Case: Sicom Limited Vs. Official Liquidator, High Court ) Bombay As Liquidator of Set ) Telecommunications Limited &amp; Others

the 1990 Mortgage Deed is concerned, it is not necessary to go into the background as to why the said Mortgage Deed was executed but probably it seems there were negotiations between the parties and thereafter the loan advanced to the company in liquidation, seems to be restructured leading to the novation of the contract. A reading of the said clause therefore discloses that the words yearly rests and compound are conspicuously absent in the clause. As indicated above the interest has been hiked to 16.5% payable quarterly and the word rests has not been suffixed to the word quarterly as is usually done in lending contracts.9. Apart from the aforesaid, it is also required to the noted that in so far as the payment of additional interest on account of default is concerned, it is stipulated that the parties agreed to payment of additional interest @ 2.5% p.a. on the total amount in default during the period of such default. Hence there is no mention of any interest which is compounded, to be paid on the defaulted amount. We therefore find merit in the submission of Mr. Kamat that when the parties had agreed to the payment of compound interest, it was specifically provided for, as in the 1987 Mortgage Deed and when they did not do so, it was conspicuously absent as in the 1990 Mortgage Deed. Hence the parties by contract having not provided for payment of compound interest the claim of the Appellant for computation of the amount on the basis of the usual banking practice of capitalisation of interest cannot be entertained.10. Now coming to the judgment cited on behalf of the Appellant i.e. in Central Bank of India (supra), the Apex Court in the said case was concerned with the interpretation of the term principal sum adjudged and such principal sum as appearing in Section 34 of the CPC and it is in the context of the said issue that the Apex Court referred to the usual banking practice of capitalisation of unpaid interest. The Apex Court concluded that the principal sum adjudged may include the amount of interest charged on periodical rests and capitalised with the principal sum actually advanced so as become a part of the principal. Paragraph 44 of the said judgment is material and is reproduced hereinunder:44. We are of the opinion that the meaning assigned to the expression the principal sum adjudged should continue to be assigned to principal sum at such other placed in Section 34(1) where the expression has been used qualified by the adjective such that is to stay, as such principal sum. Recognition of the method of capitalisation of interest so as to make it a part of the principal consistently with the contract between the parties or established banking practice does not offend the sense of reason, justice and equity. As we have noticed, such a system has a long established practice and a series of judicial precedents upholding the same. Secondly, the underlying principle as noticed in several decided cases is that when interest is debited to the account of the borrower on periodical rests, it is debited because of it having fallen due on that day. Nothing prevents the borrower from paying the amount of interest on the date it falls due. If the amount of interest is paid there will be no occasion for capitalising the amount of interest and converting it into principal. If the interest is not paid on the date due, from that date the creditor is deprived of such use of the money which it would have made if the debtor had paid the amount of interest on the date due. The creditor needs to be compensated for deprivation. As held in Pazhaniappa Mudaliar Vs. Narayana Ayyar the fact situation is analogous to one as if the creditor has advanced money to the borrower equivalent to the amount of interest debited. We are, therefore, of the opinion that the expression the principal sum adjudged may include the amount of interest, charged on periodical rests, and capitalised with the principal sum actually advanced, so as to become an amalgam of principal in such cases, where it is permissible or obligatory for the court to hold so. Where the principal sum (on the date of suit) has been so adjudged, the same shall be treated as principal sum for the purpose of such principal sum the expression employed later in Section 34 CPC. The expression principal sum cannot be given different meanings at different placed in the language of same section i.e. section 34 CPC.In so far as the judgments (supra) of the Division Benches are concerned, they also deal with the issue of the Principal Amount Due. It has been held in State Bank of Indias case that principal sum adjudged can include in it interest as well depending upon the contract between the parties. In the said case there was a contract for payment of interest with quarterly rests.In M/s. Good Luck Talkies & Ors (supra) the Division Bench held that the unpaid interest merges in the principal which under the contract is to be treated as principal. The said judgments are predating the judgment of the Constitution Bench in Central Bank of Indias case (Supra). The Constitution Bench Judgment of the Apex Court has settled the law in so far as the Principal Sum Adjudged is concerned. The Apex Court as well as the Division Benches hence concerned with the issue as to on which amount the interest under Section 34 was payable. It is in the said context that the components of the principal sum adjudged as appearing in Section 34 of the CPC were set out by the Apex Court.11. In our view the aforesaid judgments would not aid the Appellant to contend that the Appellant is entitled to compound interest in terms of the clause as appearing in the 1990 Mortgage Deed, when the parties by contract have not provided for the same.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]9. A reading of the aforesaid clauses therefore discloses that in so far as the clause in the 1989 Mortgage Deed is concerned, the interest was payable @ 15.5% by half yearly rests on the date specified in the said clause and the proviso was made to pay additional / compound interest @ 2.5% p.a. over and above the SICOM lending rate.In so far as the clause in the 1990 Mortgage Deed is concerned, it is not necessary to go into the background as to why the said Mortgage Deed was executed but probably it seems there were negotiations between the parties and thereafter the loan advanced to the company in liquidation, seems to be restructured leading to the novation of the contract. A reading of the said clause therefore discloses that the words yearly rests and compound are conspicuously absent in the clause. As indicated above the interest has been hiked to 16.5% payable quarterly and the word rests has not been suffixed to the word quarterly as is usually done in lending contracts.9. Apart from the aforesaid, it is also required to the noted that in so far as the payment of additional interest on account of default is concerned, it is stipulated that the parties agreed to payment of additional interest @ 2.5% p.a. on the total amount in default during the period of such default. Hence there is no mention of any interest which is compounded, to be paid on the defaulted amount. We therefore find merit in the submission of Mr. Kamat that when the parties had agreed to the payment of compound interest, it was specifically provided for, as in the 1987 Mortgage Deed and when they did not do so, it was conspicuously absent as in the 1990 Mortgage Deed. Hence the parties by contract having not provided for payment of compound interest the claim of the Appellant for computation of the amount on the basis of the usual banking practice of capitalisation of interest cannot be entertained.10. Now coming to the judgment cited on behalf of the Appellant i.e. in Central Bank of India (supra), the Apex Court in the said case was concerned with the interpretation of the term principal sum adjudged and such principal sum as appearing in Section 34 of the CPC and it is in the context of the said issue that the Apex Court referred to the usual banking practice of capitalisation of unpaid interest. The Apex Court concluded that the principal sum adjudged may include the amount of interest charged on periodical rests and capitalised with the principal sum actually advanced so as become a part of the principal. Paragraph 44 of the said judgment is material and is reproduced hereinunder:44. We are of the opinion that the meaning assigned to the expression the principal sum adjudged should continue to be assigned to principal sum at such other placed in Section 34(1) where the expression has been used qualified by the adjective such that is to stay, as such principal sum. Recognition of the method of capitalisation of interest so as to make it a part of the principal consistently with the contract between the parties or established banking practice does not offend the sense of reason, justice and equity. As we have noticed, such a system has a long established practice and a series of judicial precedents upholding the same. Secondly, the underlying principle as noticed in several decided cases is that when interest is debited to the account of the borrower on periodical rests, it is debited because of it having fallen due on that day. Nothing prevents the borrower from paying the amount of interest on the date it falls due. If the amount of interest is paid there will be no occasion for capitalising the amount of interest and converting it into principal. If the interest is not paid on the date due, from that date the creditor is deprived of such use of the money which it would have made if the debtor had paid the amount of interest on the date due. The creditor needs to be compensated for deprivation. As held in Pazhaniappa Mudaliar Vs. Narayana Ayyar the fact situation is analogous to one as if the creditor has advanced money to the borrower equivalent to the amount of interest debited. We are, therefore, of the opinion that the expression the principal sum adjudged may include the amount of interest, charged on periodical rests, and capitalised with the principal sum actually advanced, so as to become an amalgam of principal in such cases, where it is permissible or obligatory for the court to hold so. Where the principal sum (on the date of suit) has been so adjudged, the same shall be treated as principal sum for the purpose of such principal sum the expression employed later in Section 34 CPC. The expression principal sum cannot be given different meanings at different placed in the language of same section i.e. section 34 CPC.In so far as the judgments (supra) of the Division Benches are concerned, they also deal with the issue of the Principal Amount Due. It has been held in State Bank of Indias case that principal sum adjudged can include in it interest as well depending upon the contract between the parties. In the said case there was a contract for payment of interest with quarterly rests.In M/s. Good Luck TalkiesOrs (supra) the Division Bench held that the unpaid interest merges in the principal which under the contract is to be treated as principal. The said judgments are predating the judgment of the Constitution Bench in Central Bank of Indias case (Supra). The Constitution Bench Judgment of the Apex Court has settled the law in so far as the Principal Sum Adjudged is concerned. The Apex Court as well as the Division Benches hence concerned with the issue as to on which amount the interest under Section 34 was payable. It is in the said context that the components of the principal sum adjudged as appearing in Section 34 of the CPC were set out by the Apex Court.11. In our view the aforesaid judgments would not aid the Appellant to contend that the Appellant is entitled to compound interest in terms of the clause as appearing in the 1990 Mortgage Deed, when the parties by contract have not provided for the same.