The demand for pre-payment charges was found to be in violation of RBI guidelines and the Fair Practices Code, leading to its quashing by the court.

Rajiv Sahai Endlaw, J.

1. The petition impugns the demand by the Respondent Bank of "pre-payment charges" without there being a provision therefore in the Loan Agreement. Notice of the petition was issued and vide interim order dated 21st December, 2010, the Respondent Bank was restrained from downgrading the loan account of the Petitioner and/or reporting the default alleged of the Petitioner in payment of pre-payment charges to the Credit Information Bureau (India) Limited (CIBIL) or to the Reserve Bank of India (RBI). The Petitioner thereafter applied for release of the security deposited with the Respondent Bank averring that while the security was furnished to secure the loan of ` 1,000 crores which stands pre-paid and the demand now remaining and impugned is only of pre-payment charges of ` 20 crores only. Certain proposals for amicable interim arrangement to the said effect were discussed between the parties but without any success. During the course thereof, on suggestion of the senior counsels for the parties, arguments on the writ petition itself were heard.

2. The challenge by the Petitioner is on the grounds:

(i). that even though the entire loan amount together with interest due thereon had been remitted by the Petitioner and received by the Respondent Bank, the Respondent Bank was illegally withholding the security of the Petitioner of over ` 1,000 crores for the reason of alleged default in payment of pre-payment charges of ` 20 crores @ 2% of the loan amount of ` 1,000 crores;

(ii) the Respondent Bank in the loan subject matter of the present petition did not disclose any such pre-payment charges and is thus not entitled to claim the same. The said argument is buttressed from the fact that another Loan Agreement executed between the Petitioner and the Respondent Bank shortly after the Loan Agreement subject matter of this petition prescribed pre-payment charges of 1%;

(iii) it is contended that the claim of the Respondent Bank for pre-payment charges without there being a provision therefore in the agreement is violative of the RBI guidelines;

(iv) that the RBI guidelines dated 25th November, 2008 and 12th November, 2010 mandate the Banks to upfront disclose to the borrower all the information in relation to the loan including information regarding pre-payment options and charges;

(v) it is contended that the claim for pre-payment charges is also violative of the Fair Practices Code notified by the Respondent Bank itself requiring pre-payment charges to be notified at the stage of application for processing of loan itself;

(vi) that since pre-payment was out of internal accruals of the Petitioner, the levy of pre-payment penalty was unjustified.

(vii) that the Petitioner had notified the Respondent Bank that it was utilizing its own internal funds for pre-paying the loan;

(viii) the maintainability of the writ is sought to be justified by relying upon Sardar Associates v. Punjab & Sind Bank (2009) 8 SCC 257 laying down that if in terms of the guidelines issued by the RBI, a right is created in a borrower, writ of mandamus could be issued;

(ix) that the action of the Respondent Bank was thus illegal and arbitrary;

3. The Respondent Bank in its counter affidavit has pleaded:

(a) that the writ petition raises disputed questions of fact which cannot be decided in exercise of writ jurisdiction;

(b) that the issue whether there is any agreement between the parties as to pre-payment charges or not needs examination of detailed facts, including leading of oral evidence as to the nature of transaction and all of which is not permissible in writ jurisdiction;

(c) that the occasion for mentioning the pre-payment charges in the Loan Agreement did not arise owing to the Petitioner having not expressed any intention to pre-pay the loan ahead of the time frame fixed in the agreement; that since the Petitioner with respect to the subsequent loan had wanted an option for pre-payment, charges therefore were specified;

(d) that the Petit