4 Oct 2020 3:45 AM GMT
This article is primarily in relation to the Original Applications (OAs) filed by banks and Financial Institutions (FIs) in Debt Recovery Tribunals (DRTs) under the provisions of Recovery of Debt and Bankruptcy Act, 1993 (RDB Act, 1993) Pendente Lite period means the period from the date of filing of the suit upto the date of judgment. Future period means the period from the date...
This article is primarily in relation to the Original Applications (OAs) filed by banks and Financial Institutions (FIs) in Debt Recovery Tribunals (DRTs) under the provisions of Recovery of Debt and Bankruptcy Act, 1993 (RDB Act, 1993)
Pendente Lite period means the period from the date of filing of the suit upto the date of judgment. Future period means the period from the date of judgment upto the date of realisation of the decretal amount.
Nowadays banks and FIs are filing OAs in DRTs under the provisions of RDB Act, 1993 for recovery of huge amounts running into thousands of crores of rupees. In view of the same, the element of Rate of Interest has assumed a great importance.
Most of the times, OAs filed by the banks and FIs are decreed for the claim amount but the interest for the pendente lite and future rate of interest is awarded at a rate lower than the contractual rate and that too on simple basis instead of on compound basis.
RDB Act, 1993 vide Section 19(20) provides about the payment of interest for pendente lite and future rate of interest as below -
"(20) The Tribunal may, after giving the applicant and the defendant an opportunity of being heard, pass such interim or final order, including the order for payment of interest from the date on or before which payment of the amount is found due upto the date of realisation or actual payment, on the application as it thinks fit to meet the ends of justice."
Before discussing the legal aspects of the above issue, let us understand the significance of the pendente lite and future rate of interest by a few illustrations.
Suppose an OA with a claim of Rs. 100 crores is decided by DRT in 6 years. The bank has claimed pendente lite and future period interest at the rate of 16% with quarterly rest and while deciding the above OA, the DRT grants only 12% interest per annum on simple basis. The calculation of interest for the pendente lite period in the above illustration are given in the following table -
Rs. 100.00 crores
Compound Interest @ 16% per annum for 6 years with quarterly rests
Simple Interest @ 12% per annum for 6 years
Total Amount (A)
Total Amount (B)
Pecuniary Loss A - B = Rs. 84,33,04,164.89
Apart from the above pecuniary loss which had already occurred due to grant of reduced rate of interest on simple basis, the said loss is of a continuing nature accruing every month so long as the decretal amount is not realised in entirety.
The severity of the pendente lite and future interest can be explained by another illustration where the pendency of the OA was for comparatively a longer period. Though RDB Act, 1993 vide section 19(24) stipulates that all possible efforts shall be made for disposal of the OA by DRTs within a period of 6 months, but the same is not happening and there are thousands of cases which are decided after periods of 5, 10, 15, 20 and even more than 20 years. There is one live matter which had been filed in Delhi High Court in 1986 and upon coming into force of RDB Act, 1993, the said matter was transferred to DRT-I, New Delhi. The said matter has already completed 34 years but is still pending for the adjudication. Now suppose, an OA with a claim of Rs. 50 crores is decided after pendency of 15 years and the DRT awards simple interest @10 % instead of the contractual rate of interest i.e., 15% with quarterly rest. The effect of reducing the pendente lite and future rate of interest from 15% with quarterly rest to 10% on simple basis is being explained in the following table
Rs. 50.00 crores
Compound Interest @ 15% per annum for 15 years with quarterly rests
Simple Interest @ 10% per annum for 15 years
Pecuniary Loss A - B = Rs. 330,25,66,804.71
Generally speaking, the DRTs do not give any detailed reasoning for reducing the pendente lite and future rate of interest and/or making the same on simple basis as against the compound interest. It appears that the Hon'ble Judges while determining the pendenlite and future rate of interest do not apply their mind to the pros and cons of the same and perhaps are not aware of the fact that by so doing, they are going to cause loss of several crores of rupees to the banks and FIs and at the same time are granting unmerited financial bonus of corresponding amounts to the defaulters of the banks and FIs.
