Sri Lakshmi Hotel Pvt. Limited & Anr vs Sriram City Union Finance Ltd & Anr
CASE BRIEF
Case Name: Sri Lakshmi Hotel Pvt. Limited & Anr vs Sriram City Union Finance Ltd & Anr.
Case No.: Civil Appeal No. 13785 of 2025
Citation: 2025 INSC 1327
Court: Hon’ble Supreme Court of India.
Coram: Hon’ble Mr. Justice J.B. Pardiwala and Hon’ble Mr. Justice, K.V. Viswanathan
Date: 18 November 2025
1. FACTUAL MATRIX
1.1. M/s Sri Lakshmi Hotels Pvt. Limited (“Appellant No.1”),”) is a Private Limited company registered under the Companies Act, 1956. V.S. Palanivel (“Appellant No.2”) is the Managing Director of Appellant No.1. Sriram City Union Finance Ltd (“Respondent No.1”) is a Non-Banking Financial Company. Mr. K. Balasubramanian (“Respondent No.2”) is a retired District Judge who was appointed as the arbitrator and passed the arbitral award.
1.2. Appellant No.1 through Appellant No.2 had availed a loan facility amounting to INR 1,50,00,000/- from Respondent No.1 vide a loan agreement dated 03.04.2006 (“First Agreement”). Additionally, Appellant No.2 had also obtained another loan facility from Respondent No.1 amounting to INR 7,25,000/- vide a loan agreement dated 03.07.2006 (“Second Agreement”). Thus, in total an amount of INR 1,57,25,000 was borrowed by the Appellants from Respondent No.1.
The salient features of the loan agreements were as follows: –
- Under the First Agreement, the Appellants were to repay the loan amount within a period of 12 months along with an interest rate of 24% p.a. on monthly rest, payable on the 4th of every month commencing from 04.05.2006.
- Under the Second Agreement, the Appellants were to repay the loan amount within a period of 6 months along with an interest rate of 24% p.a. on monthly rest, payable on the 4th of every month, commencing from 04.08.2006.
1.3. The Appellants made some payments in furtherance of its repayment obligations and thereafter, stopped making the payments. Since the Appellants failed to repay the complete loan amount, Respondent No.1 invoked the arbitration clause under the First Agreement and Second Agreement respectively. Respondent No.2 was appointed as the sole arbitrator to adjudicate the dispute. Upon conclusion of the proceedings, Respondent No.2 passed an Award partly allowing the claim of Respondent No.1 and the Appellants were directed to pay a sum of INR 2,21,08,244/- with 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.
1.4. Being aggrieved by the said Award, the Appellants challenged the Award by filing a petition under Section 34of the Arbitration and Conciliation Act, 1996 (“Act”) before the Ld. Single Judge of the High Court of Madras. However, the petition was dismissed.
1.5. On the other hand, Respondent No.1 filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 before the National Company Law Tribunal (“NCLT”), Special Bench, Chennai to recover its money. The petition was admitted by the NCLT, and an Interim Resolution Professional (“IRP”) was appointed. Since no resolution applicant submitted a resolution plan, the IRP filed an application seeking initiation of liquidation proceedings against the Appellant No.1. was filed and the application was allowed by the NCLT.
1.6. Being aggrieved by the judgment passed by the Ld. Single Judge which dismissed the Section 34 petition, the Appellants filed an appeal under Section 37 of the Act. However, the Division Bench of the High Court of Madras, inter alia affirmed the order passed by the Ld. Single Judge and the Respondent No. 2 respectively and dismissed the appeal filed by Appellants. Aggrieved by dismissal of their Section 37 appeal, the Appellants filed an appeal before the Hon’ble Supreme Court.
2. CONTENTIONS OF THE APPELLANTS BEFORE THE SUPREME COURT
2.1. The Appellants submitted that the 24% p.a. interest rate stipulated inunder the loan agreement constitutes an unconscionable and usurious charge, violating the RBI guidelines which 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. Appellants relied on the guidelines on fair practices “for lenders” dated 05.05.2023 to make good their submission as regards unconscionable rates of interest. Furter, relying upon two Supreme Court precedents, Central Bank of India v. Ravindra and Others1Central Bank of India v. Ravindra and Others, (2002) 1 SCC 367 and Sardar Associates v. Punjab and Sindh Bank2Sardar Associates v. Punjab and Sindh Bank, (2009) 8 SCC 257, Appellants submitted that these judgements establish that RBI guidelines are binding in nature and must be observed by financial institutions.
2.2. The Appellants further submitted that Under Section 3 of the Usurious Loans Act, 1918, courts are empowered to determine whether interest rates are excessive and relieve debtors of liability when the interest component exceeds reasonable and accessible thresholds. The Appellants contended that Usurious Loans Act, 1918 applies to all statutes, including arbitration claims.
