Madras High Court: In a writpetition filed for calling for the records relating to the communication of Branch Manager, IDBI Bank Ltd., quash the same and consequently insisting payment of foreclosure penalty, the Single Judge Bench of S.M. Subramaniam, J. held that as in the loan document, the petitioner has affixed the seal of “M/s. Murugan Idli Shop” and signed as its proprietor. The loan was sanctioned in the name of the proprietary concern, which being the legal entity, the petitioner would not fall under the category of “individual borrower” as per the Reserve Bank of India Circular of the year 2014.
Factual Matrix
In the case at hand, petitioner is a businessman and running a business in the name of “Murugan Idli Shop”, which is sole proprietary concern. Respondent/Bank had sanctioned two term loan accounts with a limit of Rs. 10 Crore by taking over the outstanding loan of the petitioner with Fullerton India Credit Company Limited. Term loan agreement was signed by the petitioner in his capacity as sole proprietor of “Murugan Idli Shop”.
Further, petitioner approached the Bank with the proposal to shift his banking to HDFC Bank, so that HDFC bank can take over the outstanding loan of the petitioner, for the reason that Bank sought to levy foreclosure penalty at 2% of the overdraft limit, plus service tax on the outstanding term loan amount.
RBI issued a circular RBI/2013-14/ 582 dated 7 -05-2014 wherein it was advised that the banks will not be permitted to charge foreclosure charges/pre-payment penalties on all floating rate term loans sanctioned to “individual borrowers”, with immediate effect. Further, RBI vide circular RBI/2019-20/29 dated 02-08-2019, clarified that banks 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-obligants.
Therefore, relying upon the RBI Circular, 2014, the petitioner made a request seeking waiver of foreclosure charges. However, the Bank declined to accept the request.
Contentions
Petitioner contented that he is an individual and the Sole Proprietor of M/s. Murugan Idli Shop. Therefore, he is falling under the category of an “Individual Borrower” within the meaning of the RBI circular thus, entitled to avail the benefits of waiver of foreclosure charges.
He further contented, that he has given consent to recover the foreclosure charges with a hope that documents deposited will be released without prejudice to the writ petition pending during the relevant point of time.
Per Contra, the respondent contented that petitioner is not eligible to avail the benefits of the waiver of foreclosure charges, as the borrower is “M/s. Murugan Idli Shop” representing as “sole proprietor” not an “individual borrower” more so, the proprietary concern of the petitioner is falling under the category of Small Medium Enterprises (SME) and therefore, entity cannot be construed as an “individual borrower” within the circular issued by RBI Further, it contented that the petitioner agreed upon the term and condition and signed the loan documents. Thus, he cannot turn around and claim waiver of the foreclosure charges.
Analysis
The Court said that the petitioner has affixed the seal of “M/s. Murugan Idli Shop” and signed as its proprietor. The loan was sanctioned in the name of proprietary concern, which being the legal entity, thus the petitioner does not fall under the category of “individual borrower” as per the RBI Circular.
Further, it said that the circular dated 02-08-2019, clarifies that the co-obligants, who jointly borrowed loan, also can be considered as an “individual borrower” for the purpose of grant of waiver of foreclosure charges. However, the said circular cannot have any implication in respect of the sole proprietary concern of the petitioner i.e., “M/s. Murugan Idli Shop”
The Court said that if at all the definition of “individual borrowers” within the meaning of the circular is to be expanded, it is to be considered only by the Reserve Bank of India within the provisions of the Statute and certainly, the High Court cannot expand the scope of the definition of the “individual borrowers”, so as to grant waiver of foreclosure charges / pre-payment penalties, which is otherwise agreed upon to be paid by the petitioner by signing the loan document
Thus, it held that as in the loan document, the petitioner has affixed the seal of “M/s.Murugan Idli Shop”and signed as its proprietor. The loan was sanctioned in the name of the proprietary concern, which being the legal entity, the petitioner would not fall under the category of “individual borrower” as per the Reserve Bank of India Circular of the year 2014.
Hence the petition was dismissed.
[S. Manoharan v. Reserve Bank of India, Writ Petition. No. 19456 of 2017, decided on 08-03-23]
Advocates who appeared in this case :
Counsel for Petitioner: Advocate Niranjan Rajagoplan;
Counsel for Respondents: AdvocateC. Mohan, Advocate P. Elaya Rajkumar.
If they’re not falls under Individual borrower, then he should have been adopted as Micro Small Enterprises (MSE) and proceed the case under the following grounds.
There is “Code of Bank’s commitment to MSEs” , which is governed by RBI and is published in almost all bank website’s itself, wherein the Page No.14, Serial (h) commits to MSEs that “To Permit prepayment of floating rate loans without levying any prepayment penalty”.
The Code has been evolved by the Banking Codes and Standards Board of India (BCSBI) in consultation with the Reserve Bank of India, Indian Banks Association and Member Banks.
So Every commercial bank should comply under this code.