Supreme Court clarifies interest calculation on decreed amounts: Nepa Limited vs. Manoj Kumar Agrawal (2022)

Date of the Judgment: 08 December 2022
Citation: [Not Available in Source]
Judges: Sanjiv Khanna, J. and Sudhanshu Dhulia, J.
Can interest be claimed on a decreed amount when a portion of it has already been paid and withdrawn by the decree holder? The Supreme Court of India recently addressed this question in a case concerning the calculation of interest on an arbitral award. The core issue revolved around whether interest should continue to accrue on the entire principal amount even after a part of it was deposited and withdrawn by the decree holder, pending an appeal. This judgment clarifies the application of Order XXI, Rule 1 of the Code of Civil Procedure, 1908, regarding the cessation of interest on deposited amounts. The bench comprised Justices Sanjiv Khanna and Sudhanshu Dhulia, with the judgment authored by Justice Sanjiv Khanna.

Case Background

The case originated from an arbitration award dated 14 April 2000, where M/s Nepa Limited (the appellant) was directed to pay Rs. 14,49,300 to Manoj Kumar Agrawal (the respondent) as a refund of a security deposit. The award also stipulated an 18% per annum interest on this amount from the date of the award until payment. On 22 October 2001, the appellant paid Rs. 1,50,000 to the respondent, which was to be adjusted against the interest, not the principal amount. The appellant’s objections to the award under Section 34 of the Arbitration and Conciliation Act, 1996 were dismissed on 28 February 2001. Subsequently, the appellant filed an appeal under Section 37 of the same Act.

Timeline

Course of Proceedings

The appellant’s appeal under Section 37 of the Arbitration and Conciliation Act, 1996, was dismissed by the Division Bench of the High Court on 2 February 2012. The respondent had also challenged the award, which was also dismissed. Both parties had filed special leave petitions before the Supreme Court, which were also dismissed. The executing court initially ordered the appellant to pay Rs. 3,97,382 with 18% interest. The respondent then filed a civil revision before the High Court of Madhya Pradesh at Jabalpur, which was allowed on 19 June 2017. The High Court held that the respondent was entitled to interest on the entire amount, including the Rs. 7,78,280 withdrawn by him, until the dismissal of the appeal under Section 37 of the Act.

Legal Framework

The Supreme Court examined Order XXI, Rule 1 of the Code of Civil Procedure, 1908, which deals with the modes of paying money under a decree. Specifically, sub-rules (4) and (5) were relevant:

(4) On any amount paid under clause (a) or clause (c) of sub-rule (1), interest, if any, shall cease to run from the date of service of the notice referred to in sub-rule (2).

(5) On any amount paid under clause (b) of sub-rule (1), interest, if any, shall cease to run from the date of such payment.

The Court noted that the legislative intent is that interest ceases on the principal amount paid by the judgment debtor to the decree holder. The issuance of notice is to enable the decree holder to withdraw the deposited amount. Therefore, when the deposited amount is withdrawn and credited to the decree holder’s account, interest on that amount ceases, even if no formal notice was given by the judgment debtor.

Arguments

Appellant’s Submissions:

• The appellant contended that the payment of Rs. 7,78,280, which was withdrawn by the respondent on 8 November 2001, should be adjusted against the interest due. The balance amount should then be adjusted towards the principal.
• The appellant argued that interest should not accrue on the deposited amount of Rs. 7,78,280 after it was withdrawn by the respondent.
• The appellant relied on the principle that interest ceases to run on the amount paid to the decree holder, as per Order XXI, Rule 1 of the Code of Civil Procedure, 1908.

Respondent’s Submissions:

• The respondent argued that since the order dated 30 October 2001 was conditional, the withdrawal of Rs. 7,78,280 was also conditional. The condition was the personal undertaking by the respondent to restitute the amount if directed.
• The respondent submitted that interest at 18% on Rs. 7,78,280 should continue until the decision of the appeal under Section 37 of the Arbitration and Conciliation Act, 1996, on 2 February 2012.
• The respondent relied on the judgments in P.S.L. Ramanathan Chettiar and Others. vs. O.R.M.P.R.M. Ramanathan Chettiar, AIR 1968 SC 1047 and Delhi Development Authority through its Vice Chairman vs. Bhai Sardar Singh and Sons to support his claim that the conditional withdrawal does not constitute a full payment.

Innovativeness of the argument: The respondent’s argument that the conditional withdrawal of the amount did not constitute full payment and therefore interest should continue to accrue on the amount was innovative. The respondent relied on the conditional nature of the withdrawal to argue that the payment was not final until the appeal was decided.

