Borrower Cannot 'Blithely' Ignore Banks' Accounting System While Calculating Loan Liability: Supreme Court

The Supreme Court has observed that a borrower, in this case a trust and its trustees, cannot keep changing its calculations of loan liability to suit its interests while ignoring the accounting system followed by banks.

A bench of Justices Sanjay Kumar and Sanjeev Sachdeva observed, “The Trust and its trustees cannot blithely ignore the accounting system followed by banks and come up with different calculations at different points of time to suit their own interests.”

The top court restored the Debts Recovery Appellate Tribunal's (DRAT) order determining that Shree Jyoti Education and Management Trust World and its trustees were liable to pay ₹54,90,413 to Punjab National Bank (PNB), with 9% pendente lite and future simple interest.

The dispute concerned interest maintained in a separate suspense account after the loan was classified as a non-performing asset. The apex court held that this interest formed part of the debt recoverable by PNB.

The case arose from a ₹5 crore loan sanctioned by United Bank of India, PNB's predecessor, on June 27, 2011 for construction of a college building. Managing Trustee Tara Prasad Satpathy and other trustees stood as guarantors. The loan was disbursed over two years and the account was classified as an NPA on June 30, 2017.

United Bank approached the Debts Recovery Tribunal (DRT), Cuttack, seeking ₹75,56,680 as on May 4, 2018, along with future interest. The bank explained that ₹64,25,915 was the balance reflected in the loan account, with interest calculated up to June 29, 2017. Another ₹11,30,765 represented interest calculated from June 30, 2017 to May 5, 2018.

United Bank was amalgamated with PNB on April 1, 2020. PNB later issued a certificate dated December 24, 2020 stating that ₹93,31,842 had been paid between June 30, 2017 and October 13, 2020, leaving ₹31,99,000 outstanding as on October 13, 2020.

The DRT, on February 5, 2021, permitted recovery of only ₹1,83,268, with 10% pendente lite and future simple interest. PNB challenged the calculation before the DRAT, which on September 1, 2023 determined the liability at ₹54,90,413, with 9% interest from February 5, 2018 until realization.

The Trust and Satpathy challenged the DRAT order before the Orissa High Court. Relying on PNB's December 2020 certificate, the High Court treated ₹31,99,000 as outstanding and deducted ₹2,43,321.98 deposited by the Trust. It therefore arrived at ₹29,55,678.02 and directed payment in full and final settlement of the dues.

PNB's application seeking recall or modification was rejected by the High Court on May 14, 2024.

Before the apex court, PNB explained that under the accounting system followed by banks, interest was applied only until June 30, 2017, when the account was classified as an NPA. From July 1, 2017, the interest due was maintained in a separate suspense account and therefore did not appear in the loan account statement.

As on May 4, 2018, ₹64,25,915 was reflected in the loan account and ₹11,30,765 was maintained separately as interest. Together, they amounted to ₹75,56,680.

The top court found the High Court's reliance on the ₹31,99,000 certificate figure, without accounting for the suspense-account interest, to be unsustainable.

“Oversimplification of calculation by the High Court with respect to the amount payable, ignoring the existence of the suspense account for the interest component since the date of classification of the loan account as a non-performing asset, and giving effect only to the figure mentioned in the PNB's certificate dated 24.12.2020, viz., ₹31,99,000/-, thereby accepting the plea of the Trust that the sum of ₹2,43,321.98 paisa paid by it needed to be deducted therefrom reducing its dues to ₹29,55,678.02 paisa, is therefore clearly unsustainable.” the court observed.

The court also rejected the Trust's later statement showing ₹64,25,915 as the principal amount due on June 29, 2017. The bank's running account statement showed that the principal amount along with interest calculated up to that date stood at ₹1,25,30,842.

The bench noted that the Trust had earlier argued before the DRT that the interest rate was excessive and that ₹32,63,899.65 was payable. Before the High Court, it relied on the December 2020 certificate and claimed that only ₹29,55,678.02 was due.

The apex court held that the interest formed part of the “debt” under Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993. It also described the Trust's later statement of account as “patently erroneous and mischievous”.

“PNB is entitled to claim the interest due, which was calculated and maintained in a separate suspense account, in addition to the outstanding principal loan amount,” the court observed.

The top court set aside the Orissa High Court's orders dated January 11 and May 14, 2024 and restored the DRAT's September 1, 2023 order.

PNB can recover ₹54,90,413 with 9% pendente lite and future simple interest from February 5, 2018 until realization, after giving credit for subsequent payments, if any.

For Appellant: Ekta Choudhary, AOR, Advocates Rushali Sikand, Gaurav Grover

For Respondents: Bharat Sangal, Sr. Advocate, Advocates Snigdha Dash, Hemant Tripathi, Shreya Kasera, Sahil Tagotra, AOR