The Usurious Loans Act, 1918

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The legislation of British rule period, was enacted with the name and short title as ‘the Usurious Loans Act, 1918’ (Act no. 10 of 1918). It was enacted for giving an additional power to the Courts in dealing with certain cases with the Usurious Loans of Money of even of Kind. While the basic theme behind the enacting providing this legislation is concerned, the Bill connected with this Act, was drafted for preventing use of Civil Courts for enforcing harsh and unconscionable loans carrying interest at Usurious rates. Earlier, the provisions of section 16 and 19 of the Indian Contract Act, 1872 was amended in the year 1899 for enunciating the principle in which the contract should be avoided by reasons of undue influence. However, in the cases of usurious contracts undue influence cannot be established the result has been to emphasize the rigidity of Section 2 of the Usury Laws Repeal Act 1855, but exorbitant the demand, and however unconscionable the bargain. Further, the Courts by adopting a tendency to place technical meaning upon the word ‘unconscionable’ in the Section 16 of the Indian Contract Act, 1872, resulted limiting their own interfering powers. As such that Bill was to propose a remedy empowering the Courts, on the lines of provisions of Section 1 of the Money Lenders Act, 1900, to reopen transactions by way of money or grain loans in cases where the Court is satisfied that the interest or other, return is excessive and also that the transaction is substantially unfair and after investigation of the circumstances, both attendant and antecedent, for revising the transaction between the parties. Thus, the Act was assented to have force in the year 1918 on 22nd day of March.

So far as the provisions of the Act are concerned, section 2 defines several terms including interest, loan and suits to which this Act applies are also been explained under the same definition clause, as suits for recovery of loan which is made after the provisions of this Act brought into operation, suits for enforcement of any security taken or any agreement either by way of settlement of account or otherwise, which was made after the Act brought into operation, in relation to any loan. And also the provisions of this Act are made applicable in cases of suits which is for redemption of any security given in respect of any loan after this Act started operating, as the clause was inserted by the Usurious Loans (Amendment) Act, 1926, in the provisions of section 2. Moreover, the provisions were amended state wise, including State of Himachal Pradesh, Punjab, Haryana, Chandigarh, etc. for having proper application of the provisions respectively to their concerned State’s territories.

Further, the section 3 of the Act makes provisions to re- open the transactions, where it is provided that, in any suits being subjected to this Act, where either the suit was heard ex-parte of otherwise, if the Court finds any reason for having believe that there is an excessive interest and there was an, substantially, unfair transaction as amongst the parties, then the Court can exercise the powers provided under this Act, including re- opening of the transaction concerned, and taking an account between the parties and also can relive the debtor of all liabilities relating to such excessive interest, even if the any agreement is purporting to close previous dealings and create a new obligation, then such agreement need not be considered and the Court can re-open any account which was already taken between parties and can relieve the debtor of all liability in respect of such excessive interest and also the Court can exercise its other mentioned powers as to such re- opening of accounts in relation to such excessive interest. However, the Court can exercise such powers without considering what is being provided under the provisions of the Usury Laws Repeal Act, 1855. However, again the Court cannot exercise its powers under this Act, for re –opening the agreement which is to close previous dealings and to create a new obligation which has been entered into by the parties at a date more than 12 years from the date of the transaction and the Court cannot do anything by exercising the powers under this Act, which will affect the decrees of the Court. There are also several amendments in respect of this provisions of the Act, which are brought by certain States including the State of Maharashtra, Tamil Nadu, Andhra Pradesh, Madhya Pradesh, etc. for effecting the provisions in respect to their concerned areas.

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Lastly, the section 4 of the Act, provides for cases of insolvency proceedings, where the Court can exercise the similar powers as it can exercise in suits to which the provisions of this Act applies as shown in the earlier paragraphs. Such powers can only be exercised by the Courts concerned, if there is an application relating to the admission or amount of a proof of a loan is there.

The Act was recommended by the PC Jain Commission Report (Appendix A-5), for repeal, however, the same has not been repealed till now.

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 Adv. Faim Khalilkhan Pathan