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TMI Blog1973 (8) TMI 168X X X X Extracts X X X X X X X X Extracts X X X X ..... to 13-8-1964 the partners of the firm were late Padarthy Ratnam (who is the son of the 4th defendant and the husband of the 5th defendant) and defendants 2, 3, 6 and 7. During the lifetime of Padarthy Ratnam, the said Ratnam and the second defendant were managing the business and the firm. In the year 1961 the firm applied to the plaintiff-Bank for cash credit facilities and the Bank granted the firm cash credit facilities known as 'Factory type and Lock and Key Type' loans to the tune of ₹ 4,00,000/-. Subsequently the cash credit limit was raised and by the year 1963 it was enhanced to ₹ 6,00,000/- under the Factory Type loan and the ₹ 8.5 lakhs under the Lock and key type loan. Those facilities were given to the firm against pledge of tobacco stored in the firm's godowns and grading halls and against Agmarked tobacco stored in the licensed godowns and also against warehouse receipts covering stocks of tobacco issued by approved shipping agents. In view of the large cash credit facilities and on account of fluctuations in price and the possible deterioration in the quality of the pledged tobacco the plaintiff demanded and the firm furnished additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows:-- 5. The original rate of interest stipulated between the plaintiff and the firm was only 7 1/4 per cent. per annum. The account of the plaintiff as annexed to the plaint showed that the plaintiff claimed compound interest at 8 1/4 per cent. per annum with monthly rests. The defendant firm or any of its partners never agreed to pay compound interest. The plaintiff Bank wrote a letter to the defendant firm on 24-3-1965 stating that the rate of interest was revised and increased by 1 per cent. and asked the defendant-firm to agree for the revised rate of interest. But the defendant-firm did not agree. Even otherwise the rate of interest claimed by the plaintiff was usurious and liable to be reduced. The plaintiff had debited against the firm's accounts the salaries of watchman and some trunk call bills for which the defendant-firm never agreed. It was also alleged that the firm had sustained heavy loss on, account of the conduct of the plaintiff Bank. When the firm was anxious to dispose of the tobacco pledged with the plaintiff as early as possible and also to complete an order given to it from Egypt, the plaintiff did not co-operate with the firm. The Bank authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their liability on account of the agreements executed bv the second defendant on 29-3-1965. The learned District Judge on a consideration of the entire evidence on record held on issues Nos. 1, 2 and 3 that the account filed by the plaintiff Bank was correct, that the plaintiff was entitled to recover the said amount, that the interest claimed by the plaintiff was not contrary to the terms' of the contract and that the interest claimed was not usurious. On issue No. 4 the learned Judge held that the two agreements, Exs. A-8 and A-9 D/- 29-3-1965 were executed by the second defendant not in his individual capacity but as a managing partner of the firm and on behalf of the firm and that there was no substance in the contention of defendants 1 and 3 to 7 that on account of the execution of the agreement under Exs. A-8 and A-9 by the 2nd defendant their liability under the account with the plaintiff was wiped out. On issue No. 5 the learned Judge held that the defendants were liable to pay the watchman's salary and trunk call charges debited against them. It was also held that on account of the defendants deliberate default in payment of the amounts due to the plaintiff the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, Rule 11, Civil P. C. interest can be awarded at the contract rate till the period of redemption expires. The provisions of Section 34, Civil P. C. are not applicable to cases of mortgages, and the award of interest is governed by the provision of Order 34, Rule 11, Civil P. C. This position is well settled and Sri P. L. N. Sarma, has frankly submitted that this legal position cannot be controverted. 13. In Jagannath Prasad Singh Chowdary v. Surajmul Jalal, (1927) 52 Mad LJ 373 = (AIR 1927 PC I). Their Lord-slips of the Privy Council held that-- Order 34 of the Code of Civil Procedure determines' the question of the rate of interest, and whether it be simple or compound and may for this particular case of mortgages differ from the general provision of Section 34 of the Code, but if so, the particular avoids the general. Until the period for redemption fixed by the Court has expired interest has to be paid at the rate and with the rests specified in the contract or mortgage. Actually the plaintiff has claimed in the plaint subsequent interest at a rate lower than the contract rate. Therefore the appellants can have no grievance against the decree of the lower Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The watchman is appointed to safeguard the interests of the Bank. The Agent supervises the work of the godown watchmen. The salary of the Agent is not debited in the 1st defendant's account as supervision of the godown watchman's work is a part of the many duties of the Agent. Again he stated that: The factory type account is an open account where no restrictions are imposed on the party's access to the goods except that the goods are under the watch of the godown watchman appointed by the Bank at the cost of the party. The party is at liberty to sell the goods to whomsoever he likes and at whatever price he chooses. 