Interest Rate of 24% Compounded Annually Held Excessive; Adjusted to Ensure Fairness in Loan Transactions: AP HC

High Court of Andhra Pradesh allowing an appeal against the trial court's dismissal of a suit for recovery of money based on promissory notes and an equitable mortgage. The court ruled in favor of the plaintiff, setting aside the trial court's findings while reducing the exorbitant interest rate claimed by the plaintiff. Justice T. Mallikarjuna Rao, presiding over the case, observed that the trial court had erred in its application of the law and appreciation of evidence.

The court ruled, "The plaintiff successfully established the execution of the promissory notes, the consideration thereunder, and the creation of an equitable mortgage by the defendants. However, the interest rate of 24% compounded annually is excessive and has been adjusted to ensure fairness."

The appellant, Vandrasi Satyanarayana, filed a suit in 2006 for recovery of ₹3,67,333, alleging that the defendants, Banka Ammajamma and her family, had defaulted on payments under four promissory notes totaling ₹2,00,000. The plaintiff also asserted the creation of an equitable mortgage over the defendants' property as security for the loan. According to the plaintiff, the defendants executed the promissory notes on various dates in 2002 and made a part payment of ₹2,000 in 2004. Despite repeated demands and a legal notice, the defendants failed to clear the outstanding dues, forcing the plaintiff to initiate legal proceedings.

The trial court dismissed the suit in 2009, concluding that the promissory notes were not supported by consideration and were barred by the three-year limitation period applicable to such instruments. Aggrieved by this decision, the plaintiff filed the present appeal.

Justice T. Mallikarjuna Rao undertook a detailed re-evaluation of the evidence and the legal principles governing the case. The court noted significant errors in the trial court's findings, which ignored critical evidence and misapplied legal provisions.

Execution of Promissory Notes and Presumption of Consideration

The High Court found that the defendants had admitted their signatures on the promissory notes and part payment endorsements, which triggered the presumption of consideration under Section 118(a) of the Negotiable Instruments Act, 1881. Justice Mallikarjuna Rao explained:

"Once the execution of the promissory note is admitted, the presumption under Section 118(a) arises that it is supported by consideration. The defendants failed to rebut this presumption either through direct evidence or by proving the preponderance of probabilities. The bare denial of passing of consideration does not suffice as a defense."

The court criticized the trial court for focusing on minor discrepancies in the plaintiff's evidence, noting that such discrepancies were immaterial and did not undermine the overall credibility of the witnesses. The judgment emphasized:

"Normal discrepancies in evidence are due to lapses in memory over time and should not be taken as fatal to the plaintiff's case. It is improbable that the defendants would have signed multiple promissory notes without receiving the loan amounts."

Justice Mallikarjuna Rao also held that the defendants had created a valid equitable mortgage by depositing their title deeds with the plaintiff. Referring to Section 58(f) of the Transfer of Property Act, 1882, the court observed:

"Mortgage by deposit of title deeds is effected when a person delivers to a creditor documents of title to immovable property with the intent to create a security. In this case, the defendants’ admissions during cross-examination, coupled with the plaintiff's documentary evidence, clearly establish the creation of such a mortgage."

The court reprimanded the trial court for failing to consider this aspect of the plaintiff's case, which had a significant bearing on the limitation period.

Error in Limitation Period Application

The High Court found that the trial court erroneously applied the three-year limitation period applicable to promissory notes while ignoring the 12-year limitation period applicable to equitable mortgages under the Limitation Act, 1963. Justice Mallikarjuna Rao remarked:

"The trial court treated the suit as one based solely on promissory notes, overlooking the equitable mortgage created by the defendants. This led to the wrongful application of the three-year limitation period. The suit is well within the 12-year limitation period applicable to mortgages."

Adjustment of Excessive Interest Rate

While ruling in favor of the plaintiff, the High Court took note of the excessive interest rate of 24% per annum compounded annually, which the plaintiff had claimed from the date of the transaction. The court referred to established principles governing usurious and unconscionable interest rates and concluded:

"Courts must intervene where the stipulated interest is found to be excessive, unconscionable, or unfair. In the present case, an interest rate of 24% compounded annually is excessive and inconsistent with prevailing standards."

The court reduced the interest rate to 24% simple interest per annum from the date of the transaction until the filing of the suit, 12% simple interest per annum from the suit filing date to the trial court judgment, and 6% simple interest per annum from the date of the judgment until realization.

The High Court set aside the trial court's judgment and decreed the suit in favor of the plaintiff for a principal amount of ₹2,00,000, with adjusted interest rates. Justice Mallikarjuna Rao summarized the decision:

"The plaintiff is entitled to recover the principal amount of ₹2,00,000, with simple interest at the rate of 24% per annum from the date of the suit transaction until the filing of the suit, 12% per annum from the filing date until the trial court's judgment, and 6% per annum thereafter until realization. The part payments made by the defendants shall be deducted from the decretal amount. The defendants are granted three months for redemption."

This judgment underscores the importance of properly appreciating evidence and applying legal principles in cases involving promissory notes and mortgages. The High Court's decision not only reinstated the plaintiff's claims but also demonstrated judicial oversight in ensuring fairness by reducing the excessive interest rate. The case highlights how courts balance contractual freedom with the need to prevent unconscionable transactions.

Date of Judgment: November 19, 2024