Jammu & Kashmir High Court - Srinagar Bench
M/S Cottage Industries Exposition Ltd ... vs The Union Of India on 4 June, 2024
Author: Sanjeev Kumar
Bench: Sanjeev Kumar
HIGH COURT OF JAMMU & KASHMIR AND LADAKH
AT SRINAGAR
WP(C) No. 806/2024
CM No./2 2081/2024.
Reserved on: 29.05.2024.
Pronounced on:04.06.2024.
M/S Cottage Industries Exposition Ltd (CIE)
Shalimar Srinagar-Kashmir
Through its Authorized representative
Shri Muneer Ahmad Bhat ( aged 56 yrs)
S/O Ghulam Mohd Bhat
R/O Near Marriage Hall
Baghwanpora, Barbarshah-Srinagar
.....Petitioner (s)
Through :- Mr. A. Haqani, Sr. Advocate
with Mr. Shakir Haqani, Adv.
V/s
1. The Union of India
Through Secretary Banking,
New Delhi.
2. Reserve Bank of India
Shaheed Bhaghat Singh Marg
Mumbai-400021
Through its Secretary.
3. The Jammu and Kashmir Bank Ltd.
Corporate Headquarters, M. A. Road,
Srinagar, through its Secretary.
4. The Managing Director/Chief Executive,
The Jammu and Kashmir Bank Ltd.
M. A. Road,
Srinagar.
5. The Branch Head,
Large Credit Unit,
Rajendra Place,
New Delhi.
.....Respondent(s)
Through :- Ms. Bisma Ali, Adv. vice
Mr. T. M. Shamsi, DSGI for R-1&2.
Mr.Rabinder Singh,Advocate for R 3-5.
Coram: HON'BLE MR. JUSTICE SANJEEV KUMAR, JUDGE
JUDGMENT
1. The petitioners is inter alia aggrieved of the prepayment charges stipulated in the loan Sanction Orders dated 27-06-2022 and 22-09- 2022 issued by J&K Bank in favour of the petitioner.
2. The challenge of the petitioner to the stipulation of pre-payment charges contained in the two sanction orders supra is primarily based on the argument that, this stipulation is contrary to and in violation of mandatory statutory provisions contained in the Banking Regulation Act, Micro Small and Medium Enterprises Development Act 2006 [„the MSMED Act‟ for short], and Competition Act, 2002 besides it offends the statutory policy of the Reserve Bank of India, etc.
3. Before proceedings to examine the merit in the argument of Mr. A. Haqani, learned senior counsel appearing for the petitioner, few background facts leading to filing of this petition deserve to be noticed.
4. The petitioner is a public limited company registered with the registrar of companies J and K, with its registered office located at Shalimar Srinagar. The petitioner is also registered as a Small Enterprise with the Ministry of Micro, Small and Medium Enterprises, Government of India. The UDYAM registration certificate issued in favour of the petitioner indicates that the petitioner came to be registered as a Small Enterprise on 25-07-2023. The petitioner- Company is in existence since its incorporation i.e. 27-07-1978. Page2/ WPC No. 806/2024
5. The petitioner claims that, with a view to run its trading activities the petitioner has been dealing with the J&K Bank Limited [the respondent-bank], for last several decades quite satisfactorily. The petitioner claims that never ever before there was any complaint from the respondent-bank with regard to conduct of the petitioner in dealing with the bank. On the request made by the petitioner, the respondent- bank, vide its order dated 27-06-2022, accorded sanction for grant of financial assistance (Term Loan) of Rs. 19.63 crores on floating interest rate basis under Lease Rental Discounting Scheme. Subsequently, vide Order dated 22-09-2022 the respondent-bank again accorded sanction for renewal of Cash Credit Facility in favour of the petitioner on floating interest rate. In both the sanction orders, which are part of the writ petition as Annexure I and II, the respondent-bank stipulated pre- payment charges at the rate of 4% in respect of loan shifted to other banks plus applicable GST. The petitioner did accept the loan facility subject to the terms and conditions laid down in the sanction orders and availed the benefit of loan. The petitioner approached YES BANK Mumbai and got Rs. 25 crore and Rs. 6 crores loan sanctioned to take over the Lease Rental Discounting loans granted by the respondent- bank. The respondent-bank was though approached by the petitioner through series of representations, yet the respondent-bank is adamant to levy 4% foreclosure/prepayment charges at the time of shifting of the facilities to the YES Bank. It is here the petitioner feels aggrieved and Page3/ WPC No. 806/2024 is before this Court to impugn the stipulation of prepayment charges contained in the sanction orders Annexure I and II.
