Usurious Loans Act, 1918

Usurious Loans Act, 1918

Usurious Loans Act, 1918

[Act 10 of 1918] 1

[22nd March, 1918]

1. For Statement of Objects and Reasons, see Gaz. of Ind., 1917, Pt. V, p. 86 for Report of Select Committee, see Gaz. Of Ind. , 1918, Pt. v,p. 47.

This Act has been declared to be in force in Panth Piploda by the Panth Piploda Laws Regulation, 1928 (1 of 1929),S.2.

The Act has been extended to—

(A) the transferred territories in—

(i) Andhra Pradesh by A.R.Act 24 of 1961;

(ii) Tamil Nadu by T.N. Act 23 of 1960;-

(B) the States merged in the State of—

(i) Bombay by Bom. Act 4 of 1950;

(ii) Madhya Pradesh by M.P. Act 12 of 1950;

(iii) Madras by Mad. Act 35 of 1949;

(C) the Union territory of Pondicherry by Act 26 of 1968, S. 3 ( 1-9-1970 ).

The Act as in force in Mahakoshal region immediately before the appointed day, was extended as from the appointed day, to be in force in all other regions of Madhya Pradesh by M.P. Act 23 of 1958, S. 3and Sen., Part A, Item 17.

The Act as in force in Punjab was extended to the Scheduled Areas of Sahal and Spiti by Punjab Regn. 1 of 1962, S. 3 and to Pepsu area by Punj. Act 18 of 1962 ( 30-12-1960 ).

The Act was extended to the Union territory of Himachal Pradesh by H.P. A.L.O., 1948.

For non-application of the Act to certain loan transactions, see—

A.P. Gaz., 15-6-1989 , Pt. I, p. 516 (No. 24).

Ker. Gaz., 15-1 -1991, Pt. I, S. IV, p. 1, G. 2005 (No. 3).

Mah. G. Gaz., 14-12-1989 , Pt. 4-A, p. 1519.

Ori. Gaz., 5-9-1990 , Ext., P. 1 (No. 1191).

T.N. G. Gaz., 11-5-1988 , Pt. II, S. 2, p. 346.

Tri. Gaz., 26-7-1990 , Pt. I, Ext., p. 1 (No. 110).

STATEMENT OF OBJECTS AND REASONS

“The object of this Bill is to prevent the Civil Courts being used for the purpose of enforcing harsh and unconscionable loans carrying interest at usurious rates. This subject has engaged the attention of the Government of India frequently in the past and in 1899sections 16and19 of the Indian Contract Act. 1872, were amended so as to enunciate more clearly the principle on which a contract can be avoided on the ground of undue influence.

Those amendments had’ the effect of conferring on the Courts in India equitable jurisdiction in cases relating to usurious contracts in which the element of undue influence is established, but where undue influence cannot be estabilshed the result has been to emphasize the rigidity of section 2 of the Usury Laws Repeal Act (XXVIII of 1855), however exorbitant the demand, and however unconscionable the bargain.

Further there has been a tendency on the part of the Courts to place upon the word “unconscionable” in section 16 of the Indian Contract Act the, technical meaning which it has acquired in English equity, and consequently to limit their own powers of interference.

Lastly the particular transaction before the Court is often merely one of a series and unless there is power to go behind it and examined antecedent agreements and attendant circumstances there is little hope of the Courts being able to come to an equitable decision.

The remedy proposed by this Bill is to empower the Courts on the lines of section 1 of the Money Lenders Act. 1900(63 & 64 Vict, c. 51) to reopen transactions by way of money or grain loans in cases where the Court is satisfied (1) that the interest or other, return is excessive and (2) that the transaction is substantially unfair and after investigation of the circumstances, both attendant and antecedent, to revise the transaction between the parties and if necessary to reduce the amount payable to such sum as the Court, having regard to the risk and all the circumstances of the case, may decide to be reasonable. The Local Governments have been- consulted and legislation in this direction has commanded almost universal approval. Provision has been made to cover the case of loans of grain as well as of money, as loans in kind are often made on very oppressive terms. As there may be urban or rural areas where the proposed law is deemed unnecessary it has been provided that the Act shall not come into force in any Province or part of a Province except by notification.” – Gazette of India. 1917. Part V, page 86.

