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Kerala High Court · body

1988 DIGILAW 413 (KER)

Mathew v. Kerala Financial Corporation

1988-08-30

BALAKRISHNAN, PARIPOORNAN

body1988
Judgment :- 1. The counter-petitioner in S.F.C. Act Petition No.144 of 1981, District Court, Ernakulam, has filed this appeal against the order of the lower court dated 10-10-1983. The petitioner in the court below is the respondent herein. The petitioner-Kerala Financial Corporation - initiated action under Ss.29, 30 and 31 of the State Financial Corporations Act, 1951 and sought recovery of the principal and interest due from the respondent (Appellant herein) on account of a loan of Rs.2,53,000/- advanced to the respondent by the Corporation by sale of machineries etc., mentioned in the schedule to the petition, which - were hypothecated to the Corporation by way of security for repayment of the amount due from him. The Corporation sanctioned a loan of Rs.2,60,000/-. The respondent has actually advanced an amount of Rs.2,42,697.94. The loan should be repaid in seventeen half yearly instalments with 51/2% interest per annum. The petitioner-Corporation stated that the interest was liable to be varied after notice and it was so done from 14-10-1977. The interest was enhanced to 12% per annum. It was again reduced to 11% from 1-1-1980 and again enhanced to 121/2% from 15-10-1980. The respondent (appellant herein) defaulted payment of the instalment due on 10-3-1978 and thereafter. So, the petition was filed by the Corporation seeking recovery of a sum of Rs.3,89,955.66 as on 1-1-1981 with 12.5% interest per annum. The respondent filed a counter-statement disputing the correctness of the amount claimed in the petition. The main contention urged was that he took the loan from the Corporation only on the basis of the representation made by the Corporation that interest will be realised from him only at the rate of 51/2% per annum, that the Corporation is estopped from claiming any higher rate of interest as done at present and that the real amount due on proper calculation of interest will be as specified in the statement filed along with the counter. 2. The main controversy between the parties, that was agitated in the lower court, was regarding the exact rate of interest that is liable to be paid by the respondent (appellant herein) to the Corporation. The Corporation mainly relied on Clause.7 and 29 of Ext.Al hypothecation bond, executed by the respondent in favour of the Corporation on 30-3-1976, which permits the Corporation to charge higher rate of interest after notice. The Corporation mainly relied on Clause.7 and 29 of Ext.Al hypothecation bond, executed by the respondent in favour of the Corporation on 30-3-1976, which permits the Corporation to charge higher rate of interest after notice. The respondent in the petition (appellant herein) relied on the particular scheme under which the loan was sanctioned as specified in Ext.Al itself, Ext.B3, the agreement between the Corporation and the Government regarding the subsidy receivable by the Corporation from the Government for loss of interest suffered by it by advancing loans at rates of interest lower than the normal rate to certain categories of loans. Exts.B4 and B5 publications of the Corporation and Exts.B7, B8 and B9 and contended that the Corporation is incompetent to levy enhanced rate of interest in this case. 3. The court below adverted to Exts. A1, B1, B2 and B3 as also Ext.B7 and held, that in so far as Ext.A1 specifically provides for levying higher rate of interest, the Corporation is not estopped or otherwise incompetent to realise higher rate of interest and upheld the plea made by the Corporation. The respondent in the court below has come up in appeal. 4. We heard counsel for the appellant, Mr.Chacko George, as also counsel for the respondent. The sole question argued before us was regarding the exact rate of interest liable to be paid by the appellant (respondent in the court below) to the Corporation. According to the Corporation, though Ext.Al provided for levy of 51/2% interest per annum for the loan advanced, the Corporation was competent to enhance the rate of interest in view of Clause.7 and 29 of Ext.Al. According to the appellant, the Corporation cannot charge a higher rate of interest in view of the nature of contract between the parties and Exts.B3, B4, B5, B8 and B9. 5. We are primarily concerned with the relevant clauses in Ext. Al, agreement entered into between the appellant and the Financial Corporation. Ext.Al states that it is an article of agreement for loan under the "Technocrats Assistance Scheme" against the pledge of movable machinery. It further states in the preamble that the Corporation has agreed to grant a loan of Rs.2,53,000/- to the appellant under the Technocrats Assistance Scheme". Clause.7and 29 of Ext.Al dated 30-3-1976 may be extracted in full, in order to understand the jural relationship between the parties: 7. It further states in the preamble that the Corporation has agreed to grant a loan of Rs.2,53,000/- to the appellant under the Technocrats Assistance Scheme". Clause.7and 29 of Ext.Al dated 30-3-1976 may be extracted in full, in order to understand the jural relationship between the parties: 7. The Borrower shall also pay interest at the rate of 51/2 % (Five and a half percent) per annum rising and falling therewith subject to enhancement as hereinafter provided calculated respectively on the daily balance of the amount due on the first day of January and the first day of July every year, the first of such payment of interest being made on the first day of July 1976 and shall pay compound interest at the rate aforesaid in default of payment of any instalment of simple interest on the date fixed for payment thereof. xxxxxx xxxxxx 29. That the Corporation shall at anytime be entitled to give notice to the Borrower of its intention to charge and may thereafter charge interest at such higher rate than the rate hereinbefore mentioned as the Corporation may specify." At the time when Ext. A1 agreement was entered into between the parties, the Corporation has entered into an agreement with the Government dated 25-4-1973 (Ext.B3). It states that the Corporation is advancing loans to Small Scale Industrial Units in Kerala at concessional rates of interest on the undertaking of the Government to pay interest subsidy to the Corporation on such loans. It further states that interest shall be charged from the Small Scale Industrial Units only at the rates allowed for similar loans by the Government under the rules for the grant of loans to Small Scale Industries. Clause.5 of Ext.B3 is important It permits either party to terminate the agreement after notice to the other, but such termination will not affect the rights and liabilities of the parties in respect of interest subsidy on loans already sanctioned by the Corporation whether disbursed in full or only in part before the date of termination. Clause.5 of Ext.B3 is important It permits either party to terminate the agreement after notice to the other, but such termination will not affect the rights and liabilities of the parties in respect of interest subsidy on loans already sanctioned by the Corporation whether disbursed in full or only in part before the date of termination. Clause.5 of Ext.B3 is to the following effect: "S. After 31-3-1974 either party to this agreement shall have the right to terminate the agreement after giving three months notice in writing to the other provided that such termination shall not affect the rights and liabilities of the parties in respect of interest subsidy payable thereafter also by the Government on loans already sanctioned by the Corporation whether disbursed in full or only in part before the date of termination". Ext.B4 is the book-let issued by the Kerala Financial Corporation regarding its functioning. At page 5 of Ext.B4, the amount of loan that an industrial concern can obtain from the Corporation is stated. In Clause.3, it is further stated that the Corporation has entered into an agreement with the Government of Kerala for distribution of loans to Small Scale Industrial Units upto Rs.3,00,000/- on subsidised rate of interest at 51/2% per annum. It further states, that in the case of Small Scale Industries which are eligible for government subsidy the effective rate of interest will be only 51/2%. No doubt, the Corporation has the right to vary the rate of interest from time to time Ext.B5 is issued by the Kerala Financial Corporation entitled the "Technocrats Assistance Scheme Rules" and Clause.6 states as follows: "6. Rate of interest -- The rates of interest prescribed by the Corporation from time to time will apply. In the case of industries eligible for Government subsidy, the effective rate of interest will only be the subsidised rate." Clause 12 of Ext.B5 reads as follows: "12. Any subsidy received from Government will be adjusted against the loan." It is true that by Ext.B7 communication dated 13-7-1977, Ext. B8 resolution of the board dated 15-7-1977 and by Ext.B9 communication dated 29-9-1977, the Corporation issued notice to the Government terminating the interest subsidy agreement executed between it and the Government of Kerala, evidenced by Ext.B3 dated 25-4-1973. Any subsidy received from Government will be adjusted against the loan." It is true that by Ext.B7 communication dated 13-7-1977, Ext. B8 resolution of the board dated 15-7-1977 and by Ext.B9 communication dated 29-9-1977, the Corporation issued notice to the Government terminating the interest subsidy agreement executed between it and the Government of Kerala, evidenced by Ext.B3 dated 25-4-1973. But, in Exts.B7 and B-9 notices, it has been made clear that the termination will not affect the rights and liabilities of the parties in respect of interest subsidy payable thereafter also by the Government on loans already sanctioned by the corporation whether disbursed in full or only in part before the date of termination. It is in pursuance to Exts.B7 and B9, the Corporation sent a circular dated 4-10-1977 (Ext.B10) to the appellant informing that the enhanced rate of interest would be payable on the amounts advanced to him as per Ext.Al. 6. It is evident from Ext.Al that the loan was sanctioned under the "Technocrats Assistance Scheme". As per Ext.B5, which contains the rules regarding the Technocrats Assistance Scheme, the effective rate of interest payable by the borrower will be the subsidised rate. Ext.B4 states that the subsidised rate of interest will be only 51/2% per annum. The court below itself has accepted the plea of the appellant that it took the loan only on the basis of Exts.B4 and B5 and that Ext.Al agreement was entered into bearing in mind Exts.B4 and B5. At the time when the parties entered into Ext. A1 agreement, they should have obviously in mind Exts.B4 and B5. Ext. A1 itself specifies that the loan is under the "Technocrats Assistance Scheme". Ext.B3 dated 24-4-1973, which was in force at the time of Ext. A1 (Contract entered into between the Corporation and the Government) also envisaged that the advance of loan by the Corporation to the Small Scale Industrial Units was at the rate prescribed by the Government. Indeed, Ext.B4 refers to Ext.B3 agreement. Even though Ext.B3 reserves a right to either party to terminate the agreement after giving three months notice, it is specifically stated in Clause.5 thereof, that it will not affect the rights and liabilities of the parties in respect of interest subsidy payable thereafter also by the Government on loans already sanctioned by the Corporation whether disbursed in full or only in part before the date of termination. So, even if it was open to the Corporation to terminate Ext.B3 agreement, it will preserve its right to get interest subsidy on loans already advanced whether disbursed in full or only in part. The Corporation did terminate the agreement, as evidenced by Exts.B7 and B9. It was only in accord with Clause.5 of Ext.B3. It is in the light of Exts.B4, B5, B3, B7 and B9, we have to understand the scope of Clause.7 and 29 of Ext-A1 and the consequential circular Ext. B10 dated 4-10-1977 issued by the Corporation to the appellant. Though Ext.A1 does not in terms refer to Exts.B4 and B5 we are of the view that the parties to Ext. A1 agreement entered into the bargain only on the basis of Exts.B4 and B5. However wide the language of Clause.7 and 29 of Ext.A1 may be, they should be read along with Clause.6 of Ext.B5 and the relevant clauses regarding the rate of interest appearing at pages 5 and 6 of Ext.B4 regarding the loans to Small Scale Industrial Units. It is also evident that Ext.B4 at page 5 Clause.3 refers to the agreement the Corporation was entered into between the Government. The said agreement is Ext.B3. Clause.5 of Ext.B3 reserves the right of the Corporation to get subsidy once the loan was advanced either in full or in part, eventhough either party to Ext.B3 can terminate the agreement. We should, for the purpose of understanding the scope and nature of Clause.7 and 29 of Ext.Al, bear in mind the crucial clause in Ext.BS, (Clause 6 at pages 5 and 6 of Ext.B4) and Clause.5 in Ext.B3. Reading these clauses together, we have absolutely no doubt in our mind that the Financial Corporation was incompetent to invoke Clause.7 and 29 of Ext.A1 and in charging a higher rate of interest on the appellant, since the loan was advanced to the appellant before Exts.B7 and B9. In this view, Ext.B10 circular sent by the Corporation to the appellant intimating that with effect from 4-10-1977 the appellant should pay higher rate of interest, is ineffective and unauthorised. The court below was swayed by Clause.7 and 29 of Ext.Al. No doubt the court below referred to Exts.B4 and B5 and casually referred to Ext.B7. But, the court below ignored and failed to give effect to the crucial clauses in Exts.B4 and B5, Ext. B3, Ext.B7 and B9. The court below was swayed by Clause.7 and 29 of Ext.Al. No doubt the court below referred to Exts.B4 and B5 and casually referred to Ext.B7. But, the court below ignored and failed to give effect to the crucial clauses in Exts.B4 and B5, Ext. B3, Ext.B7 and B9. The relevant clauses which we have referred to in Exts.B4, B5, B3, B7 and B9 really explain or clarify the effect of Clause.7 and 29 of Ext.Al. The court below was in error in giving effect to Clause.7 and 29 of Ext.Al, without importing the relevant and material clauses in Exts.B4 and B5 as part of Ext. A1 and in failing to give effect to the relevant terms in Exts.B3, B7 and B9. 7. For these reasons, we set aside the order passed by the court below dated 10th October, 1983 in S.F.C. Act Petition No. 144 of 1981. We hold that the petitioner in S.F.C. Act Petition No.144 of 1981 was not authorised to charge interest at rates higher than 51/2% per annum in the instant transaction. 8. This appeal is allowed. The matter is remitted to the court below to recompute the amount due to the Corporation, in the light of this judgment and take further steps in the petition. 9. The matter is posted in the lower court, for appearance of parties on 19-9-1988.