Calcutta High Court Holds Prepayment And Contractual Charges Form Part Of 'Debt' Under RDB Act

The Calcutta High Court on 10 June held that prepayment charges, commitment charges and processing fees arising from a lending transaction constitute “debt” under Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993, and remain recoverable unless waived or extinguished, even after repayment of principal and interest.

Justice Rai Chattopadhyay dismissed a writ petition filed by Maan Steel and Power Ltd challenging Indian Bank's refusal to release Fixed Deposit Receipts (FDRs) and issue a No Due Certificate after ICICI Bank took over its loan facilities. He held:

“For all the aforesaid reasons, this Court holds that prepayment charges, commitment charges and processing fees constitute recoverable liabilities arising from the lending transaction and fall within the ambit of "debt" as contemplated under Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993. Since such liabilities admittedly remain unpaid and no material has been produced to establish their waiver or extinguishment, the debt cannot be said to have been fully discharged.”

The dispute arose from credit facilities availed by Maan Steel from a consortium of lenders including Indian Bank. In November 2020, ICICI Bank took over the facilities by remitting about Rs. 11.50 crore on behalf of the borrower.

Following the takeover, Maan Steel sought release of its pledged Fixed Deposit Receipts and issuance of a No Due Certificate. However, by a letter dated 8 February 2021, Indian Bank raised a demand of Rs. 42.46 lakh towards prepayment charges, commitment charges and processing fees, and retained the securities. The FDRs had been created as security under the lending arrangement.

The Court noted that the sanction terms provided that the security would cover the “entire debt” and not merely principal and interest, and therefore could not stand discharged automatically upon takeover of the loan account. It observed that the contractual framework expressly contemplated prepayment and related charges, and held that a borrower cannot accept benefits under a lending arrangement while avoiding obligations triggered by premature closure or restructuring. It applied the principle that a party cannot approbate and reprobate, holding that selective acceptance of contractual terms is impermissible in commercial lending arrangements.

Rejecting the borrower's contention that the charges were an afterthought since they were not quantified in the closure statement, the Bench held that existence of liability is distinct from quantification and that contractual liability survives unless waived or extinguished. It further held that the demand raised by Indian Bank flowed directly from the contractual documents and not from any independent or new source of liability created after takeover.

Interpreting Section 2(g) of the RDB Act, the Court emphasised that the definition of “debt” is of wide amplitude and includes any legally enforceable liability claimed by a bank in the course of its business, whether under contract or otherwise, and cannot be restricted to principal and interest alone.

Accordingly, the High Court held that Indian Bank was entitled to retain the FDRs until full satisfaction of contractual dues and dismissed the petition.