Gujarat High Court
Janak Shantilal Patel vs M/S Aditya Birla Finance Limited on 30 September, 2022
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 2375 of 2016
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy
of the judgment ?
4 Whether this case involves a substantial question
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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JANAK SHANTILAL PATEL & 1 other(s)
Versus
M/S ADITYA BIRLA FINANCE LIMITED & 1 other(s)
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Appearance:
MR ASHOK L SHAH WITH MR AB MUNSHI(1238) for the Petitioner(s) No.
1,2
MR AMAR N BHATT(160) for the Respondent(s) No. 2
MR R S SANJANWALA, SENIOR ADVOCATE WITH MR BOMI H
SETHNA(5864) for the Respondent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 30/09/2022
CAV JUDGMENT
Heard learned advocate Mr.Ashok L. Shah with Page 1 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 learned advocate Mr.A.B.Munshi for the petitioners, learned Senior Advocate Mr.R.S.Sanjanwala with learned advocate Mr.Bomi H. Sethna for the respondent No.1 and learned advocate Mr.Amar Bhatt for the respondent No.2.
1. Rule, returnable forthwith. Learned advocates for the respondents waive service of notice of rule.
2. By this petition under Article 226 of the Constitution of India, the petitioners have prayed to direct the respondent No.1 to refund an amount of Rs.1,12,55,885/- which was charged by the respondent No.1 towards pre-payment charges with interest at the rate of 2% per annum as per the guidelines dated 14.07.2014 issued by the respondent No.2-Reserve Bank of India.
3. The facts in brief which give rise to this petition are as under:
Page 2 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022
C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 3.1. The petitioners were the partners in M/s.
Sai Enterprise and they jointly applied to the respondent No.1-a Non-Banking Financial Company (NBFC) to avail loan against property amounting to Rs.58,75,00,000/- at the floating rate of 12.5% per annum linked to Indusind Bank base rate on 30th March, 2012. The period of loan was 96 months which was revised to 180 months later on. 3.2. It is the case of the petitioners that since the petitioners were getting a loan at a lower rate of interest from another Bank, the petitioners informed the respondent No.1 for pre- closure of their account and further requested the respondent No.1 to intimate the petitioners the amount that the petitioners would be required to pay up to pre-close the aforesaid loan account.
3.3. The respondent No.1 by letter dated 01.04.2015 informed the petitioners to pay the Page 3 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 amount of Rs.51,60,89,236/- towards pre-closure outstanding including the pre-payment charges of Rs.1,12,55,885/- (inclusive of service tax). 3.4. The petitioners paid the amount of Rs.51,60,89,236/- including the pre-payment charges on 27.03.2015 and 01.04.2015 whereby each of the petitioners had to pay Rs.25,80,44,618/- as per their one-half share.
3.5. The respondent No.1 issued No Dues Certificate dated 20th April 2015 to the petitioners.
3.6. It is the case of the petitioners that the respondent No.2 issued Guidelines dated July 14, 2014 relating to "Levy of foreclosure charges/pre-payment penalty on Floating Rate Loans" addressed to all NBFCs informing that the NBFCs shall not charge foreclosure charges/pre- payment penalties on all floating rate term loans Page 4 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 sanctioned to individual borrowers with immediate effect.
3.7. The petitioners therefore on coming to know about the Guidelines of 2014, by letter dated 24.07.2015 addressed to the respondent No.1, requested to refund the pre-payment charges of 1,12,55,885/- paid by the petitioners with interest at the rate of 12% per annum. It is the case of the petitioners that as the petitioners availed loans with floating rate of interest from the respondent No.1-NBFC in individual capacity and as per the Guidelines of 2014 issued by the respondent No.2-RBI, no pre-payment charges could have been recovered from the petitioners by the respondent No.1. 3.8. The respondent No.1 by letter dated 03.09.2015 rejected the demand made by the petitioners to refund the amount of Rs.1,12,55,885/- charged by it as pre-payment Page 5 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 charges on the ground that the loan was advanced to the partnership firm and not the individuals. 3.9. The petitioners thereafter filed a complaint before respondent No.2-Reserve Bank of India(RBI) which was received by the respondent No.2 as acknowledged vide letter dated 16.09.2015. 3.10. The respondent No.2-RBI vide letter dated 16.10.2015 informed the petitioners that as per the inquiry made by it from the respondent No.1 and as informed by the respondent No.1, loan was given to the partnership of the petitioners and therefore, the respondent No.1 has charged the pre-payment charges as per the sanction letter.
