Hon. Ram Autar Singh, J.
Heard Shri Manoj Gupta and Shri Mayank Agrawal, learned counsel for the petitioner. Shri Anurag Khanna appears for Pradeshiya Industrial and Investment Corporation of U.P. Ltd. (PICUP).
The petitioner is a private limited company incorporated under the Companies Act engaged in the business of packaging. It borrowed Rs.2,14,00,000/- at the rate of 21% per annum to be paid in installments under an agreement dated 31.10.1996 with PICUP, a Government company as defined under Section 617 of (The) Companies Act, 1956 with more that 51% of shareholding held by the State Government, for establishing a packaging industry at Kosi Kalan. The petitioner company wanted further advances to meet the increased production at its Agra unit and to increase the capacity at Kosi Kalan unit. The PICUP did not agree for any further advance of loan, on which the petitioner company approached the Bank of Baroda, and under the terms and conditions with the Bank, it agreed to repay the entire outstanding amount to PICUP. The offer was accepted in terms of para 10 of the agreement dated 31.10.1996 on repayment of the entire outstanding amount with interest and prepayment premium on premature repayment i.e. of Rs.10,39,329.32, as the difference between the interest on which the loan was advanced and the then prevailing rate of interest.
In this writ petition the petitioner company has prayed for:-
"(a) to issue a writ, order or direction in the nature of mandamus directing the PICUP to accept the principal amount with accrued interest upto 31.7.1997 plus interest tax from the Bank of Baroda without insisting upon the premium of Rs.10,39,329.32 paise demanded by the letter of PICUP dated 19.6.1997 and to relinquish its first charge on the Kosi Unit of the petitioner by returning the title deeds and issuing no dues certificate to the Bank of Baroda and by sending the consequential letter about satisfaction of the charge to the Registrar of the Companies Delhi & Haryana.
(b) to issue a writ, order or direction in the nature of mandamus directing the PICUP to refund to the petitioner the follow up fees amounting to Rs.1,05,500.00 and such portion of the front fees as may not have been utilised so far.
(c) to issue a writ, order or direction in the nature of mandamus directing the PICUP to refund interest tax on up front fee amounting to Rs.6,420/-."
Brief facts giving rise to this writ petition are that the petitioner approached the PICUP for setting up industrial unit at Kosi with appraisal fees of Rs.35,000/- paid on 27.1.1996. The PICUP agreed to advance the loan of Rs.2,14,00,000/- at the interest rate of 21% in accordance with the installment schedule given in the agreement, for a period of 5 years. The PICUP also charged upfront fess of Rs.2,14,000/- with interest tax of Rs.6420/-, legal services charges of Rs.35,000/-, follow up fees to be deducted from first disbursement of Rs.72,500/- and follow up fees to be deducted from second disbursement of Rs.33,000/-. The repayment of the principal amount was to start after 1 ½ years of the first disbursement. The interest, however, was due and payable immediately in four quarterly installment. It is stated that the petitioner regularly paid the interest installments. The petitioner wanted to set up another industrial unit at Agra, which was working at 50% capacity. By the time Kosi Kalan unit was set up, the Agra plant started working in full capacity. The petitioner decided to install additional machinery at Kosi and required an additional loan of Rs.1.5 crores. The PICUP did not agree to advance the loan on which the petitioner approached the 3 Bank of Baroda and entered into agreement for advance of Rs.3 crore 64 lacs from which the petitioner was to discharge the entire liability of PICUP. The petitioner as well as the Bank of Baroda wrote to PICUP to inform the bank the amount due from the petitioner so that the same could be paid by the bank to PICUP. In reply the PICUP sent a letter dated 19.6.1997 demanding a premium on premature payment in addition to the principal and interest, at Rs.10,39,329.32.
The petitioner had also taken a loan from PICUP of Rs.1.45 crores against security of the Agra unit in the year 1993. It was regularly repaying the loan in installments. The PICUP and the petitioner were jointly required to file before the Registrar of Companies the particulars of the outstanding charges in respect of the loan. It is stated in the amended paragraph 29A that since PICUP was putting tremendous pressure and the petitioner was in urgent need of money, the amount of Rs.2,24,34,773.33 was deposited by the petitioner with PICUP on 28.8.1997 including the amount by way of premium for prepayment of loan to close the transaction in accordance with the agreement.
The writ petition was filed on 21.7.1997 for direction to PICUP to accept the principal amount with accrued interest without insisting upon premium of Rs.10,39,329.32. The Court did not grant any interim order on which the petitioner deposited the entire amount as aforesaid on 28.8.1997. The amendment application challenging Clause 10 of the agreement, providing for premium on prepayment of loan, as unreasonable, arbitrary and thus violative of Article 14 and 19 (1) (g) of the Constitution of India was filed by the petitioner on 10th January, 2003 after six years of depositing the amount and was allowed on 30.11.2005.
Shri M.K. Gupta, learned counsel for the petitioner states that Clause 10 of the agreement dated 31.10.1996 with PICUP is entirely vague, arbitrary and unreasonable, giving the PICUP discretion to calculate the rate of premium on premature 4 repayment. The decision taken by PICUP to charge 2.5% interest as prepayment premium on the entire amount of interest that the PICUP would have earned is grossly illegal and confiscatory. The PICUP took undue advantage of the honesty of the petitioner in repaying the entire amount under the circumstances in which the petitioner was refused for further advance to meet his business needs. The demand of premium on premature payment is against the rule of law, unfair, and is violative of Art.14 of the Constitution of India.
