No interest on interest/compound interest/penal interest for moratorium period from any borrowers irrespective of sanctioned loan limit – Supreme Court
ABCAUS Case Law Citation
ABCAUS 3475 (2021) (03) SC
Important case law relied referred:
Union Carbide Corporation Limited v. Union of India, (1991)4 SCC 584;
M. Nagaraj vs. Union of India (2006) 8 SCC 212
Rattan Arya vs. State of T.N. (1986) 3 SCC 385;
State of W.B. vs. Anwar Ali Sarkar 1952 SCR 284: AIR 1952 SC 75
D.S. Nakara vs. Union of India (1983) 1 SCC 305
In the instant batch of appeals, Writ Petition were preferred under Article 32 of the Constitution of India by the Small Scale Industrial Manufactures Association, practising Advocate, Maharashtra Chambers of Housing Industry, Contract Carriage Operators Association, Confederation of Real Estate Developers Association of India etc. (Petitioner) for direction to the Union of India and others to take effective and remedial measures to redress the financial strain faced by the industrial sector, particularly MSMEs due to the Corona Virus Pandemic.
According to the petitioner, the Covid-19 Regulatory Package notified by the RBI vide notification dated 27.03.2020 insofar as the terms loans, working capital facilities and restructuring of Stressed Account is inadequate, ineffective and does not offer any substantial relief, aid or assistance to the industries particularly MSMEs.
According to the petitioner, the above mentioned Regulatory Package will not in any manner salvage the MSMEs and help them recover from financial losses that have been caused due to the unforeseen circumstances.
The relief claimed was broadly:
(1) waiver of compound interest/interest on interest during the moratorium period;
(2) waiver of total interest during the moratorium period;
(3) extension of moratorium period; and
(4) there shall be sector-wise economic packages/reliefs.
It was contended that under the Disaster Management Act, 2005 (DMA 2005), authorities are under legal and statutory duty to perform the legal obligation in the interest of the distressed community suffering the disaster and its impact.
It was contended DMA 2005 mandates drawing up a plan for disaster management for the whole country which has not been done.
It was also submitted that that Section 13 which casts duty upon the National Authority to recommend relief in the matter of repayment of loans and/or grant of fresh loans on concessional terms does not make any differentiation among the class of ‘persons affected by disaster’.
It was submitted that relief and concession announced has been further restricted as under:
(i) it is applicable to the borrowers in the 7 class/segments;
(ii) It is applicable to the borrowers who have loan accounts having sanction limits and outstanding amount of not exceeding 2 crores;
(iii) The aggregate of all facilities with lending institutions should not exceed 2 crores as on 29.02.2020;
(iv) The account should be standard as on 29.02.2020 i.e. the loan should not be a non performing asset as on that date
The Hon’ble Supreme Court said that it is not the function of the Court to amend and lay down some other directions. The function of the court is not to advise in matters relating to financial and economic policies for which bodies like RBI are fully competent. The court can only strike down some or entire directions issued by the RBI in case the court is satisfied that the directions were wholly unreasonable or in violative of any provisions of the Constitution or any statute. It has been repeatedly held that matters of economic policy ought to be left to the government.
The Hon’ble Supreme Court stated that it is Legality of the policy, and not the wisdom or soundness of the policy which is the subject of judicial review. The scope of judicial review of the governmental policy is now well defined. The courts do not and cannot act as an appellate authority examining the correctness, stability and appropriateness of a policy, nor are the courts advisers to the executives on matters of policy which the executives are entitled to formulate.
The Hon’ble Supreme Court noted that as such, none of the petitioners had specifically challenged the various circulars/policy decisions taken by the UOI/RBI. The Court opined that merely, since the reliefs announced by the UOI/RBI either may not be suiting the desires of the borrowers, the reliefs/policy decisions related to Covid19 cannot be said to be arbitrary and/or violative of Article 14 of the Constitution of India. It cannot be said that any of the fundamental rights guaranteed under the Constitution are infringed and/or violated.
Therefore, the Hon’ble Supreme Court held that the petitioners shall not be entitled to any reliefs, namely,
(i) total waiver of interest during the moratorium period;
(ii) to extend the period of moratorium;
(iii) to extend the period for invocation of the resolution mechanism, namely 31.12.2020 provided under the 6.8.2020 circular;
(iv) Sector-wise reliefs by the RBI; and
(v) Further reliefs by UOI/RBI over and above the relief packages already offered
The Hon’ble Supreme Court also rejected the plea that there is no National Plan at all and therefore the NDMA has failed to perform its duty.
The Hon’ble Supreme Court observed that the Central Government has come out with a policy decision subsequently by which it is decided not to charge the interest on interest on the loans up to Rs. 2 crores. However, such relief is restricted to the following categories:
(i) MSME loans up to Rs.2 crore
(ii) Education loans up to Rs.2 crore
(iii)Housing loans up to Rs.2 crore
(iv) Consumer durable loans up to Rs. 2 crore
(v) Credit card dues up to Rs.2 crore
(vi) Auto loans up to Rs.2 crore
(vii) Personal loans to professionals up to Rs. 2 crore
(viii) Consumption loans up to Rs.2 crore
The Hon’ble Supreme Court stated that there is no justification shown to restrict the relief of not charging interest on interest with respect to the loans up to Rs. 2 crores only and that too restricted to the aforesaid categories.
Further the Hon’ble Supreme Court observed that if the total exposure of the loan at the grant of the sanction is more than Rs. 2 crores, the borrower is ineligible irrespective of the actual outstanding. Therefore, if a MSME Category has availed and has outstanding of business loan of Rs. 1.99 crores and also has dues of of its credit card of Rs. 1.10 lakhs, thereby making the aggregate to Rs. 2.10 crores, it stands ineligible. Therefore, the aforesaid conditions would be arbitrary and discriminatory said the Court.
The Hon’ble Supreme Court noted that compound interest/interest on interest shall be chargeable on deliberate/willful default by the borrower to pay the installments due and payable. Therefore, it is in the nature of a penal interest. By notification dated 27.03.2020, the Government has provided the deferment of the installments due and payable during the moratorium period. Once the payment of installment is deferred, nonpayment of the same during the moratorium period cannot be said to be willful and therefore there is no justification to charge the interest on interest/compound interest/penal interest for the period during the moratorium.
Therefore, the Hon’ble Supreme Court held that there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium from any of the borrowers and whatever the amount is recovered by way of interest on interest/compound interest/penal interest for the period during the moratorium, the same shall be refunded.
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