Supreme Court upholds Partial Recovery through IBC Liquidation by Sriram City Union Finance, directs to pay 24% Interest on Loans [Read Order]

The Supreme Court has dismissed an appeal filed by Sri Lakshmi Hotels Pvt. Limited against an arbitral award requiring them to pay 24% interest on loans taken from Sriram City Union Finance Ltd., establishing that arbitrators have discretion to award interest rates as stipulated in commercial loan agreements, particularly in high-risk transactions.

The appeal was filed by Sri Lakshmi Hotels and its Managing Director, V.S. Palanivel, challengeing a 2014 arbitral award that directed them to pay INR 2,21,08,244 with 24% annual interest on two loans totaling INR 1,57,25,000 taken in 2006. After the borrowers defaulted, the lender initiated arbitration proceedings, which resulted in the award. When the borrowers challenged the award in court without success, the lender initiated insolvency proceedings under the IBC, leading to liquidation of Sri Lakshmi Hotels and partial recovery of only INR 8,27,99,917.

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Since the appellants failed to repay the complete loan amount, the respondent no.1 invoked the arbitration clause under the First and Second loan agreements respectively and accordingly, the respondent no.2 was appointed as the sole arbitrator in Arbitration Case No. 01 of 2009.

The respondent no.1 filed its Statement of Claim on 26.03.2009 inter alia claiming an amount of INR 2,21,08,244 (Rupees Two Crore Twenty-One Lakh Eight Thousand Two Hundred and Forty-Four) along with interest at the rate of 24% p.a. The appellants filed their respective statement of defense on 22.08.2009 inter alia disputing the rate of interest as usurious. However, there was no challenge as to the factum of the loan.

The core legal issue was whether the 24% interest rate was unconscionable and usurious, with the appellants arguing it violated RBI guidelines and the Usurious Loans Act, 1918. The defense contended that the rate was justified given the high-risk nature of the bridge loans, which were taken to settle a pre-existing default with another bank.

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 court further noted that an arbitrator is the final judge of facts and the findings in the award should not be interfered merely on the ground that the terms of contract were not correctly interpreted.

Since, the view of the Single was that none of the conditions under Section 34 were made out, the Award passed by the respondent no.2 was upheld and the petition, was accordingly dismissed.

As the appellants failed to pay the decretal amount in terms of the judgement passed by the Ld. Single Judge, the respondent no.1 filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) being CP/1140/(IB)/CB/2018 before the National Company Law Tribunal, Special Bench, Chennai, (“NCLT”). The said petition was admitted by the NCLT vide its order dated 28.02.2019 and an Interim Resolution Professional (“IRP”) was appointed.

Since no resolution applicant submitted a resolution plan, the IRP filed an application under section 33(2) of the IBC, seeking initiation of liquidation proceedings against the appellant no.1. By an Order dated 17.07.2019 the NCLT allowed the aforesaid application to liquidate the assets of appellant no.1

The court, comprising Justices J.B. Pardiwala and K.V. Viswanathan, relied on provisions of Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, which gives arbitrators discretion to award post-award interest. The court noted that the loans were high-risk transactions with a defaulting borrower, justifying the higher interest rate.

The court also observed that the lender had only partially recovered through IBC liquidation proceedings, and it would be "manifestly unjust" to deprive them of their rightful entitlements at this stage.

The court rejected the applicability of the Usurious Loans Act, stating it was promulgated in a different era and had to give way to the plenary powers provided under the Arbitration Act. The court also held that the interest rate did not violate public policy as it was a commercial transaction between informed parties.

Consequently, finding no merit in the appeal, the Supreme Court dismissed it and upheld the arbitral award with 24% interest, pointing that courts should not interfere with arbitral awards unless there is clear evidence of patent illegality or violation of fundamental principles of justice.

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