Imposition of exorbitant interest in contemporary commercial practices not against the fundamental policy of Indian Law, or against the morality or justice
In a recent judgment, the Hon’ble Supreme Court has held that it cannot be said that the imposition of an exorbitant interest in the background of contemporary commercial practices, would be against the fundamental policy of Indian Law, or against the basic notions of morality or justice.
ABCAUS Case Law Citation:
4871 (2025) (11) abcaus.in SC
In the instant case, the appellants had challenged of dismissal of their Petitions by High Court against grant of Arbitral award confirming interest on loan taken @ 24% p.a.
the appellant Private Limited company through its Managing Director availed two loan facilities from the respondent NBFC. The loan agreements provided for repayment the first loan amount within a period of 12 months along with an interest rate of 24% p.a. on monthly rest. The second loan was to be repaid amount 6 months along with an interest rate of 24% p.a. on monthly rest.
There was continuing default in repayment of loan by the appellant and when respondent demanded repayment, the appellant give assurance to pay the loan. However, even after such assurance no payment was made. After two years after taking the loan, the appellants for the very first time objected to the interest rate of 24% p.a. and contended that only 12% p.a. was payable on the loan amount.
Since the appellants failed to repay the complete loan amount, the respondent invoked the arbitration clause under the loan agreements and accordingly, sole arbitrator was appointed.
The sole arbitrator passed an award and appellants were directed to inter alia pay interest at the rate of 24% p.a. from the date of filing of the statement of the claim till the date of its realization.
Aggrieved, the appellant filed a petition under Section 34 of the Act, 1996 which was dismissed by the Hon’ble High Court holding that the Arbitrator had passed the Award after a thorough appreciation of facts of the matter and the terms of the agreement. Further, the Single Judge observed that the ambit of interference under section 34 the Act, 1996 being limited to the conditions mentioned therein, no interference was warranted. The Division Bench also dismissed the appeal of the appellants and affirm the order passed by the Single Judge of the High Court.
Before the Hon’ble Supreme Court the appellant argued that interest component of 24% in the loan agreement could be termed as unconscionable and usurious. It was submitted that the Reserve Bank of India guidelines have repeatedly stressed the need for banks and financial institutions to keep the customers’ welfare in mind and not charge excessively high or usurious interest rates. The interest rate of 24% in fact violates these binding guidelines. The appellants relied on RBI guidelines on fair practices “for lenders” to make good her submission as regards unconscionable rates of interest.
It was further submitted that Usurious Loans Act, 1918 allows the court to determine what constitutes excessive interest and relieve the debtor of its liability in case the interest component is beyond what is reasonable and deemed to be accessible.
The Hon’ble Supreme Court observed that the law with regard to the power of an Arbitrator to award interest for prereference period, pendent lite period and post-award period is well settled. Section 31(7)(a) provides that the arbitrator has the power to award interest at such rate as it deems reasonable, on the whole or on any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made. The grant of such interest during the pre-award period is subject to the agreement as regard the rate of interest or unpaid sum between the parties.
The Hon’ble Supreme Court further noted that clause (b) of Section 31(7) of the Act, 1996 confers discretion upon the Arbitral Tribunal to award interest for the post-award period but that discretion is not subject to any contract. If such discretion is not exercised by the Arbitral Tribunal, then the statute steps in and mandates the payment of interest at the rate specified for the post-award period. While clause (a) gives parties an option to contract out of interest, no such option is available in regard to the post-award period.
The Hon’ble Supreme Court opined that 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, as provided in Section 31(7)(b), shall apply. However, in the present case the two agreements itself provided the rate of interest to be 24% p.a.
The Hon’ble Supreme Court further noted that on the point of awarding interest, Section 31(7)(a) of the Act, 1996 stipulates that the arbitrator’s discretion while awarding pre-award interest is subject to the agreement between the parties.
The Hon’ble Supreme Court noted that the appellants were in a constant breach of the terms of the loan agreements and did not take adequate steps to repay the loan. Such constant and continuing defaults adversely affected the financial health of the respondent NBFC and deprived it from its right to use and enjoy monies for several years. Even after the arbitral award was passed, the respondent was unable to execute the same, as the appellants failed to comply with the arbitral award and continued to default in their payments. Having been left with no other option, the respondent initiated the CIRP proceedings against appellant company which also failed. It was only upon the commencement of liquidation proceedings against the appellant company that the respondent was able to recover a portion of its dues.
The Hon’ble Supreme Court opined that vaving undergone numerous hardships and going through several round of litigations it will be manifestly unjust to deprive the respondent from its rightful entitlements of post award interest at this stage.
The Hon’ble Supreme Court opined that whether the charging of a high rate of interest in the case of a purely commercial transaction is morally wrong entails a complex web of issues that would be contingent upon a variety of factors and perspectives. Although at first glance, the charging of interest at the rate of 24% could be considered as exploitative, unfair and morally blameworthy, high interest rates reflect the lenders risk of default due to highly competitive and uncertain market conditions, besides the fact that high interest rates might discourage borrowers from taking unnecessary risks.
The Hon’ble Supreme Court opined that in the commercial world, justifiability or reasonability of high interest rates would depend on the transparency of the terms and conditions of the contract entered into between the lender and the borrower, as well as the informed consent of the borrower. The moral implications of high interest rates are not absolute, rather they must be assessed through a nuanced lens that considers the inter-relationship between economic, social, and regulatory factors.
Further, the Hon’ble Supreme Court observed that the expression “public policy in the context of challenge to an arbitral award has come to be discussed in plethora of cases.
The Hon’ble Supreme Court held that on a plain and grammatical construction of clauses (ii) and (iii) of Explanation 1 to Section 34(2)(b) of the Act, 1996 it cannot be said that the imposition of an exorbitant interest in the background of contemporary commercial practices, would be against the fundamental policy of Indian Law, or against the basic notions of morality or justice. It is well-settled that fundamental policy of Indian law does not refer to violation of any Statue but fundamental principles on which Indian law is founded.
The Hon’ble Supreme Court further held that 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 sans which no interference is warranted in the award, whereby interest is awarded by the Arbitrator.
Accordingly, the Petition was dismissed.
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