Clause 10 of the agreement dated 31.10.1996 provided:-
"(10) Premature repayment:
PICUP shall have the right either to accept or reject any request from the borrower to make any premature repayment of loan or any part thereof, PICUP shall also have the right to adjust such premature repayments with any installments due from PICUP and the decision of PICUP in such cases shall be final.
Provided that in case PICUP accepts such a request of repayment the Borrower shall given to PICUP prior notice in writing of atleast 30 days of its intention to repay in advance of the due date, stating the amount, the sources and proposed earlier date of payment, and pay to PICUP if it so, directs, premium for premature repayment of the principal sum or part thereof calculated at the rate and in the manner to be decided by PICUP which decision shall be final."
Shri Anurag Khanna appearing for PICUP submits that as Government company established to promote industries in the State of U.P. the PICUP raise finances for taking loans from various financial institutions like IDBI and SIDBI, which is further disbursed to industries, which approach PICUP for financing their projects. At the time when the petitioner company was sanctioned loan the prevailing rate of interest was 21%. In case the petitioner company had followed schedule of repayment and paid the entire interest, the PICUP would have earned a sum of Rs.1,43,92,048/- as interest income, which as per the policy of PICUP is projected in the books of accounts. The term loans are granted for projects based on income, which PICUP earns from 5 interest. The agreement was signed voluntarily by the petitioner with a clause of charging premium for premature repayment to cover up loss, which PICUP would suffer. At the time when the petitioner wanted to repay the loan before the period expired, the rate of interest was 18.50%. The PICUP, therefore, worked out premium of premature payment at 2.5% interest being the difference between interest as per agreement at 21%, and the prevailing rate of interest at 18.50%. The PICUP had taken loan on higher rate of interest to finance the project and on premature payment it would have suffered loss in business. The agreement was signed and the premium on premature repayment was paid without any protest. Infact the petitioner wanted to take a chance of getting interim order, failing which it accepted the terms and conditions and has thereafter challenged the premium by filing a highly belated amendment application after six years.
The PICUP is a government company incorporated to encourage and to advance loans to the small scale and medium class industries in the State of U.P. It is a financial institution serving the interest of entrepreneurs for the development of the State. It is in the business of giving finances to the industries and earns its income from interest paid by the borrowers. The premium on premature repayment is provided to set of the loss which the PICUP as financial institution may suffer on account of difference in the interest at the time of advance of loan and at the time of premature repayment. The stipulation in the contract for the payment of premium on premature repayment is a voluntarily contract between the parties, as a established practice followed by lending financial institutions.
The PICUP has given the basis of calculation of premium for premature repayment. The method of calculation of the premium based on the difference of interest at the time when the loan was advanced and when it was repaid cannot be termed unfair or unreasonable. It is also not regulated by any statute. It 6 cannot therefore be treated as unconsciable or arbitrarily term in the contract being violative of Art.14 of the Constitution of India. Infact as suggested by Shri Anurag Khanna the petitioner company wanted to avail the same amount on a lesser interest rate, causing loss to PICUP as financial institution.
In Central Bank of India Vs. Ravindra, (2002) 1 SCC 368 a Constitution Bench upheld the validity of capitalization of unpaid interest, subject to the terms of voluntary contract or established practice or usage and subject to any legislative restrictions. The Supreme Court distinguished between interest, compounding of interest and penal interest. Relying upon CIT Vs. Dr. Sham Lal Narula, (1963) 50 ITR 513; Riches Vs. West Minister Bank Ltd., (1947) 1 AllER 469 the Supreme Court held that there is an approved long established banking practice of charging interest at reasonable rate on periodical rests and capitalizing the same on remaining unpaid amount. Such practice is also recognized in non banking money lending transactions. The legislature has stepped in from time to time to relieve the debtors from hardships, whenever it has found the practice of charging compound interest and its capitalization to be oppressive and hence needing to be curbed. The practice is permissible except when it is forbidden by law. There is nothing wrong in the parties voluntarily entering into transactions, evidenced by deeds incorporating covenants or authorizing the creditor or stipulation for payment of compound interest at reasonable rates and authorizing the creditor to capitalize the interest on remaining unpaid amount so as to enable interest being charged at the agreed rate on the interest component of the capitalized sum for the succeeding period. The interest once capitalized sheds its colour of being interest and becomes part of principal so as to bind the debtor/ borrower. The Supreme Court, however, distinguished between interest and penal interest. The penal interest, it was held, is an extraordinary liability incurred by a debtor on account of his 7 being a wrongdoer of having committed wrong by not making the payment, when it should have been made in favour of the person wronged and pays neither royalty nor limited to the damages suffered. Thus while the liability to pay interest is founded on the doctrine of compensation, penal interest is founded on the doctrine of penal action.
In the present case the parties entered into a contract fully understanding its implications. Clause 10 of the agreement is an essential part of contract in which borrower agreed to compensate the lender for any loss which it may suffer on premature payment. The PICUP agreed for repayment of compensation of the loss of interest as its business income. The premium was worked out on the difference of rate of interest on the date of advance of loan, and on the date when the repayment was offered. The premium was paid by the petitioner without any protest and has been challenged in the Court after a long delay of six years without making any complaint, long after the transaction was voluntarily closed. In the circumstances, we do not find that the provision of premium on premature prepayment is unfair, unreasonable or is violative of public conscience test to breach either Section 23 of the Contract Act, 1872 or Art.14 of the Constitution of India.
The petitioner company, therefore, is not entitled to any claim in the writ petition.
The writ petition is dismissed.
Dt.25.01.2010 SP/