Supreme Court: Interest Rate Challenge Not Valid Under Public Policy

Sri Lakshmi Hotel Pvt. Ltd. and its managing director had taken two loans from Sriram City Union Finance: Rs. 1.5 crore in April 2006 and Rs. 7.25 lakh in July 2006, both at 24% interest with monthly rests. They paid around Rs. 44.66 lakh till April 2007 and then defaulted. The NBFC kept issuing demand notices; the borrowers never questioned the principal but later raised objections to the interest rate. In 2008, they issued a check for Rs. 1.89 crore, claiming it was a full settlement, but it bounced, triggering Section 138 NI Act proceedings. Arbitration followed, and their attempt to seek handwriting and signature verification was rejected and became final.

On 27.12.2014, the sole arbitrator awarded Rs. 2.21 crore with 24% interest. Their Section 34 petition was dismissed in 2017, and the Section 37 appeal in 2020. Meanwhile, due to ongoing default, the NBFC initiated insolvency proceedings under Section 7 of the IBC. CIRP began, and the company eventually went into liquidation on 17.07.2019. Even then, the NBFC could recover only part of its dues.

Aggrieved, the borrowers approached the Supreme Court,

Issue Raised: Whether the arbitral award, particularly the 24% interest rate and post-award interest, could be set aside as unconscionable, usurious, or contrary to public policy under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996.

SC Ruled: The Supreme Court held that no interference was needed with the concurrent findings and upheld the award. The court ruled that post-award interest is mandatory under Section 31(7)(b) unless the arbitrator specifies a different rate; the arbitrator possesses full discretion to fix the rate, and parties cannot contract out of post-award interest. Pre-award interest is subject to party agreement, but the two loan agreements themselves provided for 24% interest. The Court agreed that reappreciation of evidence is expressly barred under Section 34(2A)’s proviso, and both the arbitrator and the High Court had already examined and upheld the genuineness of the loan documents.

The Hon’ble Court held that invoking the Usurious Loans Act, 1918, was wrong, as the statute belongs to a different era and cannot override the Arbitration Act regime. Observing the borrowers’ repeated defaults, dishonoured settlement cheque, failure to pay even post-award, and the NBFC’s partial recovery only through liquidation, the Court concluded that there was no basis to disturb the award. The appeal was thus dismissed.

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