Madras High Court
C.T. Faisal vs Official Liquidator And Anr. on 13 June, 2006
Equivalent citations: AIR2006MAD15, AIR 2007 MADRAS 15, 2007 A I H C (NOC) 219 (MAD) (2007) 2 MAD LJ 50, (2007) 2 MAD LJ 50
Author: Chitra Venkataraman
Bench: Chitra Venkataraman
ORDER
1. These applications are filed by one C.T. Faisal. The prayer in these petitions is to declare the transaction between the respondent company, the company in liquidation and Kunhammad in connection with the vehicle KL 11 D 9390 as a loan transaction and not one of lease of the vehicle (C.A. No. 749 of 2003); to declare that the respondent company was not entitled to claim or get anything more than a sum of Rs. 4,00,000/- advanced as a loan with interest 15.5% per annum (CA No. 750 of 2003); to direct the respondents to issue H.P. Termination form to the applicant in respect of the vehicle KL 11 D 9390 (CA No. 751 of 2003); and to direct the respondents to refund to the applicant the sum of Rs. 50,683/- with subsequent interest at 15.5% per annum till payment (C.A. No. 752 of 2003).
2. The contentions in these applications is as follows:
The applicant herein is the owner of Ashok Leyland bus with Chassis No. MYG031224 and Engine No. MYE233584 bearing Registration No. KL 11 D 9390. He had purchased the same from M. Kunhammad, Kozhikode District, paying a sum of Rs. 3,60,000/- to him. It is stated that the applicant is running a public trans port service in the Kariyad-Kannur route.
3. It is stated by the applicant that the original owner Kunhammad paid a sum of Rs. 25,000/- to T.V. Sundaram lyengar & Sons Ltd. Mudurai, as advance and made a booking for a chassis with Customer Code 2234135 as early as 21.11.1994. The said Kunhammad approached the respondent company, now in liquidation, for a loan amount. of Rs. 4,00,000/-, since the cost of the vehicle was more than Rs. 4,56,474/. The said Kunhammad was provided with a loan amount of Rs. 4,00,000/- with interest at 15.5% per annum, repayable in four years.
4. It is stated that the price of the chassis was Rs. 4,56,474/-. Alter deducting an advance of Rs. 25,000/- paid already on 21.11.1994, the balance consideration payable was Rs. 4,31,474/-. It is stated that since the loan sought for was Rs. 4,00,000/- only, the balance of the amount of consideration of Rs. 31,474/- was collected by the respondent company from Mr. Kunhamrnad on 9.9.1995 and paid the said amount of Rs. 4,31,474/- on 18.9.1995 to the dealer. It is stated by the applicant herein that the agreement between Kunhammed and the financier, the company in liquidation, was one of loan agreement pure and simple, although the same was called a lease agreement. In respect of the loan taken, the vehicle was given as a security. It is also stated that registration certificate was Issued in the name of Kunhammad with an entry that it was hypothecated to the respondent company as security for the repayment of the loan amount. The loan liability is evidenced by agreement dated 31.1.1996.
5. It is stated that as required by the local agent of the respondent company, several forms and few sheets of blank papers were signed and given by the said Kunhammad. The applicant had also obtained the road permit. The Insurance was taken in the name of Kunhammad.
6. It is stated by the applicant herein, the subsequent purchaser from Kunhammad, that he had paid a sum of Rs. 3,25,200/- towards the loan amount taken. The respondent had also issued official receipts for the same. However, the vehicle was seized on 16.11.1997, alleging default in the repayment. The applicant was compelled to make a payment of Rs. 53,000/- to get the bus released on 29.11.1997, only to be seized again by the respondent from 22.6.1998. Once again, on payment of a further sum of Rs. 1,10,592/- the applicant got back the vehicle. Thereafter, a further sum of Rs. 29,600/- was paid. Thus, a total amount of Rs. 5,33,352/- was paid. The applicant further states that the respondent threatened to seize the vehicle unless a further sum of Rs. 85,448,26 was paid, and they issued a letter demanding a sum of Rs. 3,70,000/-. The applicant states that this was followed by yet another notice, giving a different amount as outstanding liability. This led to the filing of a suit by the applicant herein in the District Munsif Court, Kozhikode-II A as O.S. No. 932 of 1998. The prayer for temporary injunction made against seizure of the vehicle was granted, however, subject to the condition that the applicant deposited the amount on the dates specified. The appeal preferred was however dismissed on 10.8.1999 and the bus was seized by the respondent on 18.9.1999. The applicant preferred C.R.P. No. 1702 of 1999 in the Kerala High Court, which ordered the release of the vehicle on execution of the bond and directed the trial Court to determine the rights of the parties. The vehicle was released on 8.11.1999. It is stated that C.P. No. 48 of 2000 was filed before this Court and the Official Liquidator was appointed as the Provisional Liquidator, and in the application in C.A. No. 310 of 2001, the suit pending before the District Munsif Court, Kozhikode, was transferred to this Court and hence, this present proceedings.