2.4. The Appellants argued that the 24% p.a. interest rate was never agreed upon between the parties, as Respondent No. 1 fraudulently induced her to sign blank documents and later manipulated/interpolated the interest rate without authorization. It was contended that the conduct in question amounts to fraud. Since fraud vitiates all transactions, the entire agreement stood tainted by fraudulent conduct. Consequently, the interest cannot be enforced, and, on this basis, it was urged that the appeal deserves to be allowed
3. CONTENTIONS OF THE RESPONDENTSRESPONDENT BEFORE THE SUPREME COURT
3.1. Respondent No. Respondents1 submitted that no error of law had been made by the High Court in passing the judgement and order. Respondent also submitted that the arbitrator acted within his discretion under Section 31(7)(b) of the Act in applying the 24% p.a. interest rate stipulated in the loan agreements. It was further contended that even if the arbitrator’s exercise of discretion were questioned, Respondent’s recovery at 24% p.a. interest would be substantially less than what could have been recovered under the mandatory default rate of 18% p.a. interest (as provided in Section 31(7)(b) prior to the 2015 Amendment).
3.2. It was submitted that RespondentsRespondent No. 1 initiated arbitration proceedings under the loan agreements in accordance with the Act, as the Respondent No. 1 had advanced loans totaling INR 1,57,25,000 to Appellant No. 1 company, who had persistently and deliberately refused repayment. Clause 15 of the loan agreements expressly stated that the loan purpose was “to clear bank loan (bridge loan)”. Letters dated 28.03.2006 and 03.07.2006 from Appellant No. 1 company demonstrated that the loans were sought to settle pre-existing debt owed to Indian Bank on which the Appellant had defaulted. Consequently, the loans constituted a high-risk transaction with a defaulting borrower, thereby necessitating both higher security and a correspondingly higher rate of interest.
3,3. Drawing support from the ruling in Nedumpilli Finance Company Limited v. State of Kerala3Nedumpilli Finance Company Limited v. State of Kerala , (2022) 7 SCC 394, where the court held that State legislation regulating interest rates does not extendsextend to NFBCs, the Respondent submitted that the Appellant’s reliance on Tamil Nadu Prohibition of Charging Exorbitant Interest Act, 2003, was untenable. The Respondent No. 1 further asserted that as an NBFC regulated solely under Chapter III B of the Reserve Bank of India Act, 1934, Respondent No.1 falls outside the purview of State legislation. Accordingly, it was urged that the appeal deserves dismissal for want of merit.
4. ISSUES
i. Whether the High Court committed any error in dismissing the Section 37 appeal filed by the appellants hereinAppellants, thereby affirming the order passed by the High Court in Section 34 proceedings?
ii. Whether interest at the rate of 24% p.a. as provided in the agreements between the parties could be said to be against public policy?
iii. Whether 24% p.a. interest rate violates Usurious Loans Act, 1918?
5.JUDGMENT
5.1. The Supreme Court expounded that Section 31(7) contains two critical provisions: Clause (a) deals with passing of an award which would include interest uptoup to the date on which the award is made, thus permitswhile the arbitrator to award interest at such rate as it deems reasonable on money for the period between the cause of action and the award date, subject to party agreement. Clausesecond part, i.e., clause (b) deals with the grant of interest on the sum awarded by the arbitral tribunal on its discretion, thus mandates post-award interest at 18% p.a. from award date to payment date, unless the award specifies a different rate.
5.2. The Court held 31(7)(a) providesexplained that the arbitratorunder Section 31(7)(a), an arbitral tribunal has the power to award interest at such rate as it deems reasonable whereas clause (b) confers discretion upon the Arbitral Tribunal to to award interest for the post-award period but that period prior to the award, including the pre-reference and pendente lite stages. However, this discretion is not subject to any contract, the key distinction is that clause (a) gives agreement between the parties an option to contract out of interest, clause (b) no such option to contract out is given to parties under post-award period, this clause is not subject to party autonomy. The phrase “unless the award otherwise directs” qualifies only, thereby if the rate ofcontract limits or excludes interest, not the entitlementtribunal must give effect to that agreement/arrangement.
5.3. In contrast, the position for the post-award period is statutory and not contractual. While the tribunal may award interest after the date of the award, if it does not do so, the law mandates interest at 18% per annum from the date of the award until payment. Unlike pre-award interest itself., parties cannot contract out of this consequence, ensuring that delayed compliance with an arbitral award carries a financial cost.
5.4. The Court extensively reliedplaced strong reliance on the Supreme Court’s decision in R.P. Garg v. General Manager, Telecom Department4R.P. Garg v. The General Manager, Telecom Department & Ors., 2024 INSC 743 decision, which heldsettled that post-award interest is mandatory and not subject to contractual exclusioncannot be excluded by contract. The Supreme Court held that even where a contract fails to provide for post-award interest, Section 31(7)(b) steps in automatically to impose 18% p.a interest. The expression Court further clarified that the phrase “unless the award otherwise directs” in Section 31(7)(b) relates only to the rate, of interest, and not to the right to receive interest itself. In other words, while an arbitral tribunal may vary the rate, the entitlement. to post-award interest is statutory and cannot be taken away.