6. The impugned stipulation, which reads, "Pre-payment charges:
4% on the outstanding in respect of loan shifted to other banks plus applicable GST", is assailed by the petitioner on the ground that the guidelines issued under Section 21 and Section 35-A of the Banking Regulation Act and Section 9 and 10 of the MSMED Act prohibits levy of any foreclosure charges/ prepayment charges in respect of Term Loans granted to Micro Small and Medium Enterprises on floating interest rate basis. Reliance is also placed by the learned senior counsel for the petitioner on RBI Circular No. RBI/FIDE/2017-18/56 dated 24- 07-2017 whereby the RBI has prohibited the levy of foreclosure charges/ prepayment penalty in case of MSMEs. It is submitted that the said notification is statutory in nature having been issued by the RBI in exercise of its powers under Section 21 and 35-A of the Banking Regulations Act. Strong reliance is placed on para 5.3 of the Circular dealing with Banking Codes and Standard Board of India [„BCSBI‟] to submit that RBI has set up an autonomous institution in the name of BCSBI in association with the Indian Banks‟ Association for promoting good and fair banking practices. Para 5.3 clearly stipulates that the member banks of the Indian Banks‟ Association shall not levy pre-
payment charges on floating interest rate loans. It is argued that the J&K Bank is not honoring its commitment made to the BCSBI and is Page4/ WPC No. 806/2024 illegally and arbitrarily demanding pre-payment charges at the rate of 4% on the shifting of the loan from it to the YES Bank Mumbai.
7. Per contra, the stand of the respondent-bank, as is disclosed by it in its reply affidavit, is that the loans were sanctioned in favour of the petitioner in the year 2022 and were never called in question by the petitioner rather the petitioner accepted all the terms and conditions stipulated in the sanction orders and took the benefit of credit facility extended by the respondent-bank. The petitioner is, therefore, estopped by his conduct to challenge one of the stipulations in the sanction orders, which are now not to the liking of the petitioner. A clear stand is taken by the respondent-bank that, when the petitioner-company availed the credit facility from the respondent-bank, it was not registered under the MSMED Act. The loans were extended in the year 2022 whereas the UDYAM registration was granted to the petitioner only on 25-07-2023. It is submitted by the respondent-bank that the case of the petitioner is covered neither by the Master Circular issued by the RBI nor the Code of Banking Commitments towards the Micro and Small Enterprises, as is claimed by the petitioner. The benefit of the Circulars, the Banking Code and the commitment of the Bank made to BCSBI is not available to the petitioner which availed the loan facility as a trading entrepreneur and was, at the relevant time, not registered as a „Small Enterprise‟ under the MSMED Act.
8. Having heard learn counsel for the parties and perused the material on record, I am of the considered opinion that the petitioner, Page5/ WPC No. 806/2024 having availed the benefit of term loan twice from the respondent-bank subject to the terms and conditions laid down therein, is estopped by his conduct to call in question a stipulation in the sanction orders, which is not to the liking of the petitioner.
9. The petitioner ought to have disputed the stipulation at the time of availing of the loan or challenged the same before actually taking the benefit of the term loan. The petitioner cannot be permitted to take the benefit of the terms and conditions in the sanction orders beneficial to him and challenge the one which is not to his liking or is some way prejudicial to him. The doctrine of estopple is fully attracted in the instant case. This Court cannot permit the petitioner to turn around and challenge the impugned stipulation envisaged in the sanction orders, Annexure I and II, that too after having taken the benefit of the term loans sanctioned thereby.
10. It is also not in dispute that when the term loans in favour of the petitioner were sanctioned by the respondent-bank, the petitioner was not registered as Small Enterprise under the MSMED Act. The petitioner cannot claim the status of an Enterprise, admitted to benefits available to such Enterprise under MSMED Act, unless it is validly registered in terms of Section 8 thereof. It is only after an industry is registered as Micro, Small or Medium Enterprise, it can avail the benefits and facilities extended to Micro, Small and Medium Enterprises under Chapter IV and V of the MSMED Act. Section 10 of the Act is of some relevance in the present case and is set out below:- Page6/ WPC No. 806/2024
" 10. Credit facilities.
The policies and practices in respect of credit to the micro, small and medium enterprises shall be progressive and such as may be specified in the guidelines or instructions issued by the Reserve Bank, from time to time, to ensure timely and smooth flow of credit to such enterprises, minimise the incidence of sickness among and enhance the competitiveness of such enterprises."