7. The applicant states that the case of the company In liquidation is a false one as though the company was the owner and the purchaser, a lessee, He alleges that on verification, It was found that the invoice copy pertaining to the vehicle filed before the District Munsif Court was a fabricated one, as the same is different from the ones Issued by the dealer at the time of delivery of the vehicle. The Invoice of the dealer are false they being directed to program on foxpro, whereas, the ones produced by the financier was created in Unix program. It is further pointed out that the dealer started issuing invoices only after 1996 in unix pro forma, the loan itself released as early as 18.9.1995. The signature of the officer in the invoices Is not the same as that of the officer who was holding the office in 1995 when it was purchased. The Registered Office of the dealer was shown as in Madurai, whereas, the details of the same are missing in the Invoices now filed before the District Court. The applicant submitted that the alleged lease agreement was a sham and non-existent transaction. Consequently, the assignment in favour of the applicant herein does not create any lease arrangement between the respondent and the applicant herein. The applicant submitted that the respondent is not entitled to claim anything more than the principal sum of Rs. 4,00,000/- with Interest at 15.5%. Any amount higher than this is opposed to law and unenforceable; that the applicant is entitled to make the payment of interest at the rate legally payable. The applicant states that they have made excess payment and is entitled to a refund of Rs. 36,083/- as on 7.12.1988 with interest on the said sum. It is further stated that he had filed a claim petition for a sum of Rs. 50.683/-. It is also stated that though the claim applications are not placed before this Court, this applicant is moving this application for the relief stated as above.
8. The respondent company in liquidation filed its counter-affidavit emphasising the contention that the transaction was one of hire purchase. It is stated that it purchased new Ashok Leyland vehicle from TVS & Sons at Kozhikode Branch vide vehicle sales invoice dated 6.10.1995 for a sum of Rs. 4,56,474/- under lease agreement dated 18.9.1995. It leased the same to one Kunhammed. The copy of the lease agreement is filed as an annexure to the counter-affidavit. The lease was assigned in favour of the present applicant under Assignment Deed dated 19.2.1996. It is stated that as per the lease agreement, the respondent company was the owner of the asset; that an endorsement to this effect had been noted by the Additional Registering Authority, Kozhikode, stating that the vehicle was under lease financing agreement with the applicant company. It is further contended by the respondent that as per the assignment agreement dated 19.2.1996, the leased asset was assigned in favour of the applicant with the consent of the respondent company. The respondent admitted that after booking, the said Kunhammad approached the respondent company to extend financial assistance under the lease agreement system. The respondent denied the allegation that the agreement was a fraudulent one; that the agreement was. one for financing and not a loan agreement but a lease agreement. It stated that the sum of Rs. 4,00,000/- was leased with lease finance charges at 15.5% per annum for (our years. The finance charges flat, for four years was Rs. 2,48,000/ and the insurance premium for three years at Rs. 45,000/- totalling Rs. 6,93.000/-. The repayment schedule was Rs. 14,800/- tor the first 46 months and Rs. 12,200/- for the last month. The first month loan commenced on 18.11.1995 and was to end on 18.9.1999. The respondent admitted that they had paid the lease finance amount with initial lease rental to the dealer concerned. Referring to, the endorsement made by the Additional Registering Authority, Kozhikode, the respondent submitted that the financial assistance granted was under lease agreement. It further alleged that a sum of Rs. 40,570/- was still outstanding from the applicant. The insurance premium for the period 1995-1999 was paid by the respondent company on behalf of the applicant and that the respondent had not renewed the insurance for the period from 2000 onwards. It is alleged that even after crediting the amount paid by the original lessee, a sum of Rs. 6,85,847/- was still due outstanding as on 7.4.2003. Hence, the respondent prayed for an order that the said sum be paid with interest at 36% per annum. It is further stated that the applicant had not taken into account the belated payments while working at the memo of calculation. The respondent also denied the payment of Rs. 1,10,952/-. It also stated that instead of settling the dues, the applicant had hurriedly moved the Court in Kerala. They denied the allegation that the respondents are setting up a false claim alleging the documents as sham. It is further stated that the sales invoice filed before the District Munsif Court. Kozhikode, was a genuine one and not created as alleged. They denied the allegations that the invoices were false. They demanded the payment of interest at the agreed rate and defended the same interest. In the context of the terms of the lease agreement, they contended that Kunhammad as well as the present applicant are severely and jointly responsible to settle the dues.
9. Consequently, the respondent prays that the applicant be directed to pay a sum of Rs. 6.85,847/- with interest from the date of payment, without prejudice to their right to recover the same from the original owner as well as the guarantor and the applicant herein, whose liability was joint and several. The respondent also prayed for attachment and sale of asset, in the possession of the applicant herein.