3.11. Being aggrieved by the rejection of the demand made by the petitioners to refund the pre- payment charges of Rs.1,12,55,885/- by the respondents, the petitioners have preferred this Page 6 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 petition.
4.1. The respondent No.2-RBI has issued Notification dated July 14, 2014 addressed to all Non-Banking Financial Companies / Residuary Non- Banking Companies with regard to levy of foreclosure charges/pre-payment penalty on Floating Rate Loans which reads as under :
"Please refer to paragraph (iii) of Guidelines on Fair Practices Code for NBFECs issued vide Circular DNBS(PD) CC No.80/03.10.042/2005-06 dated September 28, 2006 and paragraph 2(A) (iii) of Master Circular DNBS PD .CC.No.388 /03.10.042/2014-15 dated Jul 1 2014.
2. As a measure of customer protection and also in order to bring in uniformity with regard to prepayment of various loans by borrowers of banks and NBFCs, it is advised that NBFCs shall not charge foreclosure charges/ pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect."
4.2. The aforesaid Master Circular is further amended by notification dated September 1, 2016. Page 7 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 Clause 30 of the said Master Circular, 2016 titled as "Master Direction- Non-Banking Financial Company- Systematically Important Non- Deposit taking Company and Deposit taking Company (Reseve Bank) Directions, 2016." In Clause 30(4) of the said Master Circular, it is provided as under:
"As a measure of customer protection and also in order to bring in uniformity with regard to prepayment of various loans by borrowers of banks and NBFCs, applicable NBFCs shall not charge foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned to individual for purposes other than business to individual borrowers, with or without co-obligant(s).
4.3. By notification dated August 2, 2019, the aforesaid Master Circular was further clarified by the RBI as under:
"Please refer to paragraph 30(4) of Chapter VI of Master Direction - Non- Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 and paragraph 30(4) of Chapter V of Master Direction - Non-
Banking Financial Company - Non- Page 8 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022
Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 on waiver of foreclosure charges/ prepayment penalty on all floating rate term loans sanctioned to individual borrowers.
2. It is clarified that NBFCs shall not charge foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned for purposes other than business to " individual borrowers, with or without co-obligant(s).
3. The Non-Bankig Financial Comsan - Systemically Important Non-Desposit taking Company and Deposit taking Compamy (Reserve Bank) Direction, 2016 and the Non-Bankins Financial Company - Non- Systemicall Imsortant Non-Deposit taking Company (Reserve Bank) Directions, 2016 have a accordingly been updated."
5.1. Learned advocate Mr. A. L. Shah for the petitioners submitted that admittedly the loan was advanced to the petitioners who are individual natural persons. It was submitted that borrowers can be of two types, (i) individuals that are natural persons and (ii) non-individuals that are body corporates. Heavy reliance was placed upon the Guidelines of 2014 Page 9 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 issued by the RBI to submit that the said Guidelines would apply to the borrowers who are individual natural persons. It was submitted that the Guidelines of RBI stipulate that the borrowers should have applied individually for the loan and therefore, when the petitioners who have jointly applied for the loan as individual natural persons, the RBI's Notification/Guidelines would apply in the facts of the case. It was submitted that even if the borrowers consist of more than one individual but when all the loanees are individuals, then the RBI's Guidelines of 2014 would apply and the individual loanee is not required to apply in separate individual capacity.
5.2. Learned advocate Mr.Shah submitted that it is not in dispute that the petitioners have jointly applied for the loan as co-applicants being loan against property (lease rental discounting) from the respondent No.1-NBFC. It Page 10 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 was submitted that when the petitioners availed the loan on 30th March, 2012, there was a clause of foreclosure charges in the sanctioned letter however, the respondent No.1 could not have charged the fore-closure charges on 1st April, 2015 after the issuance of notification dated 14th July, 2014 issued by the respondent No.2-RBI. 5.3. It was further submitted that the joint applications made by the petitioners cannot be termed to be a loan advanced by the respondent No.1 to the partnership firm of the petitioners on the ground that the partnership firm was a guarantor to the loan advanced to the petitioners.
