M/S Cottage Industries Exposition Limited vs. Union Of INDIA And Ors. (Banking / Rbi / J And K Bank)

Held

The Court held that the petitioner is estopped by its conduct from challenging the stipulation of prepayment charges. The petitioner availed the benefit of the term loans twice from the respondent-bank subject to the terms and conditions laid down in the sanction orders. The Court reasoned that the petitioner ought to have disputed the stipulation at the time of availing the loan or challenged it before taking the benefit. It is impermissible for the petitioner to accept the beneficial terms and challenge the prejudicial ones. The Court also noted that it is not in dispute that when the term loans were sanctioned, the petitioner was not registered as a Small Enterprise under the MSMED Act. Therefore, the petitioner could not claim the status of an Enterprise admitted to the benefits of the MSMED Act. The Court distinguished the case from judgments concerning sole proprietorships and individual borrowers, emphasizing that the petitioner is a company distinct from its directors and shareholders. The Court found no merit in the petition and dismissed it. The issue of whether the prepayment charges constituted a penalty under Section 74 of the Indian Contract Act was not considered due to lack of pleadings and opportunity for the respondent to rebut.

Facts

M/s Cottage Industries Exposition Ltd (CIE), a public limited company and registered Small Enterprise, is aggrieved by prepayment charges stipulated in loan sanction orders dated June 27, 2022, and September 22, 2022, issued by J&K Bank. The petitioner obtained financial assistance under a Lease Rental Discounting Scheme and a Cash Credit Facility from J&K Bank. Both sanction orders included a stipulation for 4% prepayment charges plus applicable GST on loans shifted to other banks. The petitioner subsequently obtained loans from YES BANK to take over the facilities from J&K Bank and sought to avoid paying the prepayment charges. The petitioner argued that these charges violate provisions of the Banking Regulation Act, MSMED Act, and Competition Act, as well as RBI policy. The respondent-bank contended that the petitioner was not registered under the MSMED Act when the loans were sanctioned and therefore not entitled to the benefits of related circulars and codes.

Key Issues

1. Whether the stipulation of 4% prepayment charges plus applicable GST in the loan sanction orders dated June 27, 2022, and September 22, 2022, issued by J&K Bank to M/s Cottage Industries Exposition Ltd (CIE) is contrary to and in violation of mandatory statutory provisions contained in the Banking Regulation Act, the Micro Small and Medium Enterprises Development Act, 2006 (MSMED Act), and the Competition Act, 2002, as well as RBI policy. Petitioner's arguments: The petitioner contended that the prepayment charges are prohibited under guidelines issued under Sections 21 and 35-A of the Banking Regulation Act and Sections 9 and 10 of the MSMED Act, citing an RBI Circular dated July 24, 2017, which prohibits foreclosure charges on Term Loans to MSMEs on a floating interest rate basis. They also relied on the Code of Banking Commitments towards Micro and Small Enterprises, arguing that J&K Bank, as a member of the Indian Banks' Association, should not levy such charges on floating interest rate loans. Respondent's arguments: The respondent-bank argued that the petitioner is estopped by its conduct from challenging the stipulation as it accepted the terms and conditions of the sanction orders and availed the credit facilities. Crucially, the bank asserted that the petitioner was not registered under the MSMED Act at the time the loans were sanctioned in 2022, with its UDYAM registration only granted in July 2023. Therefore, the petitioner was not entitled to the benefits of the MSMED Act, RBI Master Circular, or the Banking Code.