Section 19(20) of RDB Act, 1993 which has been quoted above does not confer any discretion on the DRT to reduce the pendelite and future rate of interest but at the same time the said provision also does not stipulate that the DRT shall be bound to award pendente lite and future rate of interest at contractual rate only and that too on compound basis. Hence, there is a grey area and the tribunals pass the orders regarding pendente lite and future interest absolutely as per their discretion.
In Central Bank of India v. Ravindra & ors. AIR 2001 SC 3095 (a Constitutional Bench decision), it has been held that the Expression "the principal sum adjudged" occurring in s. 34 CPC includes the amount of interest charged on periodical rests and capitalized with the principal sum actually advanced. It has been further held that "award of interest pendente lite and post-decree is discretionary with the court as it is essentially governed by s. 34 of CPC dehors the contract between the parties……………..The discretion shall be exercised fairly, judiciously and for reasons and not in arbitrary or fanciful manner."
It has been held in several cases that in the commercial loans, the pendente lite and future interest should be awarded at contractual rate (which comprises the rate of interest as well as the compounding rests) as a general rule and any reduction may be granted by the court in pendente lite and future interest only in exceptional cases for reasons to be recorded in writing.
The Hon'ble Delhi High Court judgment in the matter of Canara bank vs. Marshall Cycle & Ors 1998 SCC OnLine Del 89 has held as under:-
"It appears that the preponderance of authority is in favour of the view that when the borrower has promised to pay a particular rate of interest and avail the credit and on default by borrower, when an action is commenced ending in decree, the proper exercise of discretion would be to grant interest at the contractual rate from the date of suit till the date of realization. To reduce or deny interest would amount to penalizing the creditor for approaching the court and encouraging the debtor to deliberately and unjustly prolonging the litigation and this should be the ordinary rule"
Further the Hon'ble Delhi High Court in Syndicate Bank vs. M/s W.B. Cements Ltd. 1988 SCC OnLine Del 254 has held that -
"Para 14. …..The grant of interest at a rate less than the contractual rate, as matter of rule, will amount to giving a premium to those who trade upon the money of others. The defaulting borrower, in my opinion, cannot be given the benefit of the reduced rate of interest as a matter of rule only because the bank had to resort to legal recourse on account of non-payment by the borrower except of course in exceptional circumstances. The existence of exceptional or special circumstances will depend on the facts and circumstances of each case…... In my opinion, in commercial transaction, grant of interest at the contractual rate ought to be the rule and grant of interest at reduced rate a rare exception….."
The Hon'ble Gujarat High Court in the matter of Union Bank of India v. Narender Plastics 1990 SCC OnLine Guj 65 has held as under-
Para 7: "The trial court ought to have realized that contractual rate of interest should be the rule and departure is a rare exception. This is so because ordinarily the court can not and would not vary the terms of contract arrived at between the parties. The mutual rights and obligations arising out of the contract are required to be respected and enforced by the courts. The court cannot and would not vary the terms of contract and impose a new contract on the parties. This is the basic underlying principle contained in the provisions of S. 34 of C.P. Code."
Para 8: "It is true that the court has discretion to make departure from the aforesaid ordinary rule. But such cases would be only those in which it manifestly appears to the court that the contract is unfair and unconscionable and its enforcement would be shocking to the conscience of the court.……..In cases wherein the amount advanced is to be recovered by public financial institutions, if the courts were to determine the "reasonable" rate of interest, it would be extremely hazardous and it may even lead to disastrous consequences. The task of managing the public money has been entrusted by the nation to the Bankers. It is not entrusted to the courts. Therefore, ordinarily it would not be proper for the courts to arrogate to themselves the task which is not assigned to them…….If the course adopted by the trial court is to be confirmed and if the Bankers are required to take "flexible and pragmatic" approach, it would be an invitation to the traders and businessmen to make defaults in making payments and enter a deal with bank officers……..If this course were to be approved, the honest debtors who are sincere and regular in making payment would be hit by dishonest and unscrupulous people.……..If such "flexible and pragmatic" approach is adopted by the bankers, the end product which may be delivered to the society would not be justice but it would certainly be atrocious injustice and ill-gotten gain by the defaulting debtors. All these would happen at the cost of the society. Such a course would have a dangerous portents for future justice delivery system itself."
Para 11: "It needs to be emphasized that weak financial condition should ordinarily not be the criterion for reducing the agreed rate of interest in commercial transactions. A businessman or a trader or an industrialist, who has taken loan from commercial bank or any other FI, would commit default only when his financial circumstances may not permit him to make regular payment and when he is passing through financial crisis. Default in making payment will tell upon his credit. Even one default may be precursor of major catastrophe. Whenever the bank or financial instrument is constrained to file a suit for recovery of money from defaulting debtors, in almost all cases it would be a case of weak financial position of the defaulting debtor. Therefore, weak financial position of defaulting debtor ordinarily cannot be a relevant circumstance for making departure from the rule that in a commercial transaction, the rate of interest to be awarded by the court should be the contractual rate of interest.
The same view has been taken by Hon'ble Punjab and Haryana High Court in the matter of Kamlesh Bhargava Hospital and Research Centre (Pvt.) Ltd. and Ors. Vs. Debts Recovery Appellate Tribunal and Ors. reported in MANU/PH/2665/2012 -
"26. It is the settled proposition of law that reduction of interest from contractual rate to a lower rate, would be permissible only in exceptional and special circumstances. So far as the present case is concerned, no such special or exceptional circumstances have been pointed out so as to enable this Court to interfere in the matter, reducing the contractual rate of interest. Even in the judgments relied upon by the learned senior counsel, it has been held that award of interest, pendente lite and post decree, is discretionary with the Court. In a given fact situation of the case, if the Court finds it appropriate to reduce the contractual rate of interest, it can exercise its discretion but the same is to be exercised judiciously. We have carefully scanned the record of the present case but could not find any sufficient reason to persuade ourselves, to agree with the contentions raised on behalf of the petitioners."
The Hon'ble Supreme Court in the matter of Punjab Financial Corporation Vs. Surya Auto Industries (2010) 1 SCC 297 has held that -
"25. The High Court also committed serious error in declaring that the Appellant corporation will be entitled to charge simple interest at the rate of 10% w.e.f. 1.4.2003, i.e., after expiry of six months from the date of taking over the unit. Undisputedly, the Respondent had not challenged the terms of loan agreement. Therefore, the High Court could not have suo motu altered terms of agreement and directed the Appellant to make fresh calculation of the outstanding dues and allowed the Respondent to pay the amount as per fresh demand by selling the mortgaged property. This approach of the High Court is ex facie contrary to the law laid down in U.P. Financial Corporation v. Gem Cap (India) Pvt. Ltd. (supra) and Haryana Financial Corporation v. Jagdamba Oil Mills (supra).
26. The direction given by the High Court for review of pending cases in the light of judgment of this Court in Central Bank of India v. Ravindra (supra)is also unsustainable because, as mentioned above, the High Court was not called upon to examine the legality or otherwise of the terms of agreement entered into between the Appellant-corporation and Respondent under which the latter was obliged to pay interest at the particular rate with periodical rests. Moreover, conclusion No. 3 contained in para 55 of that judgment clearly postulates that stipulations incorporated in the contract entered into and binding on the parties shall govern their substantive rights and obligations in the matter of recovery and payment of interest."
A question has arisen as to whether in matters where the dues are secured by way of mortgage, any reduction in the rate of interest can be allowed or interest with quarterly rest can be refused. This question has been answered very succinctly by the Hon'ble Supreme Court in the matter of State Bank of India v. Yasangi Venkateshwara Rao (1999) 2 SCC 375-
"8. We also find it difficult to agree with the observation of the High Court that normally when a security is offered in the case of mortgage of property , charging of compound interest will be regarded as excessive. Entering into a mortgage is a matter of contract between the parties. If the parties agree that in respect of the amount advanced against a mortgage compound interest will be paid, we fail to understand as to how the court can possibly interfere and reduce the amount of interest agreed to be paid on the loan so taken. The mortgaging of property is with a view to secure the loan and has no relation whatsoever with the quantum of interest to be charged."