5.4. It was submitted that by no stretch of imagination the contention raised on behalf of the respondents can be accepted that the loan was advanced to the partnership firm only because the repayment of loan was paid from Escrow account in Page 11 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 which the rentals of the property of the partnership firm was being deposited. 5.5. Learned advocate Mr.Shah relied upon the decision of Apex Court in case of Munshi Ram and Others versus Municipal Committee, Chheharta1 wherein the Apex Court considered the provisions of Section 4 of the Partnership Act, 1932 to the effect that the firm is only a compendious description of the individuals who compose the firm in paragraph No.17 as under:
"17. 'Partnership' as defined in Section 4 of the Indian Partnership Act, 1932, is the relation between persons who have agreed to share the profits of a business carried on by all or any of them for the benefit of all. The section further makes it clear that a firm or partnership is not a legal entity Separate and distinct from the partners. Firm is a compendious description of the individuals who compose the firm. The crucial words in the definition of 'partnership' are those that have been underlined. They hold the key to the question posed above. They show that the business is carried on by all or any 1 (1979) 3 Supreme Court Cases 83 Page 12 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 of the partners. In the instant case, admittedly, all the plaintiff-appellants are carrying on the business in partnership. All the six partners are sharing the profits and losses. All the partners are jointly and severally responsible for the liabilities incurred or obligations incurred in the course of the business. Each partner is considered an agent of the other. This being the position, it is not possible to hold that each of the six partners is not carrying on a trade or calling within the purview of clause (b) of Section 61(1) of the Municipal Act. At the most, it can be said that each of these six persons is severally as well as collectively carrying on a trade in the municipality. There is nothing in the language of Section 61 or the scheme of the Municipal Act which warrants the construction that persons who are carrying on a trade in association or partnership with each other cannot be individually taxed under clause (b) of Section 61(1). On the contrary, definite indication is available in the language and the scheme of this statute that such partners can be taxed as persons in their individual capacity. As noticed already, clause (b) makes it clear in no uncertain terms that this is a tax on 'persons'. Its incidence falls on individuals, who belong to a class practicing any profession or art; or carrying on a trade or calling in the municipality. To hold that persons who are collectively carrying on a trade in the municipality cannot be taxed individually, would be to read into the statute words which are not there. There are no words in clause (b) or elsewhere in the statute which, expressly or by Page 13 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 necessary implication, exclude or exempt persons carrying on a trade collectively in the municipality from being taxed as individuals. To attract liability to a tax under this clause, it is sufficient that the person concerned is Carrying on a trade in the municipality, irrespective of whether such trade is being carried on by him individually or in partnership with others. Thus, both the conditions necessary for levying a tax under clause
(b) of subsection (1) of Section 61 of the Municipal Act existed in this case. The appellants are "persons" and they are carrying on a trade in Chheharta Municipality."
5.6. Learned advocate Mr.Shah referred to the definition of "Individual" as per Black's Law Dictionary which reads as under :
"Individual. As a noun, this term denotes a single person as distinguished from a group or class, and also, very commonly, a private or natural person as distin:
guished from a partnership, corporation, or associa: tion; but it is said that this restrictive signification is not necessarily inherent in the word, and that it may, in proper cases, include artificial persons, See also Person."
5.7. It was submitted that "Individual" as per Page 14 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 the dictionary meaning is a single person as distinguished from a group or class, a private or natural person as distinguished from a partnership, corporation or association. It was therefore submitted that as the petitioners have availed the loan from the respondent No.1 in individual capacity as natural person, the notification of 2014 issued by the respondent No.2-RBI would be applicable and respondent No.1 therefore could not have collected the foreclosure charges from the petitioners. 5.8. Learned advocate Mr.Shah relied upon the decision of this Court in case of Bechar Arjan & Co. (Dhrangadhra) Versus Assistant Collector2 to submit that a person can be both animate and inanimate. An animate person means a natural person whereas, an inanimate person is an artificial person. It was submitted that this Court has held that an agricultural land can be 2 (1996) 3 GCD 705 Page 15 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 purchased by a partnership firm consisting of individual agriculturists and therefore, there cannot be any prohibition to sale the land to such partnership firm.
