Rate Of Interest In A Contract May Be Modified By The Court On Equitable Grounds: Andhra Pradesh High Court

Brief Facts of the Case

The case of the plaintiff was that the 1^st defendant and her husband had borrowed a sum of Rs. 90,000 from the plaintiff in 1992. This money was to be repaid with interest at 30% p.a. compounded on a yearly basis. As security for repayment of the said money, the defendants had created a mortgage in favour of the plaintiff on plaint schedule property. After a part payment, the defendant had defaulted in repayment of debt.

The 1^st defendant sold the mortgaged suit schedule property to the 2^nd defendant. However, the 2^nd defendant did not make any payment despite the plaintiff having approached the 2^nd defendant for receiving the said payment.

As the defendants had not paid the amount due to the Plaintiff, he filed a suit for recovery of Rs. 2,63,832/- with subsequent interest at 30% p.a. compounded on a yearly basis.

The defendants submitted that as the plaintiff insisted for payment of interest calculated at 30% p.a. compounded interest from the date of mortgage, the debt could not be cleared. The defendants also took the stand that interest at 30% compounded annually was usurious and the plaintiff could not claim more than 18% p.a. as defendants are agriculturists.

The trial court decided in favour of the plaintiff and aggrieved by the judgment, the defendant filed the present appeal.

Issue of law

The only issue for consideration by Court was whether the plaintiff was entitled to recovery of the unpaid principal amount along with interest at 30% p.a. compounded annually. There was no dispute that the said rate of interest had been stipulated in the contract of mortgage.

Ruling of the Court

The Court noted that the power of Court to alter the contractual rate of interest in a mortgage suit had come up for consideration before the Privy Council in Jagannath Prasad Singh v. Surajmal Jalal (1927) in which it was held that the rate of interest cannot be altered as long as it remains within the domain of contract law. However, once a decree is passed, the matter moves out of the domain of contract law to that of judgment.

After this judgment a new Rule 11 was introduced in Order XXXIV of CPC by way of amendment in 1929 which dealt with interest and provided that the court may order payment of interest to mortgagee up to the date fixed for payment at the rate payable on the principal.

Relying on the Supreme Court judgment in Soli Pestonji Majoo v. Gangadhar Khomka (1969), and AP High Court judgment in Andhra Bank Vikarabad v. Manneguda Polishing Stones Industries (2005), Justice Raghunandan Rao held that even in cases where the rate of interest is fixed in the contract, it would be open to the Court to vary the rate of interest from the date of the suit till the date of recovery of the amount.

The court observed that the rate of 30% p.a. was not being charged at a simple interest but was being compounded on an annual basis. Since the suit was filed in 1997, it would be appropriate to reduce the interest rate substantially.

The court partly allowed the appeal and modified the interest at the rate of 14% p.a. compounded annually since the date of filing of suit till payment.

Case Title : A. Satyanarayana, Versus M. Panduranga Rao

Citation: 2022 LiveLaw (AP) 41

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