10. Learned Counsel appearing for the applicant submitted that the respondent company was not the owner of the vehicle and the registered owner Kunhamad was the real owner, the predecessor in title and the applicant on his assignment. He further submitted that the Uansaction was only a loan transaction and !he applicant company was entitled to a sum of Rs. 1,00,000/- given as a loan at 15.5% interest per annum. He further submitted that anything charged over and above this interest on the loan account was hit by the provisions of the Usurious Loan Act, 1918. Learned Counsel also questioned the document of lease as a sham document and brought to my attention the essentials of the distinction between a lease and loan transaction. He emphasized the fact that the primary term in the agreement was to realise the amount given as a loan and that the real rate of interest charged was only 15.5% per annum, but calculated on an apparent rate. Consequently, learned Counsel submitted that the entire transaction is a colourable transaction aimed for a tax benefit, hence against public policy, hit by Section 23 of the Contract Act. In this connection, learned Counsel placed reliance on the decisions Sundaram Finance Ltd. v. State of Kerala Kerala High Court State Bank of Travancore v. George Indian Bank Tiruvannamalai v. A.B. Gurukal Ganga Hire Purchase Pvt. Ltd. v. State of Punjab AIR 2003 P & H 98 Tarun Bhargava v. State of Haryana and Ashok Kumar Singh v. State of West Bengal.
11. Learned Counsel for the applicant also brought to my attention that Kunhammad had paid an advance of Rs. 25,000/- to the car dealer. He also pointed out that the sum of Rs. 4,00,000/- was financed for the purchase, which was not a lease rental based on the value of the vehicle, with a clause for return of the vehicle. He also brought to my attention that the company in liquidation had no office at Calicut except an Agent's office, and for the purpose of registration under Section 40 of the Motor Vehicles Act, 1988 sale invoice was not necessary. It is further submitted that a perusal of the document filed would show that the respondent company had no knowledge of the delivery of the vehicle and registration was done on the strength of a sale certificate. After taking deliver, the purchaser had submitted the same for the purpose of registration in his name. Learned Counsel submitted that in Forms 25 and 30 of the Motor Vehicles Act 1988 the transferor as the owner of the vehicle was shown as Kunhammad and the proposed transferee shown as Faisal, the present, purchaser, the applicant herein, and the company in liquidation was shown as the financier. Document No. 4 is the copy of the loan agreement of the year 1993 between State Bank of India and the Company in liquidation, the second respondent herein. Learned Counsel for the applicant, commenting on the loan agreement between State Bank of India and Dugar Finance, submitted that there is no relevance to the issue nor could it determine the issue raised before this Court. He also pointed out to the inconsistencies in the statements contained in the counter-affidavit before the Official Liquidator as well as before this Court.
12. Per contra, learned Counsel appearing for the company in liquidation the respondent herein, submitted that the transaction was a lease transaction and that the purchaser cannot question the documents and the nature of the transactions now. She also pointed out to the evidence in support of the company in liquidation that the documents were hypothecated with State Bank of India by the company in liquidation. Being a purchaser, the respondent had no right to question the transaction as a sham transaction.
13. The Official Liquidator has submitted his written submission supporting the cause of the Administrator.
14. Before entering into the merits of the claim, the quick look into the decision of the Supreme Court in the case of Sundaram Finance Limited v. State of Kerala on the subject of hire purchase and lease finance, relied on by the applicant herein is desirable in this case. This relates to a case of hire purchase agreement. The company was engaged in the business of finance, purchase of motor vehicles on security of goods. As per the scheme, the customer purchased the vehicle and had it registered in their name. The finance company advanced the balance of price and on the customer executing the promissory note for repayment of the balance of the price, the said balance of the price was passed on to the dealer. The hire purchase agreement was executed. Going through the various clauses, the Supreme Court noted that the transactions between the dealer and the financier was between closely connected companies and the terms of the business was split as business of hire purchase; that the true effect of the transaction need to be determined from the terms of the agreement, considered in the light of the surrounding circumstances. The Supreme Court, held "when a person desiring to purchase goods and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vendor, the transaction between the customer and the lender will Unquestionably be a loan transaction. The real character of the transaction would not be altered if the lender himself is the owner of the goods and the owner accepts the promise of the purchaser to pay the price or the balance remaining due against delivery of goods." (page 1185). Drawing a distinction between a loan agreement and hire purchase agreement, the Supreme Court held that in every case, the Court has the power to go behind the documents to determine the true value of the document whatever be the form of the document; in a hire purchase agreement, there is no agreement of sale of the goods. The hirer was not under an obligation to buy. Referring to the variation in hire purchase agreements, the Supreme Court held:
...there are variations when a financier is interposed between the owner of the goods and the customer. The agreement, ignoring variations of detail, broadly takes one or the other of two forms : (1) when the owner is unwilling to look to the purchaser of goods to recover the balance of the price, and the financier who pays the balance undertakes the recovery. In his form, goods are purchased by the financier from the dealer, and the financier obtains a hire-purchase agreement from the customer under which the latter becomes the owner of the goods on payment of all the instalments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price. The decision of this Court in dealt with a transaction of this character. (2) In the other form of transactions, goods are purchased by the customer, who in consideration of executing a hire-purchase agreement and allied documents remains in possession of the goods, subject to liability to pay the amount paid by the financier on his behalf to the owner or dealer, and the financier obtains a hire-purchase agreement which gives him a license to seize the goods in the event of failure by the customer to abide by the conditions of the hire-purchase agreement.