5.9. Reliance was also placed on the decision of the Apex Court in case of M/s. Malabar Fisheries Co., Calicut Versus Commissioner of Income Tax, Kerala3 wherein the Apex Court has held while interpreting the provisions of Section 2(47) of the Income Tax Act, 1961 to the effect that a partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property all that is meant is property or assets in which all partners have a joint or common interest, therefore, upon dissolution, the firm's right in the partnership 3 (1979) 4 SCC 766 Page 16 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 assets are not extinguished but it is the partners who own jointly in common assets of the partnership and therefore, consequences of the distribution, division or allotment of assets of the partnership firm which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of Section 2(47) of the Income Tax Act, 1961. 5.10. Learned advocate Mr.Shah referred to and relied upon the commentary of Pollock & Mulla in the Indian Contract and Specific Relief Act, 14th Edition on Section 2 of the Indian Contract Act, 1982 which reads as under :
"The act constituting the consideration must have been done at the desire or request of the promisor. This indicates the 'return' element of consideration. Contracting a marriage in consideration of a promise of a settlement was enforceable. A promise to compensate for a past voluntary act is also Page 17 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 enforceable as an exception under Section 25(2) of the Act, if the voluntary act is done, 'for the promisor'. If the promisee has acted not at the desire of the promisor, but in reliance of the promise, there is no consideration of the promise. A dispute arose between the original owners of land and their assignees of underground coal and mining rights about the right to receive rent from the sub-lessee of the mining rights. The sub- lessee agreed to pay rent to the assignees, on the latter's executing an indemnity bond. The payment being made at the desire of the assignees, there was a lawful consideration, and the contract was held valid.
An act done at the desire of a third party is not consideration. Thus, a promise by the defendants to pay to the plaintiff a commission on articles sold through their agency in a market, which was constructed by the plaintiff, not at the desire of the defendants, but of the Collector of the place, was without consideration and therefore, void." It could also not be supported under Section 25(2) which enacts chat an agreement without consideration is void unless it is a promise to. compensate a person who has already voluntarily done something for the promisor. The expression 'voluntarily' appears to be used in contradistinction to the words 'at the desire of the promisor"
5.11. Referring to the above commentary it was submitted that assuming for a while that the petitioners have obtained the loan from the respondent No.1 in capacity of partners of the Page 18 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 partnership firm, there was no privity of contract between the partnership firm and the respondent No.1-NBFC in absence of any consideration of a promise of a settlement. It was submitted that in the facts of the case when the respondent No.1 is governed by the notification issued by the respondent No.2-RBI, the benefit of the notification issued by the respondent No.2-RBI ought to have been given to the petitioners.
6.1. On the other hand, learned Senior Advocate Mr.R.S.Sanjanwala for the respondent No.1-NBFC submitted that the petitioners are not entitled to get refund of the foreclosure charges paid by the petitioners because there is misinterpretation and suppression of the material fact on record. It was submitted that there are disputed questions of fact, and the entire matter requires assessment of evidence and the correctness of each fact and therefore this Court Page 19 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 may not exercise jurisdiction under Article 226 of the Constitution of India. It was submitted that this Court is not a Recovery Tribunal so as to seek recovery of the dues by the petitioners resulting into abuse of process of law. 6.2. It was submitted that the petitioners never approached respondent No.1 as individual borrowers, but they represented as partners of M/ s. Sai Enterprise. Reference was made to the partnership deed of M/s. Sai Enterprise where the petitioners are partners having 66% share. It was submitted that as per the terms and conditions of agreement between the petitioners and the respondent No.1 advancing the loan, it is apparent that the loan was not given to the individuals but to the partnership firm. Reference was made to the clause for security of the property belonging to the partnership firm. Learned Senior Advocate Mr.Sanjanwala invited the attention of the Court to the letter of amended Page 20 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 sanctioned terms dated 13th April, 2012 to show that the applicants to the loan were Mr.Jagatbhai Shantilal Patel and Mr.Mukesh Shantilal Patel as applicant and co-applicant respectively and Mrs.Amisha Janakbhai Patel and Mrs.Sharmila Mukeshbhai Patel and M/s. Sai Enterprise were guarantors. It was therefore, submitted that the loan was applied by the partners of M/s. Sai Enterprise jointly. It was pointed out that clause 5 of the sanction terms refers to the mortgage on the property of the M/s. Sai Enterprise along with underlying escrow of the lease rental receipts from the lessees of the said property to pay the installments of the loan.
6.3. It was therefore submitted that the respondent No.1 was correct in rejecting the demand of the petitioners as the said loan was availed by the partnership firm and not by individuals and hence notification dated 14 th Page 21 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 July, 2014 of the RBI would not be applicable in the facts of the case.