ACT HOW AFFECTED BY SUBSEQUENT LEGISLATION

—Amended by Act 28 of 1926; 3 A.L.O., 1956.

—Adapted by A.O., 1937; A.C.A.O., 1948; 3 A.L.O., 1956.

—Amended in its application to—

(a) Andhra Pradesh by A.P. Act 24 of 1961.

(b) Himachal Pradesh by H.P. Act 3 of 1970.

(c) Madhya Pradesh by C.P. Act 11 of 1934; M.P. Act 23 of 1958.

(d) Punjab by Punj. Acts 7 of 1934; 12 of 1940; E.P. Act 4 of 1948.

(e) Tamil Nadu by T.N. Act 8 of 1937.

(f) Uttar Pradesh by U.P. Act 23 of 1934.

—Extended in Andhra Pradesh by A.P. Act 24 of 1961.

—Extended to Himachal Pradesh by H.P. A.L.O., 1948.

—Extended in Bombay (Now Maharashtra and Gujarat) by Bom. Act 4 of 1950.

—Extended in Madhya Pradesh by M.P. Acts 12 of 1950; 23 of 1958.

—Extended in Punjab by Punj. Regn. 1 of 1962; Punj. Act 18 of 1962.

—Extended to Pondicherry by Act 16 of 1968.

—Extended in Tamil Nadu by T.N. Acts 35 of 1949; 23 of 1960.

—Repealed in Bellary district by Mys. Act 14 of 1955.

—Repealed in U.P. by U.P. Act 29 of 1976.

An Act to give additional powers to Courts to deal in certain cases with usurious loans of money or in kind.

WHEREAS it is expedient to give additional powers to Courts to deal in certain cases with usurious loans of money or in kind:

It is hereby enacted as follows:-

2. Definitions.

In this Act, unless there is anything repugnant in the subject or context,-

(1) “interest” means rate of interest and includes the return to be made over and above what was actually lent, whether the same is charged or sought to be recovered specifically by way of interest or otherwise.

STATE AMENDMENT

Uttar Pradesh

In sub-section (1) of section 2, after the words “by way of interest” insert “or in the form of service to be rendered.”- U.P. Act 23 of 1934,8.2(1).

(2) “Loan” means a loan whether of money or in kind and includes any transaction which is, in the opinion of the Court, in substance a loan.

(3) “Suit to which this Act applies” means any suit-

(a) for the recovery of a loan made after the commencement of this Act; or

(b) for the enforcement of any security taken or any agreement, whether by way of settlement of account or otherwise, made, after the commencement of this Act, in respect of any loan made either before or after the commencement of this Act; 1[or

(c) for the redemption of any security given after the commencement of this Act in respect of any loan made either before or after the commencement of this Act.]

1. Inserted by the Usurious Loans (Amendment) Act, 1926 (28 of 1926), S. 2.

STATE AMENDMENTS

Himachal Pradesh

Same as in Punjab-H.P. Act 3 of 1970, S. 2 ( 4-4-1970).

Punjab : Haryana : Chandigarh

In its application to the pre-reorganization of State of Punjab, in Cl. (a) of sub-section (3) of section 2, between the words “loan made” and the words “after the commencement of this Act” insert “whether before or.”-E.P. Act 4 of 1948, section 2 ( 20-3-1948) and Punj. Act 18 of 1962 ( 30-12-1960) and Punj. Regn. I of 1962.

Uttar Pradesh

In sub-section (3) of section 2,-

(a) after the word ‘means’ insert (i); and

(b) after clause (c) add the following, namely-

(d) for account of a loan by a debtor against his creditor.