15. The Apex Court also contrasted a normal hire purchase agreement to a case where the customer owns the vehicle but enters into an arrangement to finance his purchase. This is also in the form of hire purchase agreement but in substance evidence the loan transaction subject to the right of the financier to seize the vehicle. This is merely a licence to ensure compliance of the terms of the hire purchase agreement.
16. Learned Counsel for the applicant also brought to my attention the decision of the Punjab & Haryana High Court reported in AIR 2003 P & H 98 Tarun Bhargava v. State of Haryana as well as Ashok Kumar Singh v. State of West Bengal, which followed the decision of the Supreme Court in the case of Sundaram Finance Ltd. v. State of Kerala.
17. A perusal of the documents filed before this Court show that on 21.11.1994, the original purchaser Kunhammad paid a sum of Rs. 25,000/- for purchase of Ashok Leyland 6,651/17210" WB. This was placed with T.V. Sundaram Iyengar and Sons Ltd., Calicut. The purchaser was given a Customer Code of 2234135. This is marked as Ex. P1. The receipt dated 21.9.1995 referring to the sales customer code indicates the total receipt of a sum of Rs. 4,31,474/- being the sale price of the vehicle. This is marked as Ex. P2 found at page 2 of the paper book. There afterwards, again on 9.9.1995, the company in liquidation had issued a receipt for a sum of Rs. 31,474/-, the same being received from the original purchaser Kunhammad. A perusal of the application by Kunhammad to the company in liquidation shows that interest was calculated on Rs. 4 lakhs and the balance of the sale consideration was paid by the purchaser himself (copy filed by the respondent as Ex. R1). Copy of the R.C. Book shows the registered owner's name is Kunhammad and subject to lease agreement with company in liquidation. The agreement between Kunhammad and the present purchaser, namely, Faisal, the applicant herein, is at page 9 of the paper book filed by the applicant and the receipts for payment of the same are enclosed therein.
18. A perusal of the agreement shows that the cost of the vehicle is stated as 4,56,474/-. The finance required is shown as Rs. 4,00,000/- with a repayment period of 48 months. In page 5 of the respondent's paper book, a sum of Rs. 45,000/- is stated to have been paid by the owner. It may be noted that the interest calculated at Rs. 2,48,000/- is charged at 15.5% interest per annum on a sum of Rs. 4,00,000/- only and not on the entire value of the vehicle namely Rs. 4,56,474/-. The calculation also contains a note that Rs. 25,000/- was paid as advance booking by the purchaser Kunhammad. The total amount payable was arrived at Rs. 6,93,000/- with Rs. 4,00,000/-principal amount, Rs. 2,48,000/- being the interest calculated thereon. It is further seen that the company in liquidation had paid a sum of Rs. 4,31,474/- in favour of M/s. T.V. Sundaram Iyengar & Sons Ltd. Madurai, of which, as per the receipt available, it is seen that Rs. 31,474/- was paid by the party itself. It is also seen that the delivery challan was duly signed by the lessee. A perusal of Clause 13 of the agreement shows that the lessee had insured the vehicle. Documents shown at pages 19 to 24 pertain to the insurance of the vehicle. Learned Counsel for the respondent pointed out to Clause 23, as per which, the residual value of the equipment was to be the value mentioned in the Second Schedule of the lease agreement. A perusal of the same shows that no such value had been assigned. What had been shown was an amount of Rs. 4,00,000/- with interest calculated and not for the amount borrowed on lease amount which does not reflect as one on the value of the equipment. It is further seen that at page 27 of the respondent's paper book, a document marked as Ex. P14, shows the calendar of payment. This clearly shows that the finance amount was only Rs. 4,00,000/-with interest at Rs. 2,48,000/- and insurance deposit at Rs. 45,000/- making a total amount of Rs. 6,93,000/-. Ex. R13 is a letter dated 28.3.1993 addressed by the company in liquidation to M/s. Sundaram Iyengar & Sons Ltd., which refers to the payment of a sum of Rs. 4,31,474/-, seeking details as regards the delivery; that they did not Know whether the vehicle had been delivered to the lessee or not. Compare this document to Ex. A13 dated 6.10.1995 at page 26 of the paper book which shows that the value of the vehicle is stated as Rs. 4,56,474/-. It is also seen that the vehicle was handed over to the purchaser as early as 1996 and if the company in liquidation is really the owner which had leased out the property to the lessee, there is no necessity for the company in liquidation to seek information from M/s. T.V. Sundaram Iyengar & Sons Ltd. as regards delivery. It is also seen at page 47 giving the statement of accounts dated 7.4.2003, the contract amount is stated as finance of Rs. 4,00,000/- and the finance charges Rs. 2,48,000/-.
19. A perusal of the documents filed further reveal that the assistance extended to grant finance to the purchaser was only for the balance of consideration and nothing beyond. The detailed working at page 5 of the paper book containing the application, reveal the incontrovertible evidence as regards the nature of the transaction. The booking by paying the advance amount was by the purchaser.
20. I find the principles laid down by the Supreme Court in AIR 1966 SC 1178 in the case of Sundaram Finance applies in all force to the facts of the present case and the applicant's contention on the nature of transaction merit acceptance. Ex. P4, namely, the agreement between Kunhammad and the respondent shows that although the document is styled as an agreement, as rightly contended by the learned Counsel for the applicant, it is seen that the 'finance' required is stated as Rs. 4,00.000/-. The interest calculated is only on the said amount and has no relevance to the value of the vehicle. If really the agreement is one of hire purchase as contended by the respondent, there was no necessity at all for the applicant to have the interest, worked out on Rs. 4,00,000/- the amount advanced. The learned Counsel for the Administrator has no answer to this calculation done at Rs. 4,00,000/-.
21. Applying the principle laid down in the decision, if we look at the document which is styled as application for purchase of motor vehicles/machinery under lease scheme format and the lease agreement, the terms clearly establish the fact that the transaction is one of simple loan facility. The finance required was treated as Rs. 4,00,000/-. This clearly has no connection whatsoever to the value of the vehicle purchased but rests purely on the extent of requirement of borrower. The cost of the vehicle is stated as Rs. 4,56,474/-. The working on the back of the term sheet also shows that interest itself was calculated only on the amount borrowed, viz. Rs. 4 lakhs. If that be so, the standard format adopted having relevance to a hire purchase scheme cannot nullify the substance of the transaction, namely, a simple loan transaction, The said finding is further established by the fact that the insurance stood in the name of the insured, namely. the purchaser Kunhammad, paid by the purchaser Kunhammad. The deliver) was taken by Kunhammad. A customer code is also allotted to the vehicle ordered on payment of the advance and in all the correspondence, the customer code is maintained. This is evidence in the receipt for advance and the receipt for purchase. The motor vehicle certificate of registration also clearly spells out the owner's name as Kunhammed. The insurance policies are all in the name of the purchaser and the subsequent purchaser, the applicant herein. On the basis of all these documents, the true nature of the transaction is nothing but a simple loan transaction. The repayment had not been worked out with reference to the value of the vehicle purchased, but with reference to the loan amount required by the purchaser Kunhammad.
22. The various clauses contained in the lease agreement cannot be applied or invoked mechanically to a case of finance agreement which the transaction is so. The customer code number stood in the name of the purchaser only. The reference in all the documents pertaining to the transaction carried the customer code too. Hence, going by the aspect of finance extended, the true character of the transaction is nothing but a loan transaction. I do not find any reason to draw a different conclusion on the aspect of the character of the transaction which fully fits in with the law laid down in the case of Sundaram Finance .
23. As regards the contention of the company in liquidation charging interest as annual finance charges even to a case of a simple finance-agreement, learned Counsel for the applicant placed reliance on the provisions of the Usurious Loans Act, 1918. Pointing out to unfairness in the rate of interest, he submitted, that the excess interest charged is so excessive, that itself is a sufficient indication of unfairness practised. He pointed out to Section 3, Sub-section 2(c) of the Usurious Loans Act, 1918 and submitted that in considering the question of risk, the Court shall determine the presence or absence of the security and the value thereof, the financial condition of the debtor and that the Court may exercise all or any of the powers mentioned in Section 3 to reopen the transaction notwithstanding an agreement. He emphasized on the explanation which reads that the interest, charged itself is sufficient evidence that the transaction has substantially unfair. In support of the same, learned Counsel referred to the decision of the Kerala High Court State Bank of Travancore v. George and Anr. judgment reported in AIR 1982 Madras 296 Indian Bank, Tiruvannamalai v. A.B. Gurukal.