It will be apposite to refer to the Judgment of the Hon'ble Supreme Court in Indian Bank vs. Blue Jaggers Estate Ltd. & Ors. (2010) 8 SCC 129
"22. The argument of the learned counsel for the respondents that the rate of interest is unconscionable, expropriatory and contrary to law also merits rejection because at no stage the respondents had questioned the terms on which loan and other financial facilities were extended by the appellant. That apart, after having enjoyed those facilities for more than one decade, the respondents cannot turn around and raise an argument based on the judgments of this Court in Central Inland Water Transport Corporation v. Brojo Nath Ganguly (1986) 3 SCC 156 and Delhi Transport Corporation v. D.T.C. Mazdoor Congress and others 1991 Supp. (1) SCC 600. It must be remembered that the respondents were not in a position of disadvantage vis-`-vis the appellant. If they so wanted, the respondents could have declined to avail loan and other financial facilities made available by the appellant. However, the fact of the matter is that they had signed the agreement with open eyes and agreed to abide by the terms on which the loan, etc. was offered by the appellant. Therefore, the doctrine of unconscionable contract cannot be invoked for frustrating the action initiated by the appellant for recovery of its dues.
25. …...The Court cannot lose sight of the fact that the bank is a trustee of public funds. It cannot compromise the public interest for benefitting private individuals. Those who take loan and avail financial facilities from the bank are duty bound to repay the amount strictly in accordance with the terms of the contract. Any lapse in such matters has to be viewed seriously and the bank is not only entitled but duty bound to recover the amount by adopting all legally permissible methods."
The Madras High Court in Dr. E. Prabakaran and Another vs. Lakshmi Vilas Bank Limited 2011 SCC OnLine Mad 563 has held that -
"53…..Normally, the grant of interest at the contractual rate ought to be the General Rule However, the use of discretion to reduce the contract rate or refuse interest is an exception. To deprive or deny interest will tantamount to penalizing a Creditor for approaching the Competent Forum/Court and further will encourage the Debtor to wantonly and unfairly procrastinate the litigation. If a competent Forum/ a Court of Law is inclined to reduce the rate of interest either present or future, such reduction must be supported by valid reasons".
It is emphasised that a DRT is a creature of statute and has to dispense justice in accordance with the letter and spirit of the law. The DRT cannot travel beyond law and act as a charity institution at the cost of public money.
The willful defaulters of the bank live a lavish life and reside in palatial houses, maintain several luxury cars in the names of different companies, trusts, individual relatives, etc. but because of the laxity in our legal position, they never cooperate in liquidation of bank dues.
That as per existing legal provisions, no payments are required to be made by the borrowers/guarantors towards the liquidation of the claim amount or towards the interest amount accruing during the pendency of the OA. This results in a holiday for payment of monthly interest also. For example if the claim amount in a recovery application is Rs. 1000 crores, the minimum monthly interest will work out to Rs. 10.00 crores. The Borrowers/Guarantors during the pendency of recovery applications impliedly get exemption from payment of accruing interest also due to the absence of any statutory provision in the Act for payment of at least the interest component during the pendency of the Recovery Application.
It is pointed out that the honest borrowers pay the interest to the banks on their loans at the contractual rate and with monthly rests. It will be a travesty of justice if those who default in repayment of loan and because of which the banks have to knock the doors of courts and tribunals are allowed any concession in the rate of interest for pendente lite and future period. Due to non-payment of bank loans by the defaulters, the cost of funds increases in the hands of bank because of which on the one hand they are compelled to charge higher rate of interest from the honest borrowers and at the same time banks also reduce the interest paid on the deposits of the public i.e. saving bank account and fixed deposit account. In this manner, the NPA percentage of the banks increases which adversely affects the rating of the Banks/Financial Institution at international level.
It is the humble opinion of the author that the Section 19(20) RDB Act, 1993 is required to be amended so as to provide the following-
(Pragati Aggarwal is an associate of Delhi-based law firm, R P Agrawal & Co)