11. The Master Circular dated 01-07-2015 issued by the RBI, which is strongly relied upon by the petitioner, is virtually a consolidation of various instructions issued by the RBI in the area of customer service up to June 30, 2015. Clause 6.3 and 6.4 of the Circular, which are relevant for our purpose are reproduced hereunder:-
"6.3 Home Loans-Levy of fore-closure charges/pre- payment penalty.
6.3.1 The Committee on Customer Service in Banks (Chairman: M. Damodaran) had observed that foreclosure charges levied by banks on prepayment of home loans are resented upon by home loan borrowers across the board especially since banks were found to be hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario. As such, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source.
6.3.2 The removal of foreclosure charges/prepayment penalty on home loans will lead to reduction in the discrimination between existing and new borrowers and competition among banks will result in finer pricing of the floating rate home loans. Though many banks have in the recent past voluntarily abolished pre-payment penalties on floating rate home loans, there is a need to ensure uniformity across the banking system. It has, therefore, been decided that banks will not be permitted to charge foreclosure charges/pre-payment penalties on home loans on floating interest rate basis, with immediate effect.
6.3.3 As per extant guidelines a fixed rate loan is one where the rate is fixed for entire duration of the loan. Hence, the Dual Rate/Special Rate home loans sanctioned by banks cannot be treated as fixed rate loans. In case of Dual Rate/ Special Rate home loans, the provisions of paragraph 6.3.1 above will be applicable from the date the rate of interest on the loan becomes floating.Page7/ WPC No. 806/2024
6.4 Levy of Foreclosure Charges / Pre-payment Penalty on Floating Rate Term Loans Banks will not be permitted to charge foreclosure charges / pre-payment penalties on all floating rate term loans sanctioned to individual borrowers."
12. From reading of both the clauses, it is evident that the RBI has issued instructions to the Banks not to charge foreclosure charges/ prepayment penalties on home loans on floating interest rate basis as also on the floating rate term loans sanctioned to individual borrowers. In essence, the instructions to the Banks to forebear from charging pre- payment penalties/foreclosure charges, is in respect of the individual consumers availing housing loan on floating interest basis and other individual borrowers. The companies, like the petitioner, are not covered by the Master Circular.
13. The plea of the learned senior counsel, that petitioner too is covered by the Master Circular issued by the RBI in the year 2015, is thus without any substance.
14. Next comes the plea of the petitioner based upon Para 5.3 of the Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector]-Directions, 2017 ["directions of 2017"]. It is true that in terms of Para 5.3, the BCSBI, in collaboration with the Indian Banks‟ Association (IBA), the RBI and members Banks have evolved the „Code of Bank‟s Commitment to Micro and Small Enterprises‟ [ "the Code"]. The objective of the Code is to promote good banking practices, setting minimum standards for the adherents, Page8/ WPC No. 806/2024 increasing transparency and achieving higher operating standards etc. and the Code of Banks commitment to Micro and Small Enterprises issued in August, 2015 contains the commitment of the Bank to the Micro, Small and Medium Enterprises borrowers that, it will not charge or levy any pre-payment penalty on floating interest rate loans extended to such entities. Clause (h) of para 5.3 of the Code provides as under:-
"5.3. Sanction / Rejection We will:
a..................................................................... ....................................................................... ....................................................................... h. Permit prepayment of floating rate loans without levying any prepayment penalty,"
15. As is the correct stand taken by the respondent-bank that the benefit of the aforesaid provision made in the Code is restricted to Micro Small and Medium Enterprises only. The directions of 2017 issued by the RBI are meant for the benefit of Micro, Small and Medium Sector, so is the Code.
16. To reiterate, it may be stated that the two loans in favour of the petitioner by the respondent-bank were sanctioned at a time when the petitioner was a Company registered under the Companies Act and was not christened as Micro, Small or Medium Enterprise under the MSMED Act. It is the position of the borrower at the time of sanction of the loan which is relevant for determining the terms and conditions to which a borrower will be subjected to. The respondent-bank did not breach its commitment when it extended two loans in favour of the petitioner-company with a clear stipulation for levy of pre-payment Page9/ WPC No. 806/2024 charges at the rate of 4% for shifting of the loan to other Banks. At that point of time, when the loan sanction orders were issued, the petitioner was not a unit registered under the Micro, Small or Medium Enterprise Development Act, 2006 nor it was an individual borrower or Home loanee. There was thus no prohibition contained anywhere, either in the Master Circular of the RBI or the RBI directions of 2017 for not imposing such conditions of prepayment charges in the loan sanction orders.
