2018 (12) TMI 1858 - HC - Indian Laws

Seeking direction upon the bank to release collateral securities and issue a 'no due' certificate in favour of the petitioner without imposing any foreclosure/prepayment charges and/or penalties - HELD THAT - The petitioner having foreclosed the credit facilities enjoyed by the petitioner from the respondent no. 1 in October 2016, such foreclosure is governed by the circular dated May 7, 2014 issued by Reserve Bank of India. With effect from May 7, 2014 therefore, the respondent no. 1 is not entitled to charge any foreclosure charges/prepayment penalties on floating rate term loan sanctioned to individual borrower such as the petitioner. The foreclosure happening subsequent to the circular dated May 7, 2014, the demand of the respondent no. 1 for foreclosure charges/prepayment penalties, is contrary to such circular, and therefore is without any basis. By virtue of the interim order dated March 17, 2017, the respondent no. 1 deposited a sum of ₹ 13.35 lakhs with the respondent no. 1 as security for the prepayment charges and for issuance of the 'no due' certificate. The interim order dated March 17, 2017 put the respondent no. 1 upon notice that, should the decision of the respondent no. 1 to charge prepayment penalties found incorrect upon final hearing of the writ petition, interest as charged in respect of the credit card defaults, would be directed to be paid in respect of the deposit made in terms of such order until the refund thereof. Attention of the Court has not been drawn to any order of the Court modifying such order. The respondent no. 1 having been found not to be entitled to the prepayment charges and having received the sum of ₹ 13.35 lakhs in terms of the interim order dated March 17, 2017, the respondent no. 1 will proceed to refund the sum of ₹ 13.35 lakhs received from the petitioner, along with interest, calculated at the rate at which interest is calculated for credit card defaults, commencing from the date of receipt of the sum of ₹ 13.35 lakhs from the petitioner, till the date of refund thereof to the petitioner - Since the direction is for refund of money, the petitioner, amongst other reliefs, is at liberty to execute this order as a decree of the Court. Petition dismissed.

Summary

Issues Involved:
1. Entitlement to levy foreclosure charges by the bank.
2. Classification of the petitioner as an individual borrower under RBI guidelines.
3. Applicability of RBI circulars dated June 5, 2012, April 1, 2014, and May 7, 2014.
4. Refund of the deposit made by the petitioner as security for prepayment charges.

Issue-wise Detailed Analysis:

1. Entitlement to Levy Foreclosure Charges by the Bank:
The petitioner sought a direction for the bank to release collateral securities and issue a 'no due' certificate without imposing foreclosure/prepayment charges. The petitioner argued that as an individual borrower under RBI guidelines, the bank was not entitled to levy such charges. The bank contended that the petitioner could not be treated as an individual borrower as the credit facilities were obtained for business purposes and were granted in the name of the proprietorship firm. The court noted that the terms of the sanctioned credit facilities included pre-payment charges of 2% p.a. on the balance amount of the term loan for the residual period of pre-payment.

2. Classification of the Petitioner as an Individual Borrower Under RBI Guidelines:
The petitioner, a natural person carrying on business under the name Magnum Industries, argued that the RBI circular dated May 7, 2014, which prohibits foreclosure charges on floating rate term loans to individual borrowers, applied to them. The court observed that a sole proprietorship firm and the natural person owning it are the same legal entity. Therefore, the credit facility sanctioned to the sole proprietorship firm was effectively sanctioned to the natural person, making the petitioner an individual borrower under the RBI guidelines.

3. Applicability of RBI Circulars Dated June 5, 2012, April 1, 2014, and May 7, 2014:
The court examined the RBI circulars, noting that from May 7, 2014, banks were not permitted to charge foreclosure charges/prepayment penalties on floating rate term loans sanctioned to individual borrowers. The court rejected the bank's argument that the petitioner did not qualify as an individual borrower under these guidelines. The court held that the circular did not distinguish between loans obtained for personal or business purposes, and therefore, the petitioner's foreclosure of the credit facilities in October 2016 was governed by the circular dated May 7, 2014.

4. Refund of the Deposit Made by the Petitioner as Security for Prepayment Charges:
An interim order on March 17, 2017, required the petitioner to deposit ?13.35 lakhs as security for the prepayment charges. The court found that the bank's demand for foreclosure charges was contrary to the RBI circular and without basis. Consequently, the court directed the bank to refund the ?13.35 lakhs deposited by the petitioner, along with interest calculated at the rate applicable for credit card defaults from the date of receipt until the date of refund. The petitioner was granted liberty to execute this order as a decree of the court.

Conclusion:
The court disposed of the writ petition, directing the bank to refund the prepayment charges with interest and issue the 'no due' certificate without imposing any foreclosure charges. No order as to costs was made, and urgent certified copies of the order were to be made available upon compliance with requisite formalities.