6.4. Learned Senior advocate Mr.Sanjanwala also relied upon the mortgage deed exhibited in the year 2012 in favour of the respondent No.1-NBFC to point out that the mortgage deed dated 26th April, 2012 was executed by the petitioners and M/s. Sai Enterprise partnership firm through the petitioners creating a joint and several liability as mortgagors of the property belonging to the partnership firm as security for the loan advanced by the respondent No.1-NBFC. It was therefore submitted that the petitioners cannot be said to have availed the loan in individual capacity.
6.5. Learned advocate Mr.Sanjanwala also referred to the letter dated 25.03.2015 issued by M/s. Sai Enterprise authorising Mr.Dinesh N. Mehta to foreclose/settle the loan and release the Page 22 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 property with regard to the loan advanced by the respondent No.1-NBFC. It was therefore pointed out that though the sanction letter is in name of the petitioners but in the amended sanctioned letter dated 13th April, 2012, name of partnership firm is also mentioned as applicant to the loan. It was therefore submitted that in the facts of the case emerging from the record, the loan advanced by the respondent No.1 cannot be said to be given to petitioners in individual capacity as the same was advanced jointly to the petitioners as partners of M/s. Sai Enterprise. 7.1. Learned advocate Mr.Amar Bhatt for the respondent No.2-Reserve Bank of India submitted that the RBI has power to supervise and inspect the books of accounts of a NBFC, however, it has no power to adjudicate the disputes and in case of disputes between the NBFCs and its customers and violation of any of the regulatory guidelines/directions issued by the RBI, the Page 23 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 aggrieved party can represent to RBI for appropriate action against the regulatory authority. It was submitted that however, the complaint requires detail investigation with respect to commercial decisions of the NBFCs and RBI is not empowered to adjudicate the disputes warranting adjudication of rights. It was submitted that Banking Ombudsman Scheme, 2006 was not applicable to NBFCs at the relevant time and the letter dated 16.10.2015 issued by the RBI is only indicative of the details shared by the respondent No.1 and it is not the decision of the RBI.
7.2. It was submitted that the guidelines do not define the term "individual borrowers" and "borrowings" explicitly. Attention of the Court was invited to paragraph 30 under part-B:
Development and Regulatory Policies of the First Bi-monthly Monetary Policy Statement, 2014-15 dated 1st April, 2014 wherein, it is mentioned Page 24 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 that "consumer protection is an integral aspect of financial inclusion. The Reserve Bank proposes to frame comprehensive consumer protection regulations based on domestic experience and global best practices. In the interest of their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty." It was submitted that in view of such guidelines as a measure of consumer protection, banks were advised that they shall not charge foreclosure charges/pre-payment penalties on all floating rate term loan sanctioned to individual borrowers, with immediate effect as per circular dated May 7, 2014.
7.3. It was submitted that thereafter, as a measure of customer protection and also in order to bring in uniformity with regard to prepayment of various loans by borrowers of banks and NBFCs, vide circular dated July 14, 2014, NBFCs were Page 25 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 also advised similarly not to charge foreclosure/ pre-payment penalties on all floating rate term loans sanctioned to individual borrowers with immediate effect.
7.4. It was submitted that the RBI started issuing Master Directions on all regulatory matters from January, 2016 and the existing Master Circulars issued on various subjects were withdrawn with the issue of Master Directions on the subject and accordingly, RBI issued Master Directions, 2016 for systematically and non-systematically important non-deposit taking company and deposit taking NBFCs respectively. It was pointed out by learned advocate Mr.Bhatt that in the current version of both the Master Directions as updated on 17th February, 2020, the relevant guidelines on foreclosures are at para 31(4). It was pointed out that in clarificatory circular dated August 2, 2019 it is clarified that NBFCs shall not charge foreclosure charges/pre-payment penalties Page 26 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 on any floating rate term loan sanctioned for purposes other than business to individual borrowers, with or without co-obligant(s).
7.5. It was therefore submitted by learned advocate Mr.Bhatt that respondent No.2-RBI has issued the Master Directions which are binding upon all NBFCs but at the same time, it is for the NBFC to consider the nature of loan advanced by it. It was submitted that the respondent No.1 has issued the loan to the petitioners in joint name along with partnership firm and on basis of such information, RBI has issued the letter dated 16.10.2015 intimating the petitioners that the foreclosing charges are recovered as per the agreement of the loan given to the partnership and not to the individual borrowers.
8. Having heard the learned advocates for the respective parties, it is not in dispute that the petitioners who are individual natural persons Page 27 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 who jointly applied for loan against property from the respondent No.1-NBFC in the year 2012. As per the first agreement dated 30th March, 2012, the sanction letter was in joint names of the petitioners stipulating the terms and conditions of the sanction of the loan. On perusal of the sanction letter dated 30th March, 2012, there is a stipulation as to payment of 2% plus service tax for foreclosure charges. It is provided that "if you wish to pre-close your loan facility, you will need to pay pre-closure fee at the rate of 2% with applicable service tax on the loan plus any amount that have been part pre-paid in the same financial year which has not been charged".
9. Thereafter, on 13th April, 2012, the sanction letter was amended and the same was issued in name of petitioners and guarantors as applicants to the loans. The guarantors include the partnership firm M/s. Sai Enterprise and all its partners. The period of term loan was increased Page 28 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 from 96 months to 180 months and mortgaged property included the property of the partnership firm also in addition to the personal property of the petitioners. The security is also taken as lien and escrow of all present and future rentals receivable from M/s. Root Corporation Limited on property of the firm situated at Ginger Hotel, Opp. Four Season Residency, Behind Nilam Baugh Party Lawn, Surat Dumas Road, Surat. All four partners of M/s. Sai Enterprise consisting of petitioners and their respective wives were signatory to the loan agreement. The amended sanction terms also included the terms and conditions of the sanction letter dated 30th March, 2012. The petitioners have thus agreed to pay foreclosure charges at the time of availing the loan in the year 2012. Pursuant to the sanctioned letter, the partnership firm has also informed the lessee of the property to deposit the rent in the escrow account.
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10. In view of the above facts, the contention of the petitioners that they are individuals who have obtained the loan facility from the respondent No.1-Bank and therefore, the benefit of notification dated 14th July, 2014 is to be extended to the petitioners by refund of pre- payment charges recovered by the respondent No.1 for foreclosure of the loan cannot be accepted.
11. The reliance placed on behalf of the petitioners on the definition of the individual and distinction between the "individual" and "individual borrowers" appearing in the notification of the RBI is very attractive at the first blush but on closer scrutiny of the facts of the case, it is apparent from the undisputed fact that the loan was advanced to the petitioners in the capacity of the partners of the partnership firm as the loan amount was availed against the mortgage of the property of the firm to earn interest from the same as well. Page 30 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022
12. If the source of the notification dated July 14, 2014 is probed, then it emerges that Master Circular pertaining to Fair Practice Code was issued by the RBI consolidating all the instructions issued on the topic as on June 30, 2014. The Sub-clause (4) of the Master Circular updated on October 30, 2014 includes the notification dated July 14, 2014 to the effect that as a measure of consumer protection and in order to bring in uniformity with regard to the prepayment of various loans by borrowers of banks and NBFCs, it was advised that NBFCs shall not charge the foreclosure charges/pre-payment penalties on all floating rate term loan sanctioned to individual borrowers with immediate effect meaning thereby the intention of the RBI was to grant benefit to the individual borrowers and not the joint borrowers who are partners of the partnership firm whose property is taken as mortgage for the purpose of sanction of the loan Page 31 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 by the financial institution- the NBFC.
13. It is also pertinent to note that the petitioners have paid pre-payment charges as per the terms of the sanctioned letter in the year 2015 to the respondent No.1 as the petitioners wanted to transfer the loan facility to another Bank on account of lower rate of interest and the respondent No.1 has also issued the 'No Due Certificate' pursuant to the payment made by the petitioners in the year 2015. The petitioners therefore are not entitled to get the refund of pre-payment charges paid by them voluntarily. In such circumstances, reliance placed on behalf of the petitioners on various decisions as to whether the property of the partnership firm is the property of the partners individually or not and further on dissolution of the partnership firm whether there would be transfer of asset as per the Income Tax Act, 1961, are not required to be considered in the facts of the case because it Page 32 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 is apparent that the petitioners have availed the loan as partners of the partnership firm of M/s. Sai Enterprise which is evident from the sanction letter dated 13th April, 2012.
14. In such circumstances, it cannot be said that the respondent No.1 advanced the loan to "individual borrowers". Only because the petitioners have applied for the loan jointly along with the other partners and partnership firm being a guarantor, it cannot be said that the petitioners are entitled to get waiver of prepayment charges as per the RBI notification dated 14th July, 2014.
15. The RBI notifications are required to be interpreted in the facts of the case emerging from the record and therefore, the petitioners are not entitled to get the refund of the pre- payment charges paid by them to the respondent No.1 at the time of premature re-payment of the Page 33 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 loan in the year 2015.
16. The RBI issued the notification dated 14th July 2014 under the Fair Practice Code in continuation of earlier notifications dated November 21, 2011, December 2, 2011, and July 23, 2012 pertaining to the guidelines on Fair Practices Code for Non-Banking Financial Companies. The RBI first time issued the circular on September 28, 2006, for the purpose of enabling it to regulate the credit system of the country and in exercise of powers conferred under Section 45L of the Reserve Bank of India Act, 1934, broad guidelines on fair practice that are to be framed and approved by the Board of Directors of all Non-Banking Financial Companies was prescribed. In the said Fair Practice Code, the RBI prescribed that in the matter of recovery of loan, the NBFCs should not resort to undue harassment that is persistently bothering the borrowers, at odd hours use of muscle power for Page 34 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 recovery of loans, etc. The Fair Practice Code was thereafter amended by notifications dated October 10, 2007, January 2, 2009, April 24, 2009, including various steps to be taken by the NBFCs for transparency in the functioning of advancing loan. RBI, thereafter, issued guidelines for Fair Practice Code on March 26, 2012, followed by February 18, 2013 revising the guidelines which included as to how the application of the loan is required to be processed, appraised and loan to be disbursed by the NBFCs and other procedure to be adopted in general disclosures in loan agreement, non- coercive method of recovery, internal control system etc. The RBI thereafter consolidated all the circulars and guidelines on Fair Practice code for NBFCs by Master Circular on Fair Practice Code issued on July 1, 2014 as stated hereinabove. Pursuant to such consolidated circular, the RBI issued the notification dated 14th July, 2014 by inserting clause (d) in the Page 35 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 clause (iv) pertaining to general guidelines on Fair Practice Code offered to NBFCs which reads as under:
"(iv) General
(a) NBFCs should refrain from interference in the affairs of the borrower except for the purposes provided in the terms and conditions of the loan agreement (unless information, not earlier disclosed by the borrower, has been noticed).
(b) In case of receipt of request from the borrower for transfer of borrowal account, the consent or otherwise i.e. objection of the NBFC, if any, should be conveyed within 21 days from the date of receipt of request.
Such transfer shall be as per transparent contractual terms in consonance with law.
(c) In the matter of recovery of loans, the NBFCs should not resort to undue harassment viz; persistently bothering the borrowers at odd hours, use muscle power for recovery of loans etc. As complaints from customers also include rude behavior from the staff of the companies NBFCs shall ensure that staff are adequately trained to deal with the customers in an appropriate manner.
(d) 7As a measure of customer protection and also in order to bring in uniformity with regard to prepayment of various loans by borrowers of banks and NBFCs, it is advised that NBFCs shall not charge foreclosure charges/pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect." Page 36 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022
17. Thereafter, various circulars are issued from 2016 onwards but as the controversy in the present matter pertains only with regard to the transaction of foreclosure of the loan in the year 2015 between the petitioners and the respondent No.1, further circulars are not referred to as the same would not have any application to the facts of the case.
18. Therefore, considering various circulars issued by the RBI for Fair Practice Code for NBFCs, the notification dated 14th July, 2014 is in furtherance of the protection of the individuals who availed the loan from NBFCs. However, it is reiterated that the petitioners availed the loan not as "individual borrowers"
but as partner of the partnership firm. It is apparent from the facts of the case that the contention of the petitioner that they availed the loan facility from respondent No.1 as individuals is not tenable. In such Page 37 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022 C/SCA/2375/2016 CAV JUDGMENT DATED: 30/09/2022 circumstances, the petitioners cannot get the benefit of a notification dated 14th July, 2014.
19. For the foregoing reasons, the petition fails and is accordingly dismissed. Rule is discharged. No orders as to cost.
(BHARGAV D. KARIA, J) PALAK Page 38 of 38 Downloaded on : Sat Oct 01 20:20:56 IST 2022