The Supreme Court of India, on Tuesday, dismissed an appeal challenging an arbitral award that directed the payment of interest at the rate of 24% per annum. The Apex Court held that in purely commercial transactions, a high rate of interest does not automatically violate public policy, nor does it fall foul of the Usurious Loans Act, 1918, which must give way to the plenary powers of the courts under the Arbitration and Conciliation Act, 1996.
The Bench, comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan, affirmed the judgment of the Madras High Court, which had upheld the arbitral award against the borrowers.
Case Background
The dispute arose from two loan agreements executed in 2006 between the appellants, Sri Lakshmi Hotel Pvt. Limited and its Managing Director, and the respondent, Sriram City Union Finance Ltd. (an NBFC). The appellants borrowed a total of INR 1,57,25,000 to clear a prior bridge loan from Indian Bank. The agreed rate of interest was 24% per annum.
Following a default in repayment and the dishonour of a cheque issued by the appellants for INR 1.89 crore in 2008, the respondent invoked arbitration. The Sole Arbitrator, a retired District Judge, passed an award on December 27, 2014, directing the appellants to pay INR 2,21,08,244 along with interest at 24% p.a. from the date of the claim statement until realization.
The appellants challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, which was dismissed by a Single Judge of the High Court. A subsequent appeal under Section 37 was also dismissed by the Division Bench, leading to the present appeal before the Supreme Court.
Arguments of the Parties
Appellants’ Contentions: Ms. Nina Nariman, learned counsel for the appellants, argued that the 24% interest rate was “unconscionable and usurious” and violated Reserve Bank of India (RBI) guidelines on fair practices. Relying on the Usurious Loans Act, 1918, she contended that the court has the power to relieve a debtor of excessive interest liability. She further alleged that signatures were obtained on blank documents.
Respondent’s Contentions: Conversely, Mr. Krishnan Venugopal, learned Senior Counsel for the respondent, argued that the Arbitrator had discretion under Section 31(7)(b) of the Act, 1996, to rely on the stipulated contract rate. He highlighted that the loan was a “high-risk transaction” meant to settle a pre-existing debt on which the appellants had already defaulted. He relied on the Supreme Court’s decision in Nedumpilli Finance Company Limited v. State of Kerala to argue that state usury statutes do not apply to NBFCs governed by the RBI Act.
Court’s Analysis
The Supreme Court analyzed four key legal aspects: the mandate of post-award interest, the scope of interference under Section 34, the question of public policy, and the applicability of the Usurious Loans Act.
1. Mandate of Post-Award Interest The Court clarified the interpretation of Section 31(7)(b) of the 1996 Act (pre-amendment), citing its recent decision in R.P. Garg v. The General Manager, Telecom Department & Ors. and Morgan Securities & Credits Pvt Ltd. v. Videocon Industries Ltd.
The Bench observed:
“The grant of post-award interest under Section 31(7)(b) is mandatory. The only discretion which the arbitral tribunal has is to decide the rate of interest to be awarded. Where the arbitrator does not fix any rate of interest, then the statutory rate… shall apply.”
The Court noted that unless there is an express bar in the agreement, the arbitrator has the jurisdiction to award interest, including post-award interest.
2. Limited Scope of Judicial Interference The Bench reiterated that re-appreciation of evidence is prohibited under Section 34 and Section 37 proceedings. Referring to the Proviso to Section 34(2A) and precedents like Swan Gold Mining Ltd. v. Hindustan Copper Ltd., the Court held that since the Arbitrator’s findings on the genuineness of the loan agreement were concurrent, they warranted no interference.
3. Interest Rate and Public Policy Addressing the appellant’s contention that 24% interest violated “public policy,” the Court observed that commercial morality is dependent on context. The Court relied on OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited, stating that a mere contravention of law is not enough to invoke the defense of public policy; it must breach the “fundamental policy of Indian law.”
Justice Pardiwala wrote:
“Any difference or controversy as to rate of interest clearly falls outside the scope of challenge on the ground of conflict with the public policy of India unless it is evident that the rate of interest awarded is so perverse and so unreasonable so as to shock the conscience of the Court…”
The Court acknowledged that the high interest rate reflected the “lender’s risk of default” in a transaction where the borrower was already in debt.
4. Inapplicability of Usurious Loans Act, 1918 The Court rejected the plea that the transaction was void under the Usurious Loans Act, 1918.
“The Usurious Loans Act, 1918… were promulgated in a different era and the power of the Court to adjudicate if the interest on a loan amount is excessive has to give way in view of the plenary powers of the Courts provided under the later enactment, i.e., the Act, 1996.”
Decision
The Supreme Court concluded that the appellants had consistently defaulted on their obligations and that the respondent had been deprived of its funds for years. The Court dismissed the appeal, affirming the High Court’s decision to uphold the arbitral award.
Case Details:
- Case Title: Sri Lakshmi Hotel Pvt. Limited & Anr. v. Sriram City Union Finance Ltd. & Anr.
- Citation: 2025 INSC 1327
- Coram: Justice J.B. Pardiwala and Justice K.V. Viswanathan
