1999 (9) TMI 971 - HC - Indian Laws

Summary

Issues Involved:
1. Recovery of loan amount and interest.
2. Interpretation and applicability of Clause 6 of the Form of Agreement dated 16th May, 1991.
3. Applicability of section 176 of the Indian Contract Act, 1872.
4. Award of interest u/s 34 of the Code of Civil Procedure.

Summary:

1. Recovery of Loan Amount and Interest:
The appellant instituted a suit for recovery of Rs. 1,42,395.00 against the respondents, based on a Medium Term Loan of Rs. 95,000/- granted for the purchase of a Maruti Omni Bus. The loan was secured by documents executed on 16th May, 1991, including a Guarantee Document and a Form of Agreement. The defendants initially made regular payments but later defaulted, leading to legal notices and subsequent litigation.

2. Interpretation and Applicability of Clause 6:
Clause 6 of the Form of Agreement allowed the Bank to sell and realize securities without notice to the defendants if the loan remained unpaid. The Trial Court decreed the suit jointly against both defendants, but the Single Judge in the First Appeal held that the Bank should have adjusted the installments from the Fixed Deposit Receipts (FDRs) monthly. The Single Judge's interpretation required the Bank to exercise discretion judiciously, not arbitrarily.

3. Applicability of Section 176 of the Indian Contract Act, 1872:
The appellant contended that section 176 vests absolute discretion in the Bank to retain the security and sue for the amount due or to adjust the security at its discretion. The Court agreed, stating that the Bank was not obliged to adjust installments monthly from the FDRs. The Court emphasized that section 176 allows the pawnee to either retain the goods as collateral security or sell them after giving reasonable notice. The Bank's discretion to adjust the security without notice was upheld, rejecting the respondents' contention that FDRs are not goods u/s 176.

4. Award of Interest u/s 34 of the Code of Civil Procedure:
The appellant argued that interest should be awarded on the principal sum adjudged, which includes the principal and interest compounded quarterly. The Court noted the divergence of views among various High Courts on this issue. The Supreme Court's decision in Bank of Baroda v. Jagannath Pigment & Chem. and others was cited, which upheld the grant of interest on the compounded principal. The Court held that the principal sum adjudged can include interest, depending on the contract between the parties. The award of future interest at 6% per annum was upheld as it was not a commercial transaction.

Conclusion:
The impugned judgment was set aside, and the Trial Court's judgment was restored with modifications to account for the adjustment of Rs. 1,20,340/-. The appeal was allowed, and the parties were directed to bear their own costs.