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PETITIONER: SRINIVASAVARDACHARUR AND ORS.

       Vs.

RESPONDENT: GOPALA MENON AND ORS.

DATE OF JUDGMENT: 04/10/1966

BENCH: MITTER, G.K. BENCH: MITTER, G.K. WANCHOO, K.N. SHELAT, J.M.

CITATION:  1967 AIR  412            1967 SCR  (1) 721

ACT: Usurious Loans (Madras Amendment) Act (8 of 1937), s. 3-Rate of interest permissible.

HEADNOTE: The  first appellant advanced monies to D against  mortgages of her property. D was adjudicated an insolvent in 1949  and her  properties  got  vested in  the  Official  Assignee  of Madras. The Official Assignee brought the properties to sale which  were  ultimately purchased by the  first  respondent. The Trial Court decreed the appellants’ suit for enforcement of  the mortgages against the property and awarded  interest at  the rate of 15 per cent compoundable with yearly  rests. In appeal the Division Bench of the High Court found that in the  circumstances  of  the  case a rate  of  10,  per  cent compound   interest  with  yearly  rests  was  just.    With certificate the appellants came to this Court.  Section 3 of the  Usurious  Loans (Madras Amendment) Act, 1937  fell  for consideration. HELD  : The net result of the various clauses of s. 3 to  be that  the  court must go back to the date  of  the  original transaction  and form an opinion as to the rate of  interest which would be reasonable after considering (a)  the value of the security offered; (b)  the  financial condition of the debtors  including  the result of any earlier transaction; (c)  the known and probable risks in getting repayment; (d)  whether  compound interest was provided for and  if  so the  frequency of the Period of calculation of interest  for being added to the principal amount of the loan. [725 E-G] In the circumstances of the case the Division Bench  rightly held  that 10 per cent compound interest with  yearly  rests would  meet the justice of the case.  The security  was  not inadequate  and the threat of a suit by the brother  of  the mortgagor was not serious. [726 A-B] Venkatarao  v. Venkatratnam, A.I.R. 1952 Madras 872 and  Sri Balasaraswati v. A. Parameswara Aiyar, A.I.R. 1957 Mad.  122 referred to. There was also no reason to interfere with the scaling  down of  the  rate  of interest to 6 per cent from  the  date  of filing of the suit.  Although the reasons were not indicated

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it  was  fairly  clear that the High Court  was,  using  its discretion as regards interest pendente lite. [726 E]

JUDGMENT: CIVIL  APPELLATE  JURISDICTION:   Civil Appeal  No.  636  of 1964. Appeal from the judgment and decree dated September 1,  1959 of the Madras High Court in O. S. Appeal No. 104 of 1955. T.   V. R. Tatachari, for the appellants. R.   Thiagarajan,   Jayaram   and  M.  R.   K.   Iyer,   for respondents, Nos. 1 and 9. 722 The Judgment of the Court was delivered by Mitter,  J.  This  is  an appeal  from  a  judgment  of  the High .Court at Madras on a certificate granted by it. The  main  question in this appeal relates to  the  rate  of interest  payable in respect of four mortgages  executed  in between  March  20,  1936 and January  2,  1938.   Both  the learned  trial Judge, Ramaswami J. of the Madras High  Court and the Bench of two Judges in appeal were of the view  that the provision for interest in the impugned mortgages  should be reduced; but whereas the learned trial Judge reduced  the rate of interest from 15 pet cent compoundable every quarter to 15 per cent compoundable with yearly rests, the Judges in appeal after taking all the circumstances into consideration held  that 10 per cent compound interest with  yearly  rests would   not   be  excessive  and  they  reduced   the   rate accordingly.  They also scaled down the rate of interest  to 6  per  cent from the date of the institution of  the  suit. The creditor has come up before this Court in appeal and his substantial  complaint is that the rate of  interest  should not  have been cut down by the Division Bench of the  Madras High Court. The  power  of the court to reduce interest in a  case  like this  is  derived from s. 3 of the  Usurious  Loans  (Madras Amendment)  Act  VIII  of 1937.   Sub-section  (1)  of  that section gives the court the power to give relief in  various ways  if  it has reason to believe that the  transaction  as between  the parties thereto was substantially unfair.   One of  such  reliefs is the reopening of  the  transaction  and relieving  the  debtor of all liability in  respect  of  any excessive interest.  Explanation I to the section lays  down that "if the interest is excessive, the court shall  presume that  the  transaction was substantially  unfair;  but  such presumption   may  be  rebutted  by  a  number  of   special circumstances justifying the rate of interest."  Sub-section (2) of s. 3 provides by clause (a) that the word "excessive" in the section means in excess of that which the court deems to  be reasonable having regard to the risk incurred  as  it appeared or must be taken to have appeared, to the  creditor at the date of the loan.  Under clause (b) of the said  sub- section the court has also to take into account any  amounts charged  or paid etc. and if compound interest  is  charged, the period at which it is calculated and the total advantage which may reasonably be taken to have been expected from the transaction.   Clause (c) of sub-section 2 provides that  in considering the question of risk, the court shall take  into account  the presence or absence of security and  the  value thereof,  the  financial  condition of the  debtor  and  the result of any previous transactions of the debtor, by way of loan,  so  far as the same were known, or must be  taken  to have  been known, to the creditor.  Clause (d) of  the  said sub-section  enjoins  upon the court to  consider  also  all

