Petitioners had borrowed a loan of rupees one crore from the respondent-Corporation for the purpose of developing touring unit/Hotel in Karkala Town. In this connection, petitioners have entered into a Deed of Hypothecation dated 20-9-2003 providing for the terms and conditions of repayment of the loan. Petitioners made an application for foreclosure/prepayment of the loan account. The respondents sent a communication to the petitioners as per Annexure-C on 15-7-2005 stating that the foreclosure of the loan account is permissible upon repayment of equivalent two quarterly principle installments with the prior approval in writing of the Corporation and subject to the terms and conditions as may be stipulated by the Corporation in that behalf. It was further informed that payment of 2% of the premium on the advanced payment/foreclosure account is necessary. Petitioners have called in question the said communication at Annexure-C in this writ petition. Petitioners have also sought for a declaration that the decision to levy 2% premium on the advanced payment/foreclosure of the account is arbitrary and illegal and without jurisdiction and to quash the letter dated 30-5-2000 in No. KSFC BO 2005-06/638 as per Annexure-A. Petitioners have further sought for closure of the account without levy of any premium on the advanced payment/foreclosure of the account.

2. I have heard the learned Counsel for the parties.

3. Sri K.M. Nataraj, learned Counsel appearing for the petitioners would contend that the decision of the respondents to levy 2% penalty/premium on the advanced payment/foreclosure of the account is arbitrary and without jurisdiction. It is further contended that the respondents are not entitled to levy the penalty/premium for foreclosure of the account in the absence of any agreement to that effect and that the decision of the respondents to levy the premium/penalty is illegal and unauthorised.

4. On the other hand, learned Counsel appearing for the respondents Corporation submits that the respondents lend money to the borrowers by availing finance from Small Industrial Development Bank of India (SIDBI) and also from other financial institutions at high rate of interest. The loans sanctioned bear a fixed rate of interest and being a term loan are contracted to be repaid over a period of time. The interest rates charged to the borrower is fixed irrespective of the fact that no increase in the interest rates in general banking sector. In a failing interest regime, in the event of foreclosure of the loan, the same amount can be further lent on a lower rate of interest., In order to protect against this risk a foreclosure premium is charged on the premature closure of the loan to take care of the loss. He draws my attention to Clause 14 of the Hypothecation Deed dated 20-9-2003 wherein liberty was not reserved to the petitioners for repayment of the outstanding principal sum in full or in part before the due date or dates prescribed for payment of the dues except with the prior approval in writing of the Corporation and subject to such terms and conditions as may be stipulated by the Corporation in this behalf on its own discretion. He has also pointed out from the circular Annexure-R2 wherein the Corporation has increased the prepayment/foreclosure premium from 1 % to 2% on the outstanding loan balance amount. He has drawn my attention to Section 37 of the Indian Contract Act, 1872 in this regard as also Section 25(l)(h) and Section 27 of the State Financial Corporations Act, 1951.

5. I have carefully considered the arguments of the learned Counsel made at the Bar and perused the materials placed on record.

6. The admitted facts are that the petitioners have availed financial assistance of rupees once crore from the respondents for developing the Tourism Development/Hotel at Karkala. A deed of Hypothecation was entered into between the petitioners and the respondents as per Annexure-R1 on 20-9-2003 Containing the• terms and condi