Rajasthan High Court upholds bank’s right to levy prepayment charges on MSME loans taken over by another lender

Jaipur/Jodhpur: The Rajasthan High Court has held that banks are legally entitled to levy prepayment charges on loans availed by Micro, Small and Medium Enterprises (MSMEs) when such loans are prepaid due to takeover by another financial institution, provided the charges are expressly stipulated in the loan agreement.

A Division Bench of Justice Sanjeet Purohit and Justice Pushpendra Singh Bhati ruled that the Code of Banks’ Commitment to Micro and Small Enterprises is a statement of voluntary best practices and cannot override binding contractual terms mutually agreed between a borrower and a bank.

The court further held that once a borrower voluntarily enters into a loan agreement containing a clause for levy of prepayment charges, the borrower is estopped from later disputing the legality of such charges merely by relying on the MSME Code or equitable considerations.

These principles were laid down while dismissing a civil miscellaneous appeal filed by Amarbhaw Power Private Limited against Punjab National Bank (PNB), challenging recovery of Rs. 5.52 lakh levied as prepayment charges.

According to the facts recorded by the court, the appellant company had availed multiple credit facilities from PNB in December 2015, including a term loan of Rs. 2.76 crore for setting up a turbine mill. The sanction letter and the hypothecation agreement executed between the parties expressly provided for levy of prepayment charges at the rate of 2 percent in the event the loan was taken over by another bank or financial institution.

In 2018, the appellant repaid the loan before the scheduled tenure by securing finance from another bank, resulting in takeover of the account. PNB subsequently recovered Rs. 5.52 lakh towards prepayment charges. The appellant objected to the levy, claiming exemption under the Code of Banks’ Commitment to MSMEs and sought refund through representations, RTI replies and proceedings before the Banking Ombudsman, all of which failed.

The company thereafter filed a civil suit seeking recovery of the amount and a declaration that the prepayment clause was illegal. The Commercial Court at Jodhpur dismissed the suit in May 2023, holding that the MSME Code does not prohibit prepayment charges where repayment occurs through loan takeover.

Upholding the trial court’s findings, the High Court observed that Clause 5.3(H) of the MSME Code applies only where prepayment is made from the borrower’s own sources and does not bar levy of charges in cases of takeover by another lender. The Bench held that the contractual clause and the Code operate in distinct fields and are not contradictory.

The court also rejected the appellant’s argument that the charges were calculated on an excessive amount, noting that no cogent evidence was produced to establish the outstanding loan balance at the time of prepayment.

Relying on Supreme Court precedents, the High Court reiterated that courts cannot rewrite commercial contracts on grounds of equity or sympathy and that a party cannot approbate and reprobate after enjoying the benefits of a contractual arrangement.

Finding no infirmity in the judgment of the Commercial Court, the Division Bench dismissed the appeal and affirmed the recovery of prepayment charges by the bank.

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Case Title
Amarbhaw Power Private Limited vs Punjab National Bank Limited & Others
D.B. Civil Misc. Appeal No. 88/2024
High Court of Judicature for Rajasthan at Jodhpur

Bench
Justice Sanjeet Purohit
Justice Pushpendra Singh Bhati

Advocates
For the appellant: Mr. Vikas Balia, Senior Advocate, with Mr. Divik Mathur
For the respondents: Mr. Jagdish Vyas