(ii) any proceeding for the determination of a claim under the United Provinces Encumbered Estates Act, 1934.”-U.P. Act 23 of 1934, S. 2 (2).

3. Re-opening of transactions.

(1) Notwithstanding anything in the Usury Laws Repeal Act, 1855, where, in any suit to which this Act applies, whether heard ex-parte or otherwise, the Court has reason to believe,-

(a) that the interest is excessive; and

(b) that the transaction was, as between the parties thereto, substantially unfair, the Court may exercise all or any of the following powers, namely, may,-

(i) re-open the transaction, take an account between the parties, and relieve the debtor of all liability in respect of any excessive interest;

(ii) notwithstanding any agreement, purporting to close previous dealings and to create a new obligation re-open any account already taken between them and relieve the debtor of all liability in respect of any excessive interest, and if anything has been paid or allowed in account in respect of such liability, order the creditor to repay any sum which it considers to be repayable in respect thereof;

(iii) set aside either wholly or in part or revise or alter any security given or agreement made in respect of any loan, and if the creditor has parted with the security, order him to indemnify the debtor in such manner and to such . extent as it may deem just:

Provided that, in the exercise of these powers, the Court shall not-

(i) re-open any agreement purporting to close previous dealings and to create a new obligation which has been entered into by the parties or any persons from whom they claim at a date more than 1[twelve] years from the date of the transaction:

(ii) do anything which affects any decree of a Court.

Explanation.- In the case of a suit brought on a series of transactions the expression “the transaction” means, for the purposes of proviso (i), the first of such transactions. (2)

(a) In this section “excessive” means in excess of that which the Court deems to be reasonable having regard to the risk incurred as it appeared, or must be taken to have appeared, to the creditor at the date of the loan. (b) In considering whether interest is excessive under this section, the Court shall take into account any amounts charged or paid, whether in money or in kind, for expenses, inquiries, fines, bonuses, premia, renewals or any other charges, and if compound interest is charged, the periods at which it is calculated, and the total advantage which may reasonably be taken to have been expected from the transaction.

(c) In considering the question of risk the Court shall take into account the presence or absence of security and the value thereof, the financial condition of the debtor and the result of any previous transactions of the debtor, by way of loan, so far as the same were known, or must be taken to have been known, to the creditor.

(d) In considering whether a transaction was substantially unfair, the Court shall take into account all circumstances materially affecting the relations of the par- ties at the time of the loan or tending to show that the transaction was unfair, including the necessities or supposed necessities of the debtor at the time of the loan so far as the same were known, or must be taken to have been known, to the creditor.

Explanation.- Interest may of itself be sufficient evidence that the transaction was substantially unfair.

(3) This section shall apply to any suit, whatever its form may be, if such suit is substantially one for the recovery of a loan or for the enforcement of any agreement or security in respect of a loan 2[or for the redemption of any such security].

(4) Nothing in this section shall affect the rights of any transferee for value who satisfies the Court that the transfer to him was bona fide, and that he had at the time of such transfer no notice of any fact which would have entitled the debtor as against the lender to relief under this section. For the purposes of this sub-section, the word “notice” shall have the same meaning as is ascribed to it in section 4 of the Transfer of Property Act, 1882.

(5) Nothing in this section shall be construed as derogating from the existing powers or jurisdiction of any Court.

1. Substituted for the word “six” by the Usurious Loans (Amendment) Act, 1926 (28 of 1926), S. 3.

2. Inserted, ibid.

OBJECTS AND REASONS

We think it well to commence clause 3 by a specific reference to the Usury Laws Repeal Act,1855, as the powers conferred by the Bill override pro tan to the provisions of that Act. We have accepted the view that the Court may act under the provisions of this clause suo motu as we attach considerable weight to the body of opinion which suggests this course and have modified the language of the Bill accordingly.

