Does the Interest Cease on Award Amount if Deposited in Section 34 Court: An Analysis

This article examines whether interest on an arbitral award ceases when the award debtor deposits the amount in the court hearing a challenge under Section 34 of the Arbitration and Conciliation Act, 1996. Analysing conflicting High Court decisions and Supreme Court precedents, it argues that the decisive factor is whether the award-holder can withdraw the deposited amount unconditionally, irrespective of the court in which the deposit is made.

Introduction

A century ago, the Privy Council observed that “the difficulties of a litigant in India begin when he has obtained a decree”. The century-old adage remains true to this date. Though efficiency is regarded as the bedrock of arbitration, arbitral awards in India take far too long to get executed. Resultantly, the practical and commercial realities change significantly from the time the award is passed to the time it is finally executed. In the interregnum, though it may seem that the award debtor is protected from the pangs of the award, the bill always comes due.

Regarding arbitral awards for payment of money, after challenge to such an award is finally decided, more than the decretal amount, it is the interest on this amount that knocks the wind out of the award debtor’s sails. This is even more true for arbitral awards passed under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) which impose a hefty compound interest (with monthly rests) at three times the bank rate. Thus, it is not uncommon for an award debtor to find itself in a financially difficult position where, after an unsuccessful challenge to the award, it is now liable to pay an amount which is many times the original arbitral amount.

This begs the question: Is there a way to stop the interest from accruing during pendency of the challenge to the arbitral award? The Civil Procedure Code, 1908 (CPC) provides the answer. Order 21 Rule 1(4) and (5) (dealing with execution of decrees) of the CPC states that interest shall cease to run when the award debtor either deposits the award amount in court (from the date on which notice is given to the award-holder regarding deposit of the amount) or the award debtor directly makes the payment to the award-holder (from the date of payment). Regarding deposit of decretal amount in court, the Supreme Court has consistently held that for interest to cease on such deposit, the key question is whether the decree- holder/award-holder could freely and unconditionally withdraw the same.

While the law seems to be fairly settled regarding the “unconditional” nature of the deposit of an arbitral amount in court for it to be in consonance with Order 21 Rule 1 CPC, the issue that is still unclear is in which “court” such deposit needs to be made. To elaborate, whether the deposit of arbitral amount in court where the challenge to an arbitral award is pending (Section 34 court), as a precondition for stay, is enough to cease the interest on award amount or does the deposit necessarily have to be made in the executing court, thus requiring a strict interpretation of the phrase “by deposit into the court whose duty it is to execute the decree” as appearing in Order 21 Rule 1(a). The Bombay High Court in P.J. Rathod v. Union of India¹ and the Delhi High Court in Ramacivil India Constructions (P) Ltd. v. Union of India² have expressed divergent views on this issue.

This piece argues that the Bombay High Court’s judgment in the case of P.J. Rathod is bad in law in view of the Supreme Court’s judgment in DDA v. Bhai Sardar Singh & Sons³. Further, the Supreme Court’s decision in National Seeds Corpn. Ltd. v. National Agro Seed Corpn. (India)⁴ supports the contention that the forum in which the award amount is deposited is irrelevant as long as the award-holder is free to unconditionally withdraw the amount. Finally, insistence on deposit of decretal amount in the executing court defeats the purpose of an unconditional deposit. A more pragmatic approach is to ascertain only the nature of the deposit, i.e. whether the award-holder is free to withdraw the amount and not to insist on deposit of decretal amount in the executing court.

P.J. Rathod v. Ramacivil India: The conflict

In the case of P.J. Rathod, the Bombay High Court had framed the following issue for consideration: “whether interest will stop accruing once the amount awarded to the decree-holder is deposited by the judgment-debtor in the court other than the executing court?”. Answering this point in the negative, the Bombay High Court concluded that if the amount is not deposited before the executing court that too unconditionally and if it is deposited in any other court, it will not satisfy the requirement of Order 21 Rule 1 CPC. Interestingly, to arrive at this conclusion, the Bombay High Court exclusively relied on a judgment passed by the Division Bench of the Delhi High Court in DDA v. Bhai Sardar Singh & Sons⁵.

On the contrary, in the case of Ramacivil India, the Delhi High Court held that deposit, made as a condition for stay, on the direction of the Court, or made in the court in the execution proceedings, is intended to secure the awarded amount. Further, both the Section 34 proceedings and the execution proceedings concern the same arbitral award; and the award-holder, having once withdrawn the amount in Section 34 proceedings, cannot be permitted to take undue advantage in execution proceedings. Thus, the Delhi High Court rejected the distinction between a deposit made in an executing court and deposit made for obtaining a stay of the award under challenge.

