreement of Loan cum Hypothecation on 19.02.201, which has been marked as Ex. No. A-02. Guarantee Agreement dated 19.02.2021, which has been marked as Ex. No. A-03. Notices sent to the defendants by the Applicant has been marked as Ex. No. A-04. Demand Notice issued U/s 13 (2) of the SARFAESI Act, 2002 to the defendants has been marked as Ex. No. A-05. The Statement of Accounts maintained by the applicant bank in regular course and conduct of business has been marked as Ex. No. A-06.

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So the averments of the applicant as well as the statement of the pleading have been corroborated by the above mentioned documents.

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As the Defendants remained ex-parte, the claim of the Applicant Bank is neither disproved nor dislodged and goes on record as proved. Accordingly, a cumulative analysis of both the Proof Affidavit and documents marked by the Applicant Bank would prove the claim of the Applicant Bank in the OA.

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In this OA, from Perusal of Statement of Accounts (Ex. No. A-06), I find that Applicant Bank has capitalized the penal interest in the loan account of the defendants, which is against the policy of RBI guidelines.

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“ The Reserve Bank of India strictly prohibits the capitalization of Penal charges. Under current RBI regulations, any penalty for non-compliance with loan terms must be treated as a distinct “Penal Charge” rather than added to the Principal outstanding amount. This ensures that banks and NBFCs cannot compute further interest on the penalty amount themselves.”

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So far the claim of interest is concerned, it is a well settled Law that the Tribunal has got powers to award pendente lite interest in view of the Judgment of the Hon’ble Supreme Court in N.M. Veerapa Vs Canara Bank (reported in AIR 98(1), 1101 & in Central bank of India Vs Ravindra and OS (AIR, 2001(1), 3095).

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Page 6 of 8

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OA No. 639/2022

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So far the penal interest is concerned Hon'ble supreme court stated in the said judgement as followed " Though interest can be capitalised on the anology 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 capitalized. 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 capitalized. It will be opposed to public policy ".

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Therefore, this Original Application is allowed . The Applicant Bank is entitled for a final order on the following lines:-

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The Applicant Bank is entitled to recover from the Defendants, a sum of Rs. 33,08,859/- (i.e)

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(i) Amount arrived after deduction of capitalized penal interest included in the Cash Credit outstanding amount of Rs. 21,48,142/- towards Loan A/c No. 40022295092 with subsequent interest at the rate of 9.65 % p.a. with Half Yearly Rest and

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(ii) Amount arrived after deduction of capitalized penal interest included in the Term Loan outstanding amount of Rs. 11,60,717/towards Loan A/c No. 40023525377 with subsequent interest at the rate of 9.65 % p.a. with Half Yearly Rest

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from the date of filing of this Application till the date of realization with cost. Accordingly, it is hereby

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ORDERED

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(a) That the Defendants are directed personally/jointly/severally to pay a sum of Rs. 33,08,859/- (i.e)

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(i) Amount arrived after deduction of capitalized penal interest included in the Cash Credit outstanding amount of Rs. 21,48,142/- towards Loan A/c No. 40022295092 with subsequent interest at the rate of 9.65 % p.a. with Half Yearly Rest and

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(ii) Amount arrived after deduction of capitalized penal interest included in the Term Loan outstanding amount of Rs. 11,60,717/towards Loan A/c No. 40023525377 with subsequent interest at the rate of 9.65 % p.a. with Half Yearly Rest

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from the date of filing of this Application till the date of realization with cost within one month from the date of receipt of this order.

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Page 7 of 8

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OA No. 639/2022

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(b) In case of default of payment by the above mentioned Defendants, the Applicant Bank is at liberty to sell the movable properties more fully described in Schedule of the original application for appropriation of sale proceeds towards the satisfaction of amount due to the Applicant Bank.

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(c) If the sale proceeds are not sufficient, after defraying the expenses of such sale, for the payment of all such amounts, the defendants are personally/jointly/severally liable to pay the amount of such deficiency with interest mentioned above until realization.

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(d) Any amount remitted during the course of this proceedings shall be given due credit, to the loan account of the defendants.

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(e) Recovery Certificate be prepared, as per the directions given above, and issue accordingly. A copy of the order is to be communicated to the parties concerned, immediately.

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(f) It is further ordered that the Applicant Bank shall file cost memo within a period of one month from the date of receipt of this order, so as to prepare the recovery certificate with cost for the Cash Credit Loan and Term Loan and the Recovery Officer is also directed to proceed with the matter in accordance with law. In case, cost memo is not filed before said period of one month, Recovery Certificate will be prepared with available records.

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Dictated to SKP (Typist), taken down, transcribed, typed by her, corrected and pronounced by me in the Open Court in this the 21^st July, 2026.

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Sd/-

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(SEEMA SINHA) PRESIDING OFFICER

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Uploaded on 27.07.2026

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Page 8 of 8

State Bank of India v. Fashion Creation

Case brief

What is this about?

What did the court decide?

State Bank of India v. Fashion Creation

Case brief

What is this about?

What did the court decide?

What the court decided

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