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BOMBAY HIGH COURT (PANAJI BENCH (GOA))
R.M.S. Khandeparkar, V.K. Sabharwal, JJ.
STATE BANK OF INDIA - APPELLANT
v.
NEELA ASHOK NAIK AND ANOTHER - RESPONDENTS
Letters Patent Appeal No.15 of 1997,
Decided on: September 10, 1999
CONTRACT - SECTION 176 - INTEREST - SECTION 34 - BANKING - PLEDGE - APPROPRIATION OF SECURITY - INTEREST ON PRINCIPAL SUM ADJUDGED - INTERPRETATION OF CLAUSE 6 OF FORM OF AGREEMENT - DISCRETION OF PAWNEE TO SELL PLEDGED GOODS - APPLICABILITY OF SECTION 176 TO FIXED DEPOSIT RECEIPTS - LEGAL OBLIGATION TO ADJUST INSTALLMENTS FROM FDRS - EFFECT OF REQUEST BY PAWNOR TO ADJUST AMOUNT DUE FROM FDRS - AWARD OF INTEREST UNDER SECTION 34 - PRINCIPAL SUM ADJUDGED - INCLUSION OF INTEREST IN PRINCIPAL SUM - REVERSAL OF FULL BENCH DECISION - REFERENCE TO CONSTITUTION BENCH - PRONOUNCEMENT OF APEX COURT IN JAGANNATH PIGMENT'S CASE - CONTRACTUAL RATE OF INTEREST WITH QUARTERLY RESTS - AWARD OF FUTURE INTEREST AT 6% PER ANNUM - EVIDENCE ON RECORD - MODIFICATION OF TRIAL COURT DECREE - ADJUSTMENT OF PAYMENTS MADE BY RESPONDENTS AFTER DECREE.
Fact of the Case:
The appellant-Bank had instituted a suit for recovery of Rs. 1,42,395.00 against the respondents. The defendants executed certain documents including Guarantee Document and Form of Agreement furnishing security. The defendants agreed to repay the loan in installments with interest at the rate of 18.5% per annum compounded quarterly. The Trial Court decreed the suit jointly against both the defendants in the sum of Rs. 1,42,395 with interest at the rate of 19.75% per annum compounded quarterly from the date of the suit till date of final payment. In First Appeal, the total liability of the defendants was quantified at Rs. 24,768. The appellant-Bank challenged the impugned judgment contending that Section 176 of the Contract Act vests absolute discretion in the Bank to retain the security and sue for the amount due or to adjust the security at the point of time at its discretion and sue the debtor for the balance amount, and that the interest awarded under section 34 of the Code of Civil Procedure on the principal sum adjudged can be inclusive of the principal sum advanced and interest added thereto which as per the agreement between the parties may become principal sum.
Finding of the Court:
The Court held that Section 176 of the Contract Act vests absolute discretion in the Bank to retain the security and sue for the amount due or to adjust the security at the point of time at its discretion and sue the debtor for the balance amount. The Court further held that the interest awarded under section 34 of the Code of Civil Procedure on the principal sum adjudged can be inclusive of the principal sum advanced and interest added thereto which as per the agreement between the parties may become principal sum.
Issues: 1. Whether Section 176 of the Contract Act applies to fixed deposit receipts? 2. Whether the Bank is obliged to adjust the installments immediately on amount becoming due from the FDRs? 3. Whether the Bank is entitled to interest under section 34 on the principal sum adjudged or on the principal sum plus interest added thereto?
Ratio Decidendi: 1. Section 176 of the Contract Act applies to fixed deposit receipts. 2. The Bank is not obliged to adjust the installments immediately on amount becoming due from the FDRs. 3. The Bank is entitled to interest under section 34 on the principal sum adjudged, which can include interest as well depending upon the contract between the parties.
Final Decision: The Court allowed the appeal, set aside the impugned judgment, and restored the judgment of the Trial Court. However, the respondent was entitled to the benefit of the adjustment of Rs. 1,20,340 and to that extent the judgment and decree of the Trial Court was modified.
Y. K. SABHARWAL, CJ. - The appellant had instituted a suit for recovery of Rs. 1,42,395.00 against the respondents. The facts in brief as pleaded in the plaint are as follows:
2. The plaintiffs at the request of defendant No.1 granted to her loan facility in the form of Medium Term Loan for Rs. 95,000 for purchase of Maruti Omni Bus. Defendant No.2 stood as guarantor for the said loan amount. In order to secure the repayment of the loan, the defendants executed certain documents dated 16th May, 1991 including Guarantee Document executed by defendant No.2 for a sum of Rs. 95,000 and Form of Agreement furnishing security executed by defendants Nos. 1 and 2. The defendants agreed to repay the loan in installments with interest at the rate of 18.5% per annum compounded quarterly. Initially defendant No.1 was regular in payment of installments, but later she committed default, whereupon legal notices were sent to the defendants.
3. Defendants Nos. 1 and 2 who are respondents Nos. 1 and 2 in the present appeal are wife and husband respectively. One of the pleas taken in defence is that on 10th June, 1994, the defendants had requested the plaintiff-Bank to adjust the amount due to the Bank from the fixed Deposit Receipts which were lying with the Bank as security. According to the defendants the Bank should have encashed the Fixed Deposit Receipts for adjustment of the dues on default of payment of installments. The claim of interest is also disputed.
4. The rate of interest stipulated to be paid is as per document (Exh. A) in this appeal. There is no dispute about the execution or validity of this document. According to it, the interest on the advance is chargeable at the rate of 1% above the State Bank of India Advance Rate at minimum 17.5% per annum with quarterly rests and enhanced rate of 2% with quarterly rests in terms stated in para 7 of this document.
5. To appreciate the controversy raised in this appeal it would be useful to reproduce Clause 6 of the Form of agreement and 16th May, 1991 (Exh. B):
"(6) In the event of any money hereby secured remaining unpaid after becoming payable or the value of the said securities/shares at any time being insufficient in your opinion I/we authorise you through your agents and nominees without notice to me/us to sell and realise the said securities/shares or any part thereof at such times and prices and generally in such manner as you in your absolute discretion shall think fit without being liable for any loss I/we undertaking to accept accounts of sales as conclusive evidence of the matters therein". The schedule of this Document mentions the Fixed Receipts deposited with the Bank. Once again there is no dispute about the execution and validity of this document, but the dispute is regarding the interpretation of Clause 6, object thereof and the applicability or otherwise of Section 176 of the Indian Contract Act, 1872."
6. The Trial Court, by judgment and decree dated 27th December, 1995, decreed the suit jointly against both the defendants in the sum of Rs. 1,42,395 with interest at the rate of 19.75% per annum compounded quarterly from 21st December, 1993 i.e., date of the suit, till date of final payment with costs, etc.
7. In First Appeal filed by the defendants, their total liability quantified by learned single Judge till date of the impuguned judgment is Rs. 24,768. From this amount Rs. 15,000 deposited in the Court by them was directed to be deducted and the costs granted by the Trial Court and of the appeal was quantified at Rs. 5,000, thus working out a sum of Rs. 14,768 being payable by the defendants which they were directed to pay within a week, failing which the defendants were directed to pay interest at the contractual rate of 19.75% per annum.
8. Aggrieved by the judgment of the learned single Judge, the plaintiff-Bank is in appeal before us.
9. Before we consider the respective contentions of learned counsel for the parties, it deserves to be noticed that duri
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