17. The reliance placed by learned senior counsel for the petitioner on the judgment of Calcutta High Court rendered in Devendra Surana v, Bank of Baroda and ors, 2019(1) WBLR 202, is distinguishable on facts. In the aforesaid case the High Court was considering as to whether a sole proprietorship can be considered as an individual borrower for availing the benefits of the Circulars issued by the RBI from time to time, calling upon the Banks not to charge foreclosure charges/ prepayment penalties on floating rate loans sanctioned to individual borrowers. The Calcutta High Court opined that a natural person and his sole proprietorship are the same legal entity. It is explained that sole proprietorship is a name under which a natural person carries on business and is an alter ego of an individual.
18. In the instant case, the petitioner is not a proprietorship concern but is a Company registered under the Companies Act. The Company is distinct and has an existence different from its Directors and share- Page10/ WPC No. 806/2024 holders. Therefore, the loan sanctioned in favour of a company cannot, by any stretch of reasoning, be called a loan to an individual borrower.
19. The other judgments relied upon by the learned senior counsel for the petitioner are to bring home his point that Circulars and directions issued by the RBI from time to time to regulate the functioning of various Banks and financial institutions, are binding in nature and all the Banking institutions are bound to apply the same. Needless to say that the legal position with regard to enforceability of statutory directions issued by the RBI is not in dispute. In para 5 of the Constitution Bench judgment of Hon‟ble the Supreme Court rendered in Central Bank of India v. Ravindra, (2002) 1 SCC 367 it has been held thus:- "5. The power conferred by Section 21 and 35-A of the Banking Regulation Act, 1949 is coupled with duty to act. Reserve Bank of India is the prime banking institution of the country entrusted with a supervisory role over banking and conferred with the authority of issuing binding directions, having statutory force, in the interest of public in general and preventing banking affairs from deterioration and prejudice as also to secure the proper management of any banking company generally. Reserve Bank of India is one of the watchdogs of finance and economy of the nation. It is, and it ought to be, aware of all relevant factors, including credit conditions as prevailing, which would invite its policy decisions. RBI has been issuing directions/circulars from time to time which, inter alia, deal with the rate of interest which can be charged and the periods at the end of which rests can be struck down, interest calculated thereon and charged and capitalized. It should continue to issue such directives. Its circulars shall bind those who fall within the net of such directives. For such transaction which are not squarely governed by such circulars, the RBI directives may be treated as standards for the purpose of deciding whether the interest charged is excessive, usurious or opposed to public policy."
Page11/ WPC No. 806/2024
20. The judgment of High Court of State of Telangana in M. Yogam Naidu v. The Bank of Baroda and ors, reported as MANU/TL/0506/2022, too is not applicable to the instant case. In the aforesaid case also the High Court of Telangana was dealing with a loan to a individual borrower and not to the company.
21. In DLF Limited v. Punjab National Bank, 2011 (180) DLT, 435, the Delhi High Court has considered the prepayment penalty clause in the loan agreement in the context of Section 74 of the Indian Contract Act and the law laid down by the Constitutional Bench in Fateh Chand v. Balkrishan Dass, AIR 1963 SC 1405. The aforesaid argument of the learned senior counsel could have been accorded consideration in the light of the legal position enunciated in DLF (supra), but I find little foundation laid by the petitioner in the petition. It is not subject matter of debate in this petition as to whether the prepayment charges envisaged in the sanction orders are by way of pre- fixed compensation for breach or a penalty for breach. That apart, to take the benefit of Section 74 of the Indian Contract Act, the onus is of the petitioner to show that by shifting of the loans from the respondent- bank to the YES Bank and squaring the loans of respondent-bank prematurely will not cause any loss to the respondent-bank or will cause loss to the respondent-bank which is less than 4%, which the respondent-bank is proposing to charge as prepayment charges. In the absence of such pleadings in the petition and in the absence of an opportunity to the respondent-bank to rebut, it is not possible to Page12/ WPC No. 806/2024 examine the issue in the light of the law laid down by the Constitution Bench in Fateh Chand case (supra).
22. Viewed from any angle, I find no merit in this petition and the same is, accordingly, dismissed.
(SANJEEV KUMAR) JUDGE SRINAGAR:
04.06.2024 Anil Raina, Addl. Registrar/Secy Whether order is reportable: Yes MIR ARIF MANZOOR I attest to the accuracy and authenticity of this document 04.06.2024 Page13/ WPC No. 806/2024