5.5. The courtCourt relied uponon the case ofdecision in Morgan Securities & Credits Pvt Ltd. v. Videocon Industries Ltd.5Morgan Securities & Credits Pvt Ltd. v. Videocon Industries Ltd., 2022 INSC 898 where it waswhich held that the purpose of granting post-award interest is to ensure that the award-debtor does not delay the payment of the award. The It was observed that the arbitrator’s discretion of the arbitrator can be curtailed only be restricted by an express statutory provision to that effect. ClauseWhile clause (a) of Section 31(7) subjects the exercise ofarbitrator’s discretion by the arbitrator on the grant ofin granting pre- award interest to the arbitral award. However, there is no provision inagreement between the parties, the Act which restricts the exercise of discretioncontains no such restriction on the power to grant post-award interest by. The Court further clarified that in exercising this discretion, the arbitrator. The arbitrator must exercise the discretionact in good faith, must take into account consider only relevant factors, and not irrelevant considerations,adopt a reasonable and must act reasonably and rationallyrational approach, taking cognizancedue account of the surrounding circumstances. This ensures that the discretion is exercised judiciously and in furtherance of the legislative intent to discourage delay in the satisfaction of arbitral awards.
5.6. Addressing the issue of Public Policy issue, the Supreme Court relied upon, OPG Power Generation Private Limited v. Enexio Power Cooling Solutions,6OPG Power Generation Private Limited v. Enexio Power Cooling Solutions, 2024 SCC OnLine SC 2600 wherein it was held that merely because that the mere fact that an interest rate appears high does not, by itself, render it against the award contrary to public policy as. The Court clarified that a simple contravention of law alone will notis insufficient to attract the bar of public policy, and something more than contravention of law is is required. The court in same caseIt was further held that for an arbitral award to be set aside on the ground of being against the public policy of India, a mere infraction of the municipal laws of Indialaw is not enough. There must be, inter alia, infractiona violation of a fundamental policy of Indian law which means, meaning that the award must contravene all or any of such fundamentalthose core principles that provide aform the basis forof the administration of justice and the enforcement of law in thisthe country.
5.7. Addressing the applicability of Usurious Loans Act, 1918 and Punjab Relief of Indebtedness Act, 1934, the Supreme Court held that the Usurious Loans Act, 1918, and the Punjab Relief of Indebtedness Act, 1934these were promulgated in a different era and are superseded by the plenary powers granted under the Act. These archaic statutes, which defined loan to include loans of kind and empowered courts to relieve debtors of excessive interest, cannot override the modern contemporary statutory framework forgoverning arbitral awards. The Court emphasized that the Act, being a special and later legislation, must prevail over such general, and earlier legislationstatutes. Consequently, challenges to post-award interest cannot be sustained by relying on these archaic laws, as the modern arbitration regime occupies the field.
5.8. The Supreme Court dismissed the appeal and confirmed the High Court’s decision, concluding that there was no reason to interfere with the impugned order.
6. PSL ANALYSIS
The judgment establishes several critical principles: (1) Postbrings out five clear and significant takeaways. First, post-award interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 is statutory and mandatory and not subject to contractual exclusion;, and cannot be excluded by contract. While the arbitrator has unfetteredwide discretion to fixdetermine the rate of such interest, the entitlement to post-award interest remains intact unless the award expressly directs otherwise; (2) Pre. Second, pre-award interest under Section 31(7)(a) stands on a different footing as it is discretionary and firmly subject to agreement; when party autonomy. Where the parties agreehave agreed on the treatment of interest aspects,, the arbitrator has nois bound by that agreement and cannot exercise an independent discretion; (3) Public. Third, in the context of public policy doctrine post-after the 2015 amendments requires contravention of, the judgment reinforces that an arbitral award can be interfered with only when it violates a fundamental policy of Indian law, and not mere contravention ofmerely because it contravenes a statutory provisions, mere exorbitanceprovision. The Court makes it clear that even a seemingly high or onerous rate of interest in a commercial transaction does not, by itself, shock the conscience of the court without more extraordinaryin the absence of exceptional circumstances; (4) Concurrent. Fourth, the decision reaffirms the settled position that concurrent findings of fact by the trial court and high court cannot be the High Court are ordinarily not open to re-appreciated by appreciation in appellate court; and (5) Archaic usurious interestproceedings. Finally, the Court holds that older usury-related statutes (such as the Usurious Loans Act, 1918, and the Punjab Relief of Indebtedness Act, 1934) are superseded have been overtaken by the modern arbitration frameworkregime and cannot restrict arbitrator’sbe used to curtail an arbitrator’s power to award interest in commercial lending disputes.
Overall, the judgment brings much needed clarity and certainty to the law on interest in arbitration, firmly balancing party autonomy with statutory mandate. By limiting judicial interference and reaffirming the primacy of the modern arbitration framework, the Court strengthens the enforceability of arbitral awards and discourages delay in compliance.
This Case Brief is authored by Himesh Thakur, Associate Partner and Syed Moosa, Associate.