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circumstances materially affecting the relations 723 the parties at the time of the loan or tending to show  that the  transaction  was unfair, including the  necessities  or supposed  necessities of the debtor at the time of the  loan so far as the same were known, or must be taken to have been known, to the creditor. In  effect the provisions of the section which are  relevant for the purpose of this appeal are as follows:- (a)If the Court has reason to believe that the transaction was unfair it will exercise the powers given by  subsection, (1). (b)The  court  shall presume the transaction  to  be  sub- stantially  unfair if the interest is excessive,  such  pre- sumption being a rebuttable one by the special circumstances of the case; (c)In order to find out whether the interest is  excessive the court must examine the circumstances of the case in  the light of the risk incurred or the risk as would be  apparent to  the  creditor at the date of the loan,  and  then  judge whether  compound interest at the rate prescribed  and  with therests provided for was justifiable keeping also in view thesecurity  given  by the mortgagor, the  value  of  such securityand  the  condition of the  debtor  including  the result of any previous transaction. The net result of the above seems to be that the Court  must go back to the date of the original transaction and form  an opinion as to the rate of interest which would be reasonable after considering (a)  the value of the security offered; (b)  the  financial  condition of the debtor  including  the result of any prior transaction; (c)  the known or probable risks in getting repayment, (d)  whether  compound interest was provided for and  if  so the  frequency of the period of calculation of interest  for being added to the principal amount of the loan. The  facts  of  the case may now  be  briefly  stated.   The original  mortgagor  Dhanakoti Ammal had  succeeded  to  the properties of her father along with her sisters under a will executed  by him on the basis that the properties  were  his self-acquired  properties.   Her brother Alavandar  filed  a suit  in the year 1919 through a next friend  claiming  that the properties were not the self-acquired properties of  his father  and  as such not capable of bequest  under  a  will. This suit was dismissed as also the appeal therefrom to 724 the  Madras High Court preferred in 1922.  By the year  1936 when the first mortgage in favour of Srinivasavaradachariar, the appellant, before us, was executed, Dhanakoti Ammal  was involved   in  debts.   The  most  important  item  of   her properties  was  a market on the outskirts of  the  city  of Madras  which had become dilapidated and the Corporation  of Madras  was refusing to renew the licence unless it was  put in  good  order.  She had further borrowed a  sum  of  money repayable with interest at 20 per cent compoundable monthly. Her  brother Alavandar who was due to attain  majority  very soon  threatened to file another suit impeaching the  decree in  the  earlier suit.  As a matter of fact, the  first  two mortgages  were executed in 1936 before Alavandar had  filed his suit and the last mortgage was executed in January 1938. Dhanakoti Ammal got more and more involved -in debt and  was adjudicated  an  insolvent  in  0.  P.  148  of  1949.   Her properties  got vested in the Official Assignee  of  Madras. The  Official Assignee brought the properties to sale  which were  ultimately  purchased  by Dr.  Gopala  Menon  for  Rs.

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5,0001-.   Dr. Gopala Menon tried to come to an  arrangement with  Srinivasavaradachariar but nothing came out of it  and the  suit out of which this appeal has arisen was  filed  in the year 1950.  Other aliences were involved in the suit but we  are not concerned with them.  According to  the  learned trial  Judge the risks which the creditor ran  in  advancing the  money  were considerable in that the  adequacy  of  the security  was questionable in view of the threat of suit  by Dhanakoti Ammal’s brother and the condition of the  property in  an undeveloped area of Kodambakkam.  The  learned  trial Judge could not find anything unfair in the transaction, but nevertheless he thought that the rate of interest should  be scaled down to 15 per cent compoundable at the end of  each. year. The learned Judges of the Division Bench of the Madras  High Court found that the amount advanced under the old mortgages came  to nearly Rs. 48,000/- that there was already a  prior mortgage in respect of which nearly Rs. 8,000/- was due  and the value of the security though not very ample could not be said to be markedly inadequate and there was a shadow on the title  of the mortgagor by reason of the threat of  suit  by her  brother.   On a consideration of  the  entire  evidence bearing  on the point revealing the circumstances  in  which the loan transaction came into existence the appellate bench held  that  15 per cent compound  interest  calculated  with quarterly  rests  was certainly excessive.  Taking  note  of several decisions of the Madras High Court to which we shall presently refer, the learned Judges thought that the rate of interest  to  be allowed was 10 per cent  compound  interest with yearly rests. It  is  difficult to predicate of any rate  of  interest  as being excessive divorced from the circumstances of the  case unless the rate 725 fixed  is  so  high  as  to  be  suggestive  of  an   unfair transaction  on  the face of things.  It is not  for  us  to speculate  as to why the Legislature of the State of  Madras proceeded in such a round about way in making amendments  to the  Usurious  Loans Act of 1918 for the purpose  of  giving relief  to borrowers when it is well known that at or  about the  time of the Madras amendment the Legislatures of  other States in India had fixed certain rates as being the maximum beyond which the courts of law were not competent to go.  So far as we are aware difference was made in the treatment  of unsecured  loans and secured loans and even in the  case  of the  former the rate allowed was not to exceed 12  per  cent simple  in most of the States.  With regard to the  rate  of interest allowed by the Madras High Court after 1937 we find that in Venkatarao v. Venkataratnam(l) a bench consisting of Govinda  Menon  and Ramaswami JJ. observed,  "that  anything above  12 per cent per annum simple interest  is  excessive, considering the nature of transaction in this State."  There the  suit  was on a mortgage which provided for  payment  of interest  at 12 1/2 per cent per mensem with  annual  rests. In  Sri Balasaraswati v. A. Parameswara Aiyar(2) a  Division Bench consisting of Rajamannar C. J. and Panchapekesa  Ayyar J. observed, "in normal cases where the security is ample to cover  the  loan  and  there is no  danger  at  all  to  the principal and interest the court will hold more than 12  per cent simple interest to be excessive, as held in A.I.R. 1952 Madras  872  and  by  us  in A.S.  348  and  361  of  1948". According  to the learned Judges "Where the security is  not sound,  10 per cent compound interest can be allowed  as  in A.I.R.  1954 Madras 764." In the result the  learned  Judges only  allowed simple interest at 12 per cent per annum.   In

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the instant cases the learned Judges in appeal also referred to a judgment, of Subba Rao J. (as he then was) in C. S. 163 of  1949  as containing an observation that  the  dictum  in Venkatarao  v. Venkatratnam(l) that "anything above  12  per cent  simple interest was excessive would not be taken as  a principle of law applicable to all cases irrespective of the circumstances  obtaining  at the time of  the  transaction". That   transaction  also  related  to  Dhanakoti   Ammal-the original  debtor in this case and Subba Rao J. (as  he  then was) reduced the rate of interest from 15 per cent  compound interest  to 12 per cent per annum simple.  We have not  had the benefit of reading the judgment of his Lordship, but  we take  it  that  the  result of it is  as  indicated  in  the judgment in appeal before us. It  appears to us therefore that in the opinion of a  number of Judges of the Madras High Court who were cognizant of the state of affairs prevailing in the State interest beyond the rate of 12%. per annum simple would be considered  excessive by  court of law where the security was not  inadequate  and the risk run by the creditor was not abnormal.  There can be no dispute that (1) A.I.R. 1952 Madras 872. (2) A.I.R. 1957 Madras 122, 129. 726 interest  payable  at the rate of 10 per  cent  compoundable annually  over  a  number  of years would  be  more  in  the interest  of the creditor than 12 per cent per annum  simple for  the same period.  In our opinion the learned Judges  of the  Division Bench of the Madras High Court were  right  in holding that 10 per cent compound interest with yearly rests would  meet the justice of the case.  The security  was  not inadequate  and the threat of suit by Alavandar in  view  of the  fact  that  his earlier suit which had  been  taken  in appeal  to the Madras High Court and subsequently lost,  was never regarded seriously.  This is corroborated by the  fact that  even  after the institution of that suit in  1937  the appellant  before  us  advanced further  sums  of  money  to Dhanakoti  Ammal at the same rate of interest as before;  if he had thought that his security was put in jeopardy by  the institution  of the suit he would have been careful  not  to advance  any  further  amounts and would in  any  case  have insisted  on  the rate of interest being  higher  than  that provided for in the earlier mortgages. In  our opinion the Division Bench of the Madras High  Court made  a  correct  assessment  of  the  situation  and  their pronouncement  with regard to the rate of interest prior  to the date of the suit ought not to be disturbed. We also find no reason to interfere with the scaling down of the  rate  of interest to 6 per cent from the  date  of  the filing of the suit.  Although the reasons are not indicated, it seems fairly plain that their Lordships were using  their discretion  as  regards interest pendente lite.   We  cannot overlook  the fact that the mortgages -were executed as  far back  as 1936 and 1938 and that the creditor who had  waited till  1950  for the institution of the suit  would,  in  any event,  get interest substantially exceeding  the  principal amount  of  the loans.  In this view of things  we  are  not prepared  to interfere with the exercise of  the  discretion exercised  by  the learned Judges of the Madras  High  Court even though they have given no reasons for the reduction  of rate of interest pendente lite. In the result the appeal fails and is dismissed with  costs. G. C. Appeal dismissed.

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