17. The evidence of P. W. 1 shows that watchman was appointed ever since the transactions began between the firm and the bank to keep a watch over the goods pledged, and the charges were being debited to the account of the firm. [After considering the defendants' evidence his- Lordship proceeded]. 18-21. ***** 22. The oral evidence of the plaintiff and the defendants clearly establishes that ever since the transactions began between the plaintiff-bank and the defendants-firm, monthly statements were being sent by the bank to the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; system to the contrary the advance is secured by the pledge of goods in the godowns through the simple and effective expedient of putting a lock or seal of the creditor bank on the godowns, the key or kees thereof being retained, by that bank. But, naturally, this latter system has the profound disadvantages that it immobilises trade or credit. It is no longer possible for the borrower to deal with the goods, even for a restricted purpose, unless he takes possession of the key from the creditor bank and thus operates upon his stock. Again the learned Judges observed: We would here emphasise that, in such a matter the form of the Judicial relationship is very important, and that it cannot be divorced from the substance, merely because in mercantile practice, there is a certain flexibility and freedom for the borrower under the 'open credit' system. On the contrary, the system seems to have been devised for this very reason, in effect, it secures for the borrowers a certain freedom to deal with the goods, provided a stipulated margin above the value of the advance is maintained though the formal character of the 'pledge' is throughout preserved. Under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent. over S. B. I. Advance Rate minimum 7 1/4 per cent per annum on drawings upto 4 lakhs and at I per cent. over S. B. I. advance Rate Minimum 7 1/2 per cent. per annum on drawings over ₹ 4 lakhs shall be calculated respectively on the daily balance of such account or accounts as aforesaid and shall be charged to such account or accounts as the case may be on the last working day of each month. The language of Clause (7) in the agreements Exs. A-8 and A-9 is the same. This clause provides that interest should be calculated on the daily balance of the account and should be charged to such account on the last working day of each month. Exs. A-15 and A-16 are cash credit Account of Factory-type of the 1st defendant-Company. These accounts show that the defendant-firm was availing the cash credit facility from time to time and making certain repayments of the loans and that the daily balance was varying. Clause (7) of the agreements provides for calculating interest on the daily balance of the account and charging the same to the account on the last working day of each month. The expression, shall be charged to such account or accounts implies that interest will be added ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... themselves accepted the accounts sent by the plaintiff-bank in which interest was being charged at monthly rests. 29. The 2nd defendant examined as D. W. 1 admitted that the bank was sending a copy of the account every month. Ex. A-15 contains copies of the accounts sent by the bank to the defendants-firm for the period 18-2-1961 to 31-12-1963. Ex. A-16 is a true copy of the account for the period 13-8-1964 to 5-12-1966. D. W. 1 further admitted that whenever they receive such accounts, they varify the entries with reference to their accounts and that the statement sent by the bank showed that interest was calculated at compound rate of interest and that it was being so charged from the year 1963. Admittedly the firm or its managing partners (defendants 2 and 3) did not at any time object in writing to the charging of interest at compound rate. D. W. 2 no doubt stated that he orally protested before the bank agent, but it is not possible to accept this statement. There is no other evidence to support this version. This conduct of the 1st defendant-firm and its partners shows that they not only accepted the rate of interest charged but also the method of accounting adopted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: Where the defendant is a man of business and appears upon the evidence to be well conversant with dealings of banks and bank rates of interest, and there is clear evidence that the defendant used to intelligently examine the entries in his pass book and to dispute or call for explanations as regards entries which to him seemed open to exception, x x x x It is quite true that the rates of interest charged were not stated in the entries but the entries would at once show that compound interest at monthly rests was being charged and debited--a fact which goes a long way to 'support the plaintiffs' case as to the agreement and completely demolishes the case of the defendant on that point. From circumstances such as these it would not be unreasonable to contend that means of knowledge was equivalent to knowledge or reasonable grounds of belief so as to fix the defendant with adoption or ratification of the rate of interest that was being charged. And from continued and persistent acquiescence of this character, the existence of an agreement may be presumed. 35. In Hulas Kunwar v. Allahabad Bank, a notice communicating the decision of the Bank to raise the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand it is the contention of Sri K. Ramgopal, the learned Counsel for the plaintiff bank that the interest charged came to about 8.84 per cent per annum with monthly rests at 8 1/2 per annum. 40. The question whether interest is usurious or not has to be determined with reference to the provisions of Usurious Loan* Act. Section 3 of the said Act as amended by the Madras Amending Act VIII of 1937 which it is admitted is in force in the State of Andhra Pradesh, reads as follows:-- 3 (1) Notwithstanding anything in the Usury Laws Repeal Act, 1855 where in any suit to which this Act applies, wheher beard ex parte or otherwise, the court has reason to believe that the transaction was as between the parties thereto substantially unfair, the Court shall exercise one or more of the following powers, namely (i) reopen the transaction, take an account between the parties, and relieve the debtor of all liability in respect of any excessive interest; (ii) notwithstanding any agreement, purporting to close previous dealings and to create a new obligation, reopen any accounts already taken between them and relieve the debtor of all liability in respect of any excessive interest, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -1970 of this court in Godugula Lakshmi Narasimha Murty v. Muthuku-malli Venkata Subba Rao, (L. P. A. No. 69/ 1968 (Andh Pra)). After considering the relevant case law on the point, the position was summarised as follows :-- (1) The Court can reopen the transaction and give appropriate relief in the matter of interest when the transaction is substantially unfair; (2) If the interest is excessive, the court shall presume that the transaction is substantially unfair, but this is a rebuttable presumption; (3) No hard and fast rule can be laid down as to what is a reasonable or excessive rate without reference to the several circumstances enumerated in Clauses (a), (b) and (c) of Sub-section (2) of Section 3 of the Act. (4) In determining whether the rate is reasonable or not, the court has to take into consideration the following circumstances. (a) The value of the security offered; (b) The financial condition of the debtor including the result of any prior transaction; (c) The known or probable risks in getting repayment; (d) If compound interest was provided for the frequency of the period of calculation of the interest; and (e) The advantage which the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest charged is excessive and unconscionable. The burden of establishing that the interest is excessive is on the debtor who sets up such a plea. Further, the mere fact that the interest claimed had accumulated to a considerable amount over a long period of years due to the default is payment of the loans by the debtor, could not be a ground for holding the transaction to be substantially unfair or unconscionable or that the interest charged is excessive and these propositions are well-settled. 44. In Lala Balla Mal v. Ahad Shah, (AIR 1918 PC 249=35 Mad LJ 614). Their Lordships of the Privy Council held: In money-lending transactions the mere fact that the sum claimed exceeds enormously the amount originally advanced is no ground for holding the transaction unconscionable. It must also appear that there is something unconscionable, either in the original dealings, or in the subsequent stages of the transaction. By taking short terms loans and insisting on capitalising the interest immediately It falls due a money-tender may pile up compound interest at an oppressive and unconscionable rate. But there is nothing inherently wrong or oppressive in his securing interest upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid down that if the interest is excessive, the Court shall presume that the transaction may be rebutted by proof of special circumstances justifying the late of interest. Thus, before the explanation could be invoked it should be established that the interest is excessive. It is only then that it may be presumed that the transaction was an unfair one. 48. In Gopala Menon v. Sreenivasa, , Rajamannar, C. J. and Ganapatia Pillai, J. observed: It cannot be laid down that any interest in excess of 12 per cent. per annum simple is excessive and that therefore the court cannot grant a decree for more than at that rate. It has also never been held that compound interest per se is usurious. 49. This decision was upheld by the Supreme Court in . referred to earlier. 50. In Ramkrishna v. Heramba Chandra, (AIR 1930 Cal 207), the learned Judges observed: that interest at 12 per cent. per annum with yearly rests could not be considered as excessive when the rate of interest prevailing at the time was not lower than that provided in the mortgage bond or there were no circumstances on which it could be held that the transaction as between the parties to it was substantially unf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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