As such, there is a divergence of views between the Bombay High Court and the Delhi High Court. However, as will be established below, the finding in P.J. Rathod is bad law and the forum in which the award amount is deposited is irrelevant for cessation of interest on the award amount.

The fault in P.J. Rathod’s stars

Firstly, the Bombay High Court’s judgment in P.J. Rathod is bad in law. In the case of P.J. Rathod, the Bombay High Court has relied exclusively on the observations of the Delhi High Court in Bhai Sardar Singh that the amount lying in deposit in appeal is not a deposit made in the executing court in terms of Order 21 Rule 1 and as such the deposit could not be construed as direct payment made to the decree-holder. However, the decision in Bhai Sardar Singh was carried to the Supreme Court in Bhai Sardar Singh and the Supreme Court had modified the Division Bench’s judgment. This fact does not seem to have been brought to the Bombay High Court’s attention. Crucially, regarding deposit of amount in appellate court, the Supreme Court in Bhai Sardar Singh⁶ specifically observed as follows:

28. The amount deposited by the appellant in terms of the interim order passed in FAO (OS) No. 93 of 2002 was obviously made with the intent that the amount would be released and paid to the respondent, on they being held as entitled to payment under the award. The direction to make payment was only with this intent in mind, that is, to secure payment to the respondent in case and if the appellant was held liable to make payment. The direction in the impugned order would, to this extent, be contrary to the object and scheme of Rule 1 Order 21….

(emphasis supplied)

Thus, the finding of the Delhi High Court regarding deposit of decretal amount in appellate court having been modified by the Supreme Court and this fact having not been brought to the Bombay High Court, renders the judgment in the case of P.J. Rathod bad in law.

Secondly, the Supreme Court recently in the case of National Seeds Corpn. Ltd. has distilled the principles regarding cessation of interest and held that a deposit of the amount in the court has to be made unconditionally and the same must be available to the decree-holder for withdrawal, in order to make the deposit in consonance with Order 21 Rule 1 CPC. Admittedly, while the Supreme Court has not specifically dealt with the issue of the “court” in which the deposit needs to be made, it has not made any distinction between deposit in the executing court or deposit in the Section 34 court as a condition for granting stay. In fact, in that case, the Supreme Court was dealing with a situation where 50 per cent of the award amount was deposited in Section 34 court as a condition for granting stay to the execution of the impugned award. Further, the Supreme Court went on to hold that where only a part of outstanding sum is deposited or tendered which is available for withdrawal by the award-holder/decree-holder unconditionally, accrual of interest shall cease only on such deposit, and the remaining part will continue to attract interest at the applicable rate. Thus, per National Seeds Corpn. Ltd., the nature of inquiry for ascertaining cessation of interest on a deposited amount is simply this: whether the deposited amount is freely available for withdrawal. If the answer is in the affirmative, the interest ceases from the date of deposit and the court in which the amount is deposited, i.e. either the Section 34 court or executing court, is immaterial.

Finally, the artificial distinction between an executing court and a Section 34 court for unconditional deposit defeats the object of Order 21 Rule 1 CPC, which is based on sound public policy. As long as the amount is available at the disposal of the award-holder, be it in an executing court or a Section 34 court, the award debtor’s obligation is discharged. Moreover, P.J. Rathod’s insistence on deposit in the executing court for cessation of interest, presumes filing of execution proceedings by the award-holder for cessation of interest, thus putting the award debtor at a severe disadvantage. Taking this reasoning to its logical end, this would mean that even if the award debtor deposits 100 per cent of the award amount in Section 34 court, but only because the award-holder did not file the execution proceedings (and decides to sit on its right until the very fag end of the 12 year limitation period for execution of awards) and decretal amount could not be deposited in the executing court, the interest on the award amount will not cease. Such an interpretation of Order 21 Rule 1 would cause havoc to the award debtor’s finances, especially in cases of awards passed under the MSMED Act.

Conclusion

The analysis above shows that the Bombay High Court’s ruling in the case of P.J. Rathod does not reflect the correct legal position. Its reliance on Bhai Sardar Singh, since modified by the Supreme Court in the case of Bhai Sardar Singh, renders the finding bad in law. The Delhi High Court’s approach in the case of Ramacivil India, treating deposits in the Section 34 court and the executing court alike, better serves the object of Order 21 Rule 1 CPC. The Supreme Court’s guidance in the case of National Seeds Corpn. Ltd. reinforces this: the only relevant inquiry is whether the deposited amount is unconditionally and freely available for withdrawal by the award-holder, regardless of the forum. An award debtor who unconditionally deposits the decretal amount, even before the Section 34 court, and permits the opposite side to freely withdraw it, ought not to remain exposed to mounting interest merely because the award amount was not deposited in the executing court.