MSME Code Doesn’t Override Contractual Terms: Rajasthan High Court Upholds Bank’s Right To Levy Prepayment Charges On Loan Takeover

"Borrower Having Accepted Contractual Terms Cannot Resile From Them Later And Claim Exemption Under MSME Code", Division Bench of the Rajasthan High Court upholding the right of banks to levy prepayment charges on MSME borrowers in accordance with contractual clauses, even when the borrower claims benefit under the Code of Banks’ Commitment to Micro and Small Enterprises, 2015.

The Court dismissed a civil miscellaneous appeal filed by the appellant-company, which had challenged the commercial court's decree dated 10 May 2023 rejecting its suit for recovery of ₹5,52,000 levied as prepayment charges upon premature closure of a loan.

“MSME Code Permits Free Prepayment Only From Own Sources, Not On Loan Takeover By Another Bank”

The key question before the Court was whether Clause 5(ii) of the hypothecation agreement—which allowed Punjab National Bank to impose 2% prepayment charges on loan foreclosure when the loan was taken over by another financial institution—could be held illegal or contrary to the MSME Code.

The Court rejected this contention emphatically, holding that the MSME Code does not prohibit levy of prepayment charges where loan repayment is made via a takeover. It clarified:

“Clause 5.3(H) of the Code pertains to pre-payment charges simplicitor i.e., payable by the borrower himself from his own income sources. It does not prohibit levy of prepayment charges where the loan is prepaid pursuant to takeover by another bank or financial institution.”

Thus, the High Court affirmed the Commercial Court’s reasoning that both provisions—contractual clause and the MSME Code—operate in distinct factual scenarios and cannot be read as contradicting each other.

Contract Is Binding: Borrower Estopped From Challenging Terms After Acting Upon Them

The Court placed heavy reliance on the sanctity of commercial contracts, holding that once parties voluntarily enter into a binding agreement, courts cannot rewrite the terms on equitable or sympathetic grounds. The Bench observed:

“It is a settled principle of law that once a borrower voluntarily and by exercising his own free will, enters into a contract, he is bound by the terms and conditions stipulated therein and cannot be permitted to bypass the same.”

Citing Union Bank of India v. Krupanidhi Educational Trust, (2021) 18 SCC 318, the Court emphasized that the terms of a signed loan agreement cannot be reduced, waived or invalidated unless expressly permitted under law. The Court quoted:

“We are of the considered opinion that once a loan agreement was signed between the parties, a concluded contract came into being incorporating pre-payment charges... in no case could the pre-payment charge be lowered beyond that waived by the bank under the agreement.”

Doctrine of Estoppel and Approbate-Reprobate Squarely Apply: Borrower Cannot Blow Hot And Cold

The Court further invoked the doctrine of estoppel and the principle of approbate and reprobate, stating that the appellant, having fully availed the benefits of the crontract, cannot later dispute its obligations. The Bench relied on Union of India v. N. Murugesan, (2022) 2 SCC 25, which held:

“A person cannot be allowed to have the benefit of an instrument while questioning the same. One cannot take advantage of one part while rejecting the rest.”

In the same breath, the Court cited Water Resources Dept. v. Rattan India Power Ltd., (2023) 19 SCC 410, and concluded that once the borrower had signed the hypothecation agreement and issued undertaking, it stood estopped from questioning the validity of prepayment charges.

MSME Code Is Not Statutory Law: Voluntary Code Cannot Supplant A Commercial Agreement

A pivotal aspect of the Court's reasoning was that the MSME Code is not a statutory instrument, but a voluntary code of best practices. Hence, it cannot override a binding contract.

“The Code, by its very nature, is a statement of voluntary commitments and best practices adopted by banks… it cannot ipso facto override or nullify express contractual terms mutually agreed upon between the parties.”

The Court warned against any interpretation of the Code that would allow borrowers to escape contractually assumed obligations by taking recourse to regulatory guidance meant to promote ethical conduct, not override legal commitments.

RTI Reply Has No Evidentiary Value To Alter Terms Of Contract

The appellant also relied on a Right to Information (RTI) reply from the bank stating that MSME borrowers are generally not liable to pay prepayment charges. The High Court dismissed this contention:

“The said communication cannot override the express contractual provisions nor can it be construed as conferring a substantive legal right contrary to the agreement executed between the parties.”

No Proof Of Excessive Charges: Appellant Failed To Show Prepayment Was Calculated On Outstanding Amount

On the secondary contention that the 2% prepayment charge was wrongly calculated on the entire sanctioned amount (₹2.76 crore) rather than the outstanding amount, the Court held that the appellant had failed to prove the actual balance outstanding at the time of foreclosure:

“The appellant failed to place on record cogent material to establish exact outstanding balance as on the date of pre-payment. In the absence of such evidence, the Trial Court was justified in rejecting the said contention.”

Thus, both on merits and on evidence, the appellant’s claims were found to be unsustainable.

Commercial Contracts Not Subject To Post-Facto Reinterpretation On Equitable Grounds

Dismissing the appeal, the Rajasthan High Court reiterated that commercial contracts, especially in the banking and finance sector, cannot be interpreted or modified based on unilateral claims or post-facto dissatisfaction.

“We are in complete agreement with the impugned judgment of the learned Trial Court… The findings recorded are based on proper appreciation of the contractual documents and applicable legal principles and do not warrant interference from this Court in appellate jurisdiction.”

The appeal was dismissed without costs, and the judgment of the Commercial Court was affirmed.

Date of Decision: January 20, 2026