We have careful consideration to the question whether there should not be some restriction on the powers of .the Court to re-open agreements closing previous dealings and creating new obligations.’ We think that there is something to be said for the view that the Courts should not be required or allowed in such a case to go back beyond a definite period. In the case of a running account such a restriction is not possible, but we have accepted the view that where there is such an agreement which has been entered into by the parties or by their representatives in interest, the Court should not be allowed to re-open the agreement if it was made more than six years prior to the transaction before the Court. We have therefore inserted a proviso limiting in this way the powers under clause 3 (1) of the Bill annexed to this Report. To prevent any misapprehension we have also laid it down that the powers conferred by the clause shall not be used in such a way as to affect the decree of a Court

We have accepted the view expressed in many opinions that the concluding words of clause 2 (2)(a) of the Bill. referred to us should be omitted. We recognized that there is some danger of a local combination creating a prevailing rate which would be an excessive rate. We have amended the closing words of sub-clause (2) (b) so as to make it clear that it is for the Court to decide the total .advantage which may reasonably be taken to have been expected from any transaction. We have inserted an Explanation to make it clear that interest may of itself be sufficient evidence that at rans action is substantially unfair. By doing so we have deliberately adopted the view set forth in the House of Lords in Samuel v. New bold .

We have modified the provision in the Bill by which protection is afforded to a transferee for value so as to make it clear that it only extends to a case where a Court is satisfied that the transfer is bona fide, and that the transferee had at the time of the transfer no notice of any fact which would have entitled the debtor as against the lender to relief under Clause 3.”- S. C. R.

Andhra Pradesh

In its application to the Andhra Area of the Andhra Pradesh, the amendments made in section 3 are the same as those made by Madras Act 8 of 1937 which are given under Madras.

Madhya Pradesh

(1) In its application to the whole State of Madhya Pradesh, in sub-section (1) of section 3-

(a) for the word ‘and’ in clause (a), the word ‘or’ shall be substituted; and

(b) for the words “the Court may exercise all or any of the following powers, namely, may” occurring after clause (b), the words “the Court shall exercise all or any of the following powers, namely, shall” shall be substituted.

(2) After clause (a) of sub-section (2) of section 3, the following provisos shall be inserted, namely :-

“(i) Provided that compound interest in excess of ten per cent., on any loan made after such date as the Local Government may, by notification, fix, shall be deemed to be excessive.

(ii) Provided further that, where in any suit the Court finds the rate of interest exceeds twelve per cent, per annum in the case of a secured loan or eighteen per cent, per annum in the case of an unsecured loan or that there is a stipulation for rents at intervals of less than six months, it shall, until the contrary is proved, presume that such rate is excessive, but this provision shall be without prejudice to the powers of the Court under subsection (1) where the Court is satisfied that the interest charged, though not exceeding twelve per cent, per annum or eighteen per cent, per annum, as the case may be, is excessive.”-C.P. and B. Act 11 of 1934, Ss. 2 and 3 ( 15-6-1934).

Maharashtra

In its application to the Vidarbha region of the State of Maharashtra, the amendments made in section 3 are the same as those made by C.P. and B. Act 11 of 1934 which are given under Madhya Pradesh.

Punjab, Haryana : Chandigarh

In its application to the pre-reorganisation State of Punjab, in section 3,-

(i) for the word ‘and’ in clause (a) of sub-section (1) the word ‘or’ shall be substituted;

(ii) for the word ‘may’ where it appears for the first time in sub-section (1), the word ‘shall,’ shall be substituted;

(iii) for the word ‘may’ after the word ‘namely’ in sub-section (1), the word ‘shall’ shall be substituted;

(iv) to sub-section (2) the following clause shall be added, namely :-

“(e) The Court shall deem interest to be excessive if it exceeds seven and a half per centum per annum simple interest or is more than two per centum over the Bank rate, whichever is higher at the time of taking the loan, in the case of secured loans, or twelve and a half per centum per annum simple interest in the case of unsecured loans :

Provided that the Court shall not deem interest in excess of the above rates to be excessive if the loan has been advanced by the Imperial Bank of India or any bank included in the Second Schedule, Reserve Bank of India Act, 1934, or any banking company registered under the Indian Companies Act, 1913, prior to the first day of April, 1937, or any cooperative society under, the Co-operative Societies Act, 1912.”-Punj. Act 7 of 1934, S. 5 ( 19-4-1935) as amended by Punj. Act 12 of 1940, S. 3.

