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Judgment
Mehta, J.—The appellant, original plaintiff, Central Bank of India, has preferred this appeal against the judgment and decree in so far as the
trial court has refused to decree interest at the contractual rate of 16 1/2% per annum and against the quarently instalment of Rs. 5,000 with
interest due against the decretal dues of Rs. 9,23,521.44.
The respondent defendants are a private limited company and their two directors have been held personally, jointly and severally liable along
with the company because they have given personal guarantees. The defendants had executed several documents on July 30, 1977, for obtaining
advances and credit facility --one was a letter of credit facility with a limit of Rs. 5,00,000 one was an overdraft facility with a limit of Rs. 25,000
and the third was a cash credit with a limit of Rs. 8,00,000. Thus, there was a total credit facility up to the limit of Rs. 13,25,000. There were also
personal guarantees executed by defendants Nos. 2 and 3 for Rs. 13,25,000 at 16 1/2% interest per annum. On the date of the suit, no amounts
were due under the letter of credit facility and overdraft facility.
As per the statement of accounts produced, a sum of Rs. 9,23,521.44 was due and payable by the defendants as on December 31, 1978, and
the statement of that account is at exhibits 38 to 45 and from January 1, 1979, interest is due at the rate of 16 1/2% per annum. On behalf of the
defendants defendant No. 2, Prafulchandra R. Shah, had deposed at exhibit 71. He has stated that when he was the director of defendant No.1-
company, the factory was started in 1977. He has stated that his garment unit in the Kandla Free Trade Zone was facing financial difficulties. His
brother, defendant No.3 was a director of Kanti Cotton Mill which was closed an year earlier. He has stated that the unit had to incur huge debts.
He has stated that defendants Nos. 2 and 3 have large family and social obligations and they have no other property except the factory of the unit
and the Kanti Cotton Mill and that his sons have no income of their own and they are dependent on them and they have got to be married and their
marriage expenditure was required to be met and, therefore, it was prayed that small instalments may be granted and looking to the economic
condition, he prayed that instalments of Rs. 5,000 per quarter be granted. He also stated that he had a personal income of Rs. 2,000 to Rs. 2,500
and that he had cash deposit of about Rs. 1,00,000 to Rs. 1,25,000 and that he was getting 12% interest on that amount and he was a member of
a Hindu undivided family in which there were a total 7 members residing together and he did not have any other movable or immovable property.
He has stated that defendant No.3 was getting Rs. 5,000 per month when Kanti Cotton Mill was being run. He stated that he will not be in a
positions to say what instalment defendant No.3 was getting Rs. 5,000 per month when Kanti Cotton Mill was being run. He stated that he will not
be in a position to say what instalment defendant No.3 could pay. Defendant No.3 has not entered the witness box. He has not even appeared
before this court. He has not prayed for any instalment. He has not consuetude this appeal. Defendant No. 2 has admitted in the cross-examination
that it is true that there was a contract with the bank regarding rate of interest. As per the contract, interest was at the rate of 16 1/2%. In spite of
that, only a decree for the principle amount has been granted and against that there is no cross-appeal or cross-objection filed by any of them.
It is curious and inexplicable as to why in such circumstances, the secured loan of the bank has been put to jeopardy for an incredibly long
period. The learned judge has granted quarterly instalments of Rs. 5,000 with interest due. It is not clear as to whether Rs. 5,000 includes interests.
It is also not clear whether the defendant is required to pay every quarter Rs. 5,000 only inclusive of interest, or Rs. 5,000 plus interest. Defendant
No.2 has clearly stated that he wanted instalments of Rs. 5,000 and he could pay Rs. 5,000 only per quarter and the learned judge seems to have
accepted the same without any question. Calculating interest at the rate of 6% as per the decree, the yearly interest would be more than Rs.
54,000 and the decretal amount is more than Rs. 9,00,000. Quarterly instalments of Rs. 5,000 would bring only Rs. 20,000 and that would
certainly not be sufficient even to pay up the interest. The interest amount on the principle amount would go on mounting and the decree would
never be satisfied. This instalment of Rs. 5,000 inclusive of interest also gets support from the further direction in the decree which is as under:
The defendants should continue to pay the amount due every quarter at the rate of Rs. 5,000 per quarter. If they fail to pay any one instalment,
the plaintiff shall be entitled to recover the whole of the remaining amount due together with cost and interest at a time in one lump sum.
Thus, the learned judge makes it clear that quarterly instalments of Rs. 5,000 is the only thing required to be paid inclusive of interest. In the
alternative, assuming that interest has to be paid over and above the quarterly instalment of Rs. 5,000 the yearly payment towards principal
decretal dues will be Rs. 20,000 per year and for the dues of Rs. 9,23,000 it would required 45 years to pay up the dues of the bank. The learned
judge does not seem to have given any serious tought whatsoever to this aspect of the matter while granting decree for instalments.