24. These decisions are rendered with reference to provisions of Section 3 as amended by Madras Act VIII of 1937. These decisions lay down that the Court will presume the transaction as unfair, if the interest was excessive. Where the terms of the agreement show the interest as excessive, the transaction hence unfair and that the agreement was totally against public policy. Learned Counsel for the applicant submitted that if one looks at the terms, the inescapable conclusion is that the transaction is one of finance. In the face of the law laid down in the decision of this Court Indian Bank, Tiruvannamalai v. A.B. Gurukal as well as the decision of the Kerala High Court State Bank of Travancore v. George, he submitted that the interest charged at 36% is totally against public policy and hence, the demand of 36% interest on the defaulted payment is totally unfair and penal. The decision of the Supreme Court reported in AIR 1971 SC 684 S. Rajagopalaswami Naidu v. The Bank of Karaikudi Ltd. supports the case of the applicant herein. Any collection over and above by fixing penal interest, per se, would be illegal, particularly in the context of the fact that the agreement was only for repayment of the loan advanced by the respondent to the original purchaser Kunhammad. Learned Counsel further submits that the provisions in the agreement providing for payment of interest was above the legally permissible interest and is opposed to public policy.
25. Learned Counsel for the applicant also relied on the decision of the Supreme Court in S. Vardachariar v. Gopala Menon in particular, to the power of the Court to reduce interest with reference to Section 3 of the Usurious Loans Act VIII of 1937.
26. It may be seen that while summarising the Scheme of Usurious Loans Act, 1918 and the power of the Court under Section 3 of the Act, the Supreme Court, in S. Vardachariar v. Gopala Menon, held as follows:
4... (a) If the Court has reason to believe that the transaction was unfair it will exercise powers given by Sub-section (1);
(b) The Court shall presume the transaction to be substantially unfair if the interest is excessive, such presumption 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 the rests provided for was justifiable keeping also in view the security given by the mortgagor, the value of such security and the condition of the debtor including the result of any previous transaction.
5. The next 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.
This case relates to a relief against the excessive interest charged on the mortgages executed in the year 1936 and 1938 charging interest at 15% compoundable every quarter. The learned trial Judge reduced the rate of interest from 15% compoundable every quarter to 15% compoundable with yearly rests. On appeal, taking into consideration the circumstances, the appellate Court held that 10% compound interest with yearly rests would be proper. The Court further scaled down the rate of interest to 6% from the date of institution of suit. On appeal, the Supreme Court confirmed the view of the Division Bench of this Court with 10% compound interest with yearly rests. In the course of discussion, the Supreme Court further opined that it was difficult to predicate of any rate of interest as being excessive divorced from the circumstances of the case. The Supreme Court also expressed the view that the provisions of the Act do not in any manner control or regular the charging of rate of interest However, it affords the relief from the claim of excessive interest, in cases, where the transaction shows to be substantially unfair.
27. A look at the decision of the Supreme Court in S. Rajagopala-swami Naidu v. The Bank of Karaikudi Ltd. show that the borrower took a loan on the strength of a property mortgaged. The amount was repayable with interest at 10Vfe% compoundable monthly. It is further stated that where the mortgagee failed to pay the interest periodically, he will be liable to pay at 12% from the date of such default and if there be further failure of the entire amount stipulated within the years, he would have to pay the entire sum with interest at 3½% per annum.
28. Analysing the various factors pertaining to the execution of the mortgage deed and the subject property afforded as security, the Supreme Court held that the rate of interest at 12% was penal and that the interest could be charged at 10½% from the original contractual rate from the date of mortgage to the date of preliminary decree, thereafter interest to be chargeable at the rate of 6% per annum till realisation. A reading of the decision of the Supreme Court clearly show that in matters of considering whether the interest charged is penal and against the public policy, the Court is bound to look into the circumstances of the case and find out whether the rate charged on the interest front, if so high, making the transaction wholly one side and unfair. As the Supreme Court held that the provisions of the Act are invoked only under the given set of circumstances which show the transaction as unfair which call for interference. by the Court.
29. This Court, in the decision Indian Bank, Tiruvannamalai v. A.B. Gurukal held at page 303:
On a consideration of the relevant provisions of the Usurious Loans Act, it is evident that there is no prohibition as such against the charging of compound interest. Indeed, no provision of law has been brought to our notice, which per se prohibits the charging of compound or even high rates of interest. But where such transactions are sought to be enforced through Courts of law, the Courts have been charged with the duty of examining the transaction as a whole and ascertaining whether in a given case, the transaction is unfair or the rate of interest is usurious and if that is found to be so, to afford relief to the debtor-concerned.
30. The applicant herein had paid substantial sum of money to the respondent herein pending the suit on various applications arising thereon contested up to the High Court. Hence, taking note of the real intent of the transaction as a loan transaction and the nature of security backing the loan, the demand of interest at 36% per annum is certainly excessive demanding intervention by the Court in the provisions of the Usurious Loans Act, 1918. Consequently, the stand of the applicant placing reliance on the decision of the Supreme Court merits acceptance. The penal interest at 36% per annum is excessive and offensive of the provisions of the Act. In the context of the view that I have taken that this is a case of simple loan agreement, having regard to the above-said circumstances, the penal interest charged at 36% is liable to be set aside.