Tamil Nadu

(1) Sub-section (3) of section 1 of the Usurious Loans (Madras Amendment) Act, 1936 is as follows :-

“(3) The provisions of this Act shall apply to all suits to which the Usurious Loans Act, 1918 . . . . . . . . would apply and which are pending on, or are instituted on or after, the date of the commencement of this Act.”

(2) In its application to the whole State of Madras in section 3-

(i) in sub-section (1), for the words, letters and brackets beginning with “has reason to believe” and ending with “any of the following powers, namely, may,” following shall be substituted, namely :-

“has reason to believe that the transaction was, as between the parties thereto, substantially unfair, the Court shall exercise one or more of the following powers, namely :-“;

(ii) the Explanation to the same sub-section shall be renumbered as Explanation II thereto and the following shall be inserted as Explanation I prior thereto :-

“Explanation.- If the interest is excessive, the Court shall presume that the transaction was substantially unfair; but such presumption may be rebutted by proof of special circumstances justifying the rate of interest”;

(iii) to clause (b) of sub-section (2), the following proviso shall be added, namely :-

“Provided that in the case of loans to agriculturists, if compound interest is charged, the Court shall presume that the interest is excessive,” and (iv) the Explanation to clause (d) of the same sub-section shall be omitted.- T.N. Act 8 of 1937, S. 2 (2-3-1937).

Uttar Pradesh

In section 3- ;

(1) in sub-section (1),-

(a) in clause (a) for the word ‘and’ substitute the word ‘or';

(b) after clause (b), for the words “the Court may exercise all or any of the following powers, namely, may,” substitute the words, “the Court shall exercise one or more of the following powers, namely, may,” and

(c) in clause (i) of the proviso to the same sub-section, for the word ‘twelve,’ substitute the word ‘seventeen.’

(2) in sub-section (2), after clause (b), add the following provisos, namely,-

“Provided that in the case of loans secured by a first mortgage the Court shall deem the interest excessive if-

(1) the rate exceeds 12 per cent, per annum, or

(2) the amount of interest that might become due at any time exceeds the amount that would become due at that time if the rate were 12 per cent, per annum and the interval between rests were six months :

Provided also that in the case of loans secured otherwise than by a first mortgage the Court may, if it considers that the nature of the security warrants it, deem that the interest is not excessive even though the rate exceeds twelve per cent, per annum or the amount of interest that might become due at any time exceeds the amount that would become due at that time if the rate were 12 per cent, per annum and the interval between rests were six months :

Provided also that in the case of unsecured loans the Court shall, unless the contrary is proved, deem the interest excessive if-

(1) the rate exceeds 24 per cent, per annum, or

(2) the amount of interest that might become due at any time exceeds the amount that would become due at that time if the rate were 24 per cent, per annum and the interval between rests were six months :

Provided also that in the case of secured loans the Court shall not deem the interest excessive if-

(1) the rate does not exceed 7 per cent, per annum, and

(2) the amount of interest that might become due at any time does not exceed the amount that would become due at that time if the rate were 7 per cent, per annum and the interval between were six months :

Provided also that in the case of unsecured loans the Court shall not deem the interest excessive if-

(1) the rate does not exceed 9 per cent, per annum, and

(2) the amount of interest that might become due at any time does not exceed the amount of interest that could become due at that time if the rate were 9 per cent, per annum and the interval between rests were six months.”-U.P. Act 23 of 1934, Ss. 3 to .6

4. Insolvency proceedings.

On any application relating to the admission or amount of a proof of a loan in any insolvency proceedings the Court may exercise the like powers as may be exercised under by a Court in a suit to which this Act Applies.

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