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TMI Blog2003 (5) TMI 537X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of interest awarded by the Arbitrator/Registrar. The Bank as well as the loanees challenged the above orders by filing Original Petitions. 3. Loans had been advanced by different co-operative banks for different purposes to its borrowers at different rates of interest. Certain banks advanced loans with interest at 12.5% and imposing a condition to recover 2% penal interest in the case of default in making repayments in time. Some co-operative banks granted loans with interest at different rates ranging from 14.5% to 21% and also imposing condition to recover penal interest ranging from 2 to 3 percent in the case of default in making repayments in the scheduled time. Further there was provision in the agreement to capitalisation of interest on periodical rests. When there was default, the banks filed suits/claims before the Arbitrator/Registrar and in all cases awards were passed with future interest from the date of claim at the contract rate including the penal interest also. The loanees challenged the award before the Co-operative Tribunal mainly challenging the rate of future interest awarded by the Registrar. In some of the cases the Co-operative Tribunal reduced the rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the special provision in Order 34, Rule 11 is applicable and not Section 34. This has been laid down in several decisions of this Court and also by the Karnataka High Court in Thulasi Bhai's case. 5. Veerappa's case was a mortgage suit instituted by the Canara Bank before a civil court for realisation of the amount on the basis of the equitable mortgage created by deposit of title deeds. Order 34 of CPC would apply only to mortgage suits before the civil courts. The disputes between the Co-operative Societies/Co-operative Banks and its debtors/loanees are to be adjudicated by the Arbitration Courts/Arbitrators/Registrars in accordance with the provisions of the Act and the Rules framed under the Act. The procedure for settling the disputes between the parties before the Registrar also had been specified by the statute and the Rules made thereunder. The application of certain provisions of the CPC also had been specifically mentioned in Section 98 of the Act. Section 98 of the Act says that the provisions of the CPC shall have application in- (a) Summoning and enforcing the attendance of any person and examining him on oath, (b) Requiring the discovery and produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The High Court again issued notification amending Order 34 of CPC and published in the Kerala Gazette No. 46 dt. 20.8.1990 and the above notification is still in force. The amended provisions of Order 34 do not provide a Rule similar to Order 34, Rule 11 CPC. The amended Order 34, though provides for the grant of future interest, does not specify the rate of interest regarding future interest. A single Judge of this Court in Div. Manager, LIC of India v. Bhagavathy Amma (1991 (2) KLT 522) held that in view of the amended Order 34 applicable to this State, the court has to pass a decree in a mortgage suit, fixing the interest payable from the date of suit in accordance with Section 34 CPC. In State Bank of India v. Yasangi Venkateswara Rao (AIR 1999 SC 896) the Supreme Court has observed that the mortgaging of the property is with a view to secure the loan and has no relation whatsoever with the quantum of interest to be charged. In Veerappa's case the Supreme Court had considered Order 34 Rule 11 CPC and held that the future interest allowable was only at 6%. So far as our State is concerned, the above decision of the Supreme Court in Veerappa 's case has no relevance a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arbitrator shall have power to direct any party to the dispute to pay the costs of the other party with interest in appropriate cases and the interest awarded on the amounts decreed shall not exceed the contract rate from the date of the suit to the date of realisation of the amount. 9. The above Rule says that the future interest shall not exceed the contract rate from the date of suit till the date of realisation of the amount. The law permits the Arbitrator/Registrar to allow interest up to the contract rate. The learned counsel appearing for the loanees submitted that the contract rate of interest did not include the penal interest and as such the award passed by the Arbitrator/Registrar allowing future interest adding penal interest was beyond the jurisdiction conferred under Rule 67(10)2. The Supreme Court in Central Bank of India v. Ravindra (2002 (1) KLT 743 (SC) = AIR 2001 SC 3095) while considering whether penal interest can be added to the principal amount by capitalisation held in para 55 of the judgment: 55. xxxx xxx xxx xxx Though interest can be capitalised on the analogy that the interest falls due on the acquired date and remaining unpaid, partakes the char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed by banks and in suits filed by creditors other than bankers, Section 34 is a general procedural provision and whether it would apply or not and if apply then to what extend would obviously depend of the fact situation of each case. Section 34 is a general provision for the grant of interest which can be followed by the Arbitrator/Registrar dealing on arbitration proceedings, as Rule 67(10)2 does not specify the rate of future interest. The proviso to Section 34 CPC permits the Court to grant the contract rate of interest towards future interest. There also the wording was that the future interest shall not exceed the contract rate of interest. Hence the Arbitrator/Registrar can adopt the principle in Section 34 CPC in the grant of future interest. The Supreme Court in the above cited decision in AIR 2001 SC 3095 (supra) had laid down certain guidelines in the grant of future interest. In para 55 of the judgment it was held: 55. xxxx xxx xxx xxx 6. Agricultural borrowings are to be treated on a pedestal different from others. Charging and capitalisation of interest on agricultural loans cannot be permitted in India except on annual or six monthly rests depending on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om its borrowers while advancing loans. There was much difference in the rate of interest charged by different banks on different loans. It was averred in O.P. 38447/01 that the petitioner, the Pampady Housing Co-operative Society was receiving loans from the Kerala State Co-operative Housing Federation at 14.5% interest and was advancing the above amount to the borrowers at 15.5% interest and the society was receiving only a very narrow margin of interest of 1%. In such cases if interest at 6% alone was allowed the very existence of the society would be in peril. Many of the co-operative banks cannot exit unless they are permitted to have the contract rate of interest from the date of suit till realisation. If 6% of interest is awarded in a uniform manner as decided by the Tribunal, the very existence of co-operative banks would be in peril. When the loans were granted for commercial or for business purpose, the contract rate of interest (excluding penal interest) can be awarded towards future interest. But so far as the agricultural loans are concerned the rate of interest need not always be the contract rate of interest and the Arbitrator/Registrar shall have the option to pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipal sum adjudged on the date of suit, if the component of interest appears to be disproportionate with the component of principal sum actually advanced, the Arbitrators/Registrars shall be at liberty to allow future interest at a rate lower than the contract rate. The rate of such future interest has to be fixed considering the facts and circumstances of each case. (6) In cases where the contract rate of interest appears to be exorbitant or unconscionable, the Arbitrators/Registrars shall be at liberty to allow interest at a rate below the contract rate and such future interest can be at the discretion of the Arbitrator/Registrar which has to be exercised fairly, judicially and for reasons and not in an arbitrary or fanciful manner. In view of the above principles, the awards passed in all the above cases by the Arbitrators/Registrars allowing future interest including the penal interest also at contract rate of interest are set aside. Likewise, all the impugned judgments passed by the Co-operative Tribunal reducing the interest at 6% from the date of suit and upholding the grant of contract rate of interest including the penal interest are set aside. This order setting asid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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