31. Learned Counsel appearing for the respondent administrator however submitted that considering the contract entered into by the original purchaser, it is not open to the subsequent purchaser to question the same. Learned Counsel for the Administrator, however, submitted that once the borrower had signed the document as a hire purchase agreement agreeing to pay interest at the defaulted instalment, the subsequent buyer or assignee has no locus stand! to question the same.
32. I do not think that this submission merits acceptance. The respondent is a party to the present deed in the form of applicant. An illegality present in the original agreement carried on further into the subsequent assignment deed cannot be permitted to stay in its place once the matter comes to the Court for consideration. Courts have the duty to examine the transaction as a whole to find out whether the transaction is unfair on the interest demanding interference by the Court whenever an issue arises before the Court for consideration. When the interest is found to be usurious and the circumstances demand interference, I do not find reason to show hesitancy or inhibition in granting relief to the party suffering the excessive interest levy.
33. In this regard, useful reference may also be made to the decision of the Kerala High Court State Bank of Travancore v. George, relied on by the learned Counsel for the applicant in the context of Section 3 of the Usurious Loans Act, 1918 that any admission of a liability to pay interest at 36% per annum cannot nullify the jurisdiction of the Court to reopen the transaction, to relieve the debtor of the liability to pay excessive interest. Having regard to the nature of the levy as additional finance charges, the interest stipulated is excessive and violative of the provisions of the Madras Act of 1937. I do not find any justification to differ from the view expressed therein. Hence, the objection taken by the respondents is hereby overruled.
34. In the view I have taken, the contracted amount at 15.5% interest per annum on the amount borrowed alone shall stand. Any default thereon in the remittance of the monthly installments cannot be compensated with annual finance charges at 36% per annum. The interest that is to be calculated beyond the period of repayment, at best, can carry interest at 12% per annum and nothing beyond, till the date of realisation.
35. Learned Counsel for the applicant submits that by getting the signature of the borrower in a printed format, clauses whereof are wholly irrelevant to a simple case of borrowing, the borrower should not be overburdened with an unfair payment. Apart from the irrelevancy of these clauses, per se, the demand itself is thrust on the borrower in a very unwitting way. There are no special circumstances warranting the charging of interest at such rate of 36%.
36. The learned Counsel for the applicant submitted that the primary purpose of the document was to lend and realise the amount lent. If the intention were to prove the transaction as a hire purchase scheme, then the document would have a value fixed to the vehicle. Further, lease financing would have left an option for purchase by the borrower at a depreciated value. In the absence of vital details thereon, the intention is clear that it is a case of simple money lending. The learned Counsel for the applicant also placed reliance on Section 23 of the Contract Act that the agreement was against public policy and the transaction was wholly colourable, aimed at a tax benefit to itself.
37. Learned Counsel for the applicant also pointed out that the respondent company in liquidation produced a document alleged to be a copy of the invoice pertaining to the vehicle purchased, in the suit filed before the Kozhikode Munsif Court. The applicant states that the format of the alleged invoice is different from the format of the invoice issued by the dealer at the time of delivery of the vehicle. It is stated that the invoices of the dealer in 1995 was prepared in a program called "foxpro". The invoice produced in the suit is created with Unix program, which was started only after 1996. Learned Counsel also pointed out to the absence of the dealer's name in the document marked. In this context, learned Counsel submits that the mere invoice per se, does not confer title on the respondent to convert a loan agreement into a hire purchase agreement. Learned Counsel for the applicant brought to my attention the copy of the R. C. Book to show that the registration in question was in the name of Kunhamrnad and that including the insurance certificate, all documents stood in the name of the owner. Learned Counsel also pointed out to the provisions of the Motor Vehicles Act, 1988 and submits that in the case on hand, the delivery was taken by the applicant herein. Learned Counsel refers to Form 21, Rule 47 of the Motor Vehicles Rules and the Special Provisions under Section 51 under the Motor Vehicles Act, 1988 which has specific reference to vehicles held under hire purchase agreement. He also brought to my attention Form-35 to impress on the fact that under the Motor Vehicles Act, 1988 for purposes of registration, the requirement is the sale certificate only.
38. Learned Counsel placed reliance on the decision of the Punjab and Haryana High Court reported in AIR 2003 P & H 98 Tarun Bhargava v. State of Haryana as well as to Ganga Hire Purchase Pvt. Ltd. v. State of Punjab to emphasise on the fact that the term 'owner' as per Section 2(30) Motor Vehicles Act must be held to mean the "registered owner" of the vehicle in whose name the vehicle stands registered under the provisions of (he Motor Vehicles Act, 1988.