Issues Framed by the Supreme Court

The main issue before the Supreme Court was:

1. Whether the respondent is entitled to interest at 18% on the principal amount of Rs. 14,49,300 until the decision of the appeal under Section 37 of the Arbitration and Conciliation Act, 1996, on 2 February 2012, or whether the interest is payable only on the net principal amount after adjusting the interest due on 8 November 2001 from the withdrawn amount of Rs. 7,78,280.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• Gurpreet Singh v. Union of India, (2006) 8 SCC 457:* The Court followed this authority to explain the effect of the substitution of Rule 1 to Order XXI of the Code of Civil Procedure, 1908, stating that interest ceases upon deposit and notice to the decree holder or when the amount is credited to the decree holder’s account.
• P.S.L. Ramanathan Chettiar and Others. vs. O.R.M.P.R.M. Ramanathan Chettiar, AIR 1968 SC 1047:* The Court distinguished this authority, noting that in Ramanathan, the money was not withdrawn by the decree holder, unlike in the present case. The court noted that the judgment in Ramanathan was prior to the substitution of Rule 1 to Order XXI of the Code of Civil Procedure, 1908.
• Delhi Development Authority through its Vice Chairman vs. Bhai Sardar Singh and Sons:* The Court distinguished this authority, noting that in Delhi Development Authority, the money was not withdrawn by the contractor. The court noted that the award under the Arbitration Act, 1940 was not a decree of the Court.

What weighed in the mind of the Court?

The Supreme Court focused on the principle that interest is compensation for the deprivation of the use of money. Once the money is paid to and utilized by the decree holder, the justification for paying interest on that amount ceases. The Court emphasized that the purpose of Order XXI, Rule 1 is to ensure that interest stops accruing on the amount paid by the judgment debtor. The Court also considered the fact that the respondent had the benefit of using the money, and the undertaking for restitution did not alter the nature of the payment.

Logical Reasoning:

The Court reasoned that once the respondent withdrew the money, he had the benefit of its use. The personal undertaking was only relevant if the appeal was decided in favor of the appellant, in which case the respondent would have to return the amount. The Court emphasized that interest is compensation for the deprivation of the use of money and that the respondent was not deprived of the use of the withdrawn amount.

The Court rejected the interpretation that the conditional withdrawal meant that the payment was not final. The Court noted that the money was fungible and would have mixed with the other amounts available with the respondent. The right to restitution did not make the payment conditional.

The Supreme Court held that the appellant was liable to pay interest at 18% on the net principal amount (Rs. 9,13,483 or Rs. 9,30,300, to be determined by the executing court) from 8 November 2001 until the date of payment. The Court set aside the High Court order that directed payment of interest on the entire principal amount until the decision of the appeal under Section 37 of the Arbitration and Conciliation Act, 1996.

“In the present case, order dated 30.10.2001 was passed in the presence of the parties including the respondent. Thereupon, the appellant had deposited Rs. 7,78,280/- before the executing court on 05.11.2001. The respondent had notice of the deposit and accordingly had withdrawn the said amount, i.e., Rs. 7,78,280/- on 08.11.2001.”

“Therefore, when the deposited amount is withdrawn and gets credited in the account of the decree holder, he is not entitled to interest on the deposited amount, even when there is failure on the part of the judgment debtor to issue notice of deposit.”

“In the context of the present case, interest would be the compensation payable by the appellant to the respondent, for the retention or deprivation of use of money. Therefore, once the money was paid to the respondent, interest as compensation for deprivation of use of money will not arise.”

Key Takeaways

• Interest on a decreed amount ceases to accrue on the portion of the amount that has been paid and withdrawn by the decree holder.
• The purpose of notice under Order XXI, Rule 1 of the Code of Civil Procedure, 1908, is to enable the decree holder to withdraw the deposited amount.
• A personal undertaking by the decree holder to restitute the amount does not alter the fact that the payment has been made and the decree holder has the benefit of the money.
• Interest is compensation for the deprivation of the use of money. Once the money is paid, the justification for paying interest on that amount ceases.

Directions

The Supreme Court directed that the executing court should determine the exact net principal amount (either Rs. 9,13,483 or Rs. 9,30,300) and calculate the interest accordingly. The appellant was allowed to invoke Section 144 of the Code of Civil Procedure, 1908, in case of overpayment.

Development of Law

The ratio decidendi of the case is that interest on a decreed amount ceases to accrue on the portion of the amount that has been paid and withdrawn by the decree holder, irrespective of whether the withdrawal is conditional. This clarifies the interpretation of Order XXI, Rule 1 of the Code of Civil Procedure, 1908, and reinforces the principle that interest is compensation for the deprivation of the use of money. This judgement clarifies the law and does not change the previous position.

Conclusion

The Supreme Court’s judgment in Nepa Limited vs. Manoj Kumar Agrawal clarifies that interest on a decreed amount stops accruing on the portion that has been paid and withdrawn by the decree holder. This decision reinforces the principle that interest is compensation for the deprivation of the use of money and provides clarity on the application of Order XXI, Rule 1 of the Code of Civil Procedure, 1908. The Court set aside the High Court order and directed the executing court to calculate the interest accordingly.