The learned judge has also not considered that commercial loans by banks and public financial institutions are given on securities of immovable
property or movable property or personal guarantees of other solvent persons. In the present case, apart from the dues being secured by
hypothecation of goods, defendants Nos. 2 and 3 had given personal guarantees to the tune of Rs. 13,25,000. While giving such guarantees, they
must have professed to be solvent to that extent and induced the bank to accept the personal guarantees. It is, of course, impossible to believe that
they are in insolvent circumstances. If instalments were to be granted in such secured commercial transactions with public financial institutions, the
whole purpose of securing the advance would be lost. These securities are taken only with a view to see that dues can be recovered from all the
securities taken. Even then the principal debtor may not be in a position to pay, the liability of such persons such as sureties and guarantors is joint
several and co-extensive and in such circumstance the decree for instalment and relief of instalment cannot be justified and, therefore, that direction
is clearly illegal unjust and without any valid reason and is required to be quashed and set aside. It is curious to note that defendant No.2 who had
stated in his deposition that it was his duty to discharge the debt by paying in instalments of Rs. 5,000 quarterly, has not paid any single instalment
until now or has any other defendant paid any dues towards the decree. In view of the default clause in the impugned decree, an execution
application has been filed in 1982, and we are told that till today no recovery has been made.
On the question of interest, there is no dispute that the contractual rate of interest is 16 1/2% per annum. The learned trial judge has also upheld
this observing that no doubt the rate of interest is stated at 16 1/2% but further held that it cannot form the basis of the contractual rate of interest
on the ground that the plaintiff had not shown the exact amount which was advanced to the defendants under the cash credit scheme and the
statement of accounts produced by the plaintiff did not show the exact amount advanced to the defendants under the said scheme. This is
absolutely incorrect.
The hypothecation agreement cash credit against goods (exhibit 40) in paragraph 7 prescribes compound interest at the rate of 16 1/2% over
the bank rate subject to a minimum of 16 1/2% per annum. Exhibit 63 also refers to the same credit account, namely, packing credit account. It is
the same as the cash credit-cum-packing facility. Moreover, it would not make any difference as to under which of the three accounts the amounts
were advanced, because in respect of every account, the contracted rate of interest is 16 1/2% and the learned judge was obviously in error in
holding that the contractual rate of 16 1/2% interest would not be attracted on the ground that the plaintiff had not shown the exact amount which
has been advanced under the cash credit scheme. The other reason given by the learned trial judge that defendant No.1''s financial position is
stringent is also without any basis. The learned judge has observed as under:
It appears that looking to the stringent financial position of defendant No.1 it appears that the said exhibit 40 was also passed by the defendant
under pressure and so the same cannot be relied upon.
This agreement exhibit 40 was executed on July 30, 1977, at the time of obtaining advance and at that time there was no question whatsoever
about the stringent financial position of defendant No. 1 or any pressure on defendant No.1. This exhibit 40 is also procedure for inspection before
the Registrar of Companies on September 5, 1977, as per endorsement on the said document. Exhibit 40 in paragraph 7 clearly stipulates
compound interest at the rate of 16 1/2%. Thus, the learned judge has clearly erred. The learned judge has observed that the plaintiff in order to
claim the contractual rate of interest ought to have shown the exact amount advanced to the defendants under each head, namely, cash credit-cum-
packing credit and overdraft limit. The overdraft limit was only Rs. 25,000 and no amount was due under that head. The letter of credit facility was
not availed of at all. Therefore, the only account that had remained was the cash credit-cum- packing credit facility and exhibit 63, the statement of
accounts, clearly shows the head of the account, i.e. account of the defendant in respect of packing credit account. Interest amounts have also
been shown separately and periodically. The accounts are properly maintained. Thus all the reasons given by the learned trail judge for not
awarding 16 1/2% rate of interest are erroneous and without any basis and it appears that reasons have been stretched to give an unduly low rate
of 6% interest only, as against the contractual rate of 16 1/2% interest. Proviso to section 34, Civil Procedure Code, inserted by amendment in
1976, provides that where the liability in relation to the sum so adjudged had arisen out of a 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; a commercial transaction is defined to be connected with
industry, trade or business of the party incurring the liability. Undoubtedly, this was a commercial transaction and, therefore, ordinarily, the rate of
interest shall be a contractual rate or such rate at which moneys shall be lent by nationalised banks in relation to commercial transactions, for
otherwise, it will amount to the court granting credit facility of somebody else''s money at a lower rate of interest. The bank would not have
advanced a commercial loan at a lesser rate of interest. Because the party has committed default in payment and the bank is required to file a suit
against such party such a defaulting party cannot have the benefit of lesser rate of interest. Therefore, ordinarily, in such transactions, the
contractual rate of interest should be the rule and departure a rare exception.
In such transactions by public financial institutions where money is advanced on security including personal guarantees, the granting of
instalments is ruled out because that would frustrate the very purpose of taking security and granting of lesser rate of interest is also ordinarily ruled
out.
In the result, the appeal is allowed and the judgment and decree of the trial court is modified and the direction in respect of interest is
substituted by 16 1/2% compound interest per annum instead of 6% and the direction for instalments is quashed and set aside. Rest of the decree
will stand modified as hereinabove. The appeal is accordingly allowed with costs.
Before parting with this matter, we must express our feeling of great distress over the fact that though the execution proceeding was filed in
1982, because the defendants then did not pay any instalment, there is no significant progress in the matter. It now appears that there are some
legal difficulties in effecting the recoveries by sale of goods lying in Kandla Free Trade Zone. However, that does not mean that other properties of
defendants Nos. 1, 2 and 3 and their persons cannot be simultaneously proceeded with. We are told that the plaintiff bank has prayed for the
execution not only against the properties of defendant No. 1 but also against the properties of defendants Nos.2 and 3 as well as against their
persons. The executing court should now see that the decree is executed in all