39. The term "owner" is defined under Section 2(30) of the Motor Vehicles Act, 1988 as the person in those name the motor vehicle stands registered and in relation to a motor vehicle, which is the subject matter of the hire purchase agreement or an agreement of lease or of hypothecation, the person in possession of the vehicle under that agreement. A reading of the provisions under Section 2(30) of the Motor Vehicles Act, 1988 shows that when the motor vehicle is the subject of a hire purchase agreement, the person in possession of the vehicle would come under the definition "owner". The provision under Section 51 also may by referred herein where the vehicle is a subject arising under the hire purchase agreement, there shall be an entry made regarding the existence of such agreement. A perusal of the R.C. Book in this case shows the name of the owner as Kunhammad and in compliance of Section 51, there name of the respondent company appears. However, ownership on this score cannot be rested on this alone. As 1 had viewed earlier, the fact is that the transaction was a loan agreement. The finance for the purchase of the vehicle,, was by the applicant herein. The receipt shows the customer code number which is carried through till the end of the delivery to the applicant herein. In the letter dated 28.3.1996. the respondent addressed a letter to the dealer TVS, Calicut, seeking copies of documents as well as the information as regards the delivery of the vehicle. It is ironical that the vehicle delivered to Kunhammad on 2.2.1996 was registered to the knowledge of the company, the second respondent should plead ignorance of delivery of the vehicle. Considering the nature of the transaction, I have no difficulty in accepting the contention of the applicant herein that the respondent is not the owner of the vehicle, but a mere creditor. The right of the respondent herein is extinguished by the payment of the amount due under the loan agreement. The various terms under the agreement could, at best, be viewed as one intended to secure the interest of the respondent herein to an easy mode of recovery of the amount advanced. The applicant and the predecessor in title is the real owner and he retains his possession of the vehicle throughout. The advance made by the purchaser is no1, a nominal sum of money to secure the hire purchase agreement. In the circumstances, the decision of the Supreme Court Sundaram Finance Ltd. v. State of Kerala applies in full force to the case on hand, which is similar to that of the one decided by the Supreme Court. Viewed in the context of the various terms as well as the documents evidencing the delivery of the vehicle, the sale certificate, the insurance cover, it is clear that the real nature of the transaction is one of simple loan transaction.
40. Learned Counsel for the respondent pi iced reliance on the hypothecation agree merit entered into between the company in liquidation and the State Bank of India and the stock statements sent to the bank in the consortium rate by the State Bank of India for stocks of hire purchase/leased rentals hypothecated to the banks.
41. Learned Counsel appearing for the applicant states that the loan agreement between the respondent herein and the State Bank of India has no relevance as regards the loan taken by the purchaser, under the agreement entered into between the company in liquidation with Kunhammad or in the subsequent one and therefore deserves to be ignored. As regards the stock statement given to the banks, learned Counsel pointed out that the statement merely refers to the agreement particulars and the amount due under each account. As rightly contended by the applicant, the manner of description of the document between the respondent and State Bank India is not decisive of the nature of the transaction between the applicant/purchaser and the respondent herein. As such. I do not think the statement carries any significance' or relevance for the purpose of this case. Learned Counsel also pointed out to the inconsistencies in the amount claimed under the statement filed before the civil Court as well as the counter-affidavit filed before this Court.
42. Learned Counsel for die applicant stales that the applicant had overpaid and is entitled to a refund of Rs. 66.083/- as on 7.12.1998 with interest on the said payment till repayment. It is further stated that us on 24.6.2002, as per the affidavit held in Form-66, the claim for refund was for a sum of Rs. 50,683/-. Having regard to the full compliance of the (sic) agreement terms the applicant prays for the refund of the account with interest at 15.5%, per annum (sic) payment. Learned counsel (sic) the (sic) however (sic) applicant is bound to payment amount of Rs. 6,85,817/- which is after giving (sic) to the payment made belatedly. Interest at 36% per annum as Additional Finance Charges is worded out at Rs. 4,64,583/-. In the view that I have taken, I do not find any ground for acceptance of this plea of the respondent company. In the light of the decision that I have taken, the conclusion herein is that here is a case of simple borrowing of Rs 4,00,000/- with interest payable at 15.5% per annum. If the amount, as borrowed with interest at 15.5% per annum had been repaid within the stipulated time, any amount collected in excess merits to be refunded to the applicant herein. Consequently, there shall be an order as prayed for, directing the respondent to refund the sum of Rs. 50,683/- with interest at 6% per annum from the date it had fallen as excess payment till the date of payment.
43. The applications are allowed, declaring that the transaction between the parties is a loan transaction, that the respondent company was entitled to interest at 15% per annum only on the amount of loan advanced viz., Rs. 4,00,000/-, that the respondent shall refund the excess amount paid of Rs. 50,683/- with interest at 6% per annum from the date it had fallen as overpayment; that the respondent shall issue the H. P. termination form to the applicant in respect of the vehicle KL 11 D 9390. There will, however, be no order as to costs.