S.34 CPC | In Commercial Transactions, Courts May Award Interest Higher Than 6% : Supreme Court

The Supreme Court on Tuesday (April 1) held that the Courts have the authority to determine the appropriate rate of interest to be awarded for decree amounts. The Court also have the discretion to decide from which date the interest is payable- whether from the date of the filing of the suit, from any date prior to it, or the date of decree.The Court observed that in the absence of an agreement between the parties regarding the rate of interest on delayed payment of amount in a commercial transