D.P. Sood, J.
The controversy in between the parties to the instant suit is confined only to the charging of penal interest, the issue regarding which is as under:
1. Whether penal interest as charged by the plaintiff-Corporation is not payable to them by the defendants? O.P. Defendants.
2. The plaintiff-Corporation is a Corporate Body established under the State Financial Corporations Act, 1951. Amongst other, it also indulges in advancement of the loan to the Industrial Units, and other persons to promote and expand industries in the State of Himachal Pradesh. The defendants for the purpose of promoting and expanding transport industry, applied for a loan and an amount of Rs. 2,22,000/- was sanctioned onthe terms and conditions mentioned in the deed of hypothecation, trust receipt and irrevocable power of attorney and guarantee-deed etc. The repayment of the loan was secured by hypothecation of the properties mentioned in para 8 of the plaint. Interest @ 61/2% above IDBI lending rate as may be prevalent from time to time subject to a minimum of 15 1/2% per annum along with 3% penal interest on the amount of default and for the period of default was agreed to in between the parties. The defendants defaulted in complying with the terms and conditions of the hypothecated deed and other documents referred to above, resulted into the issuance of notice under Section 29 of the State Financial Corporations Act, 1951 (hereinafter shortly called the Act), asking defendant No. 1 to pay the outstanding dues amounting to Rupees 2,09,083.00/- but the defendants failed to do so. The plaintiff-Corporation waived their rights to initiate action against the defendants on the first and subsequent defaults having committed by them and ultimately filed the instant suit for the recovery of the outstanding dues.
3. The defendants admitted the loan advanced to them and execution of the various documents. However, they disputed the payment of penal interest upon the loan in question. The defendants otherwise admitted the outstanding dues except that of penal interest charged by the plaintiff Corporation to the tune of Rs. 10.602.00/- w.e.f. 1-4-1990 to 11-1-1993 as shown in the ultimate statement filed by the plaintiff.
4. Ld. counsel for the defendants has made a statement at the Bar that he confines his defence to the dispute of penal interest referred to above only. In that view of the matter, both the ld. counsel did not produce any evidence on the issue framed today. Accordingly arguments have been heard.
5. The execution of the documents referred to above have been admitted. No doubt, there is a clause agreed to in between the parties for payment of the penal interest over and above the interest agreed to be paid by the defendants on the loan in question. However, if the relevant clause to this effect isclosely examined the rate of interest is to be calculated on the outstanding amount with quarterly rests. In other words, the agreement indicates the payment of compound interest on the loan advanced to the defendants. Section 74 of the Contract Act deals with the compensation for breach of contract where penalty is stipulated for. This section lays down as under:--
'74. Compensation for breach of contract where penalty stipulated for. -- When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract, reasonable compensation not exceeding the amount so named, as the case may be, the penalty stipulated for.
Explanation. -- A stipulation for increased interest from the date of default may be a stipulation by way of penalty:
Exception.-- When any person enters into any bail bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the (Central Government) or of any (State Government) gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.
Explanation. -- A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.
Illustration 'D' thereto is to the following effect:
(d) A gives B a bond for the repayment of Rs. 1,000/- with interest at 12 per cent at the end of six months with a stipulation that, in case of default, interest shall be payable at therate of 75 per cent, from the date of default. This is a stipulation by way of penalty, and B is only entitled to recover from A such compensation as the Court considers reasonable.'
I have already pointed out above that there is a stipulation for the payment of interest --61/2% above the IDB1 lending rate as may be prevalent from time to time with quarterly rests meaning thereby that whatever interest becomes due within three months it is added towards the principal amount and the entire outstanding arrears is treated as principal for the purpose of calculation of interest in a way that the plaintiff in this way is entitled to charge compound interest. It is true that Explanation to Section 74 of the Contract Act, 1872, entitles the creditor to enter into a stipulation for the increased interest from the date of default, it can be treated as stipulation by way of penalty but it has to be considered as compensation for breach of contract, Whether such like compensation for the breach by way of penalty stipulated for over and above the compound interest being charged by the plaintiff is to be considered as a reasonable covenant in between the parties or hot would depend upon the object and other terms and conditions for which the loan was advanced. In the instant case, in the first instance the interest is 6 1/2% over and above the IDBI lending rate and subject to a minimum of 15 1/2% per annum. It has been compounded. Statement of account shows that over and above, the penal interest has been charged to the tune of Rs. 10,602.00. It means that this way interest has also not been charged over the principal but also on the interest accrued on the original sum advanced to the defendnats. Considering all these facts, I do not deem it to be a reasonable term of the contract to recover the compensation by way of penalty in the instant case. Accordingly, the issue is decided in favour of the defendants and against the plaintiff.
6. In view of the above, a decree in the sum of Rs. I,46,906.00/- as recoverable amount as on 11-1-1993 is passed in favour of the plaintiff and against the defendants jointly and severally with proportionate costs. In case the decretal amount is not paid by the defendants within two months from today, the plaintiff shall also be entitled to interest on the decretal amount @ 12% per annum from the date of this decree up to the date of realisation.
7. The decree sheet be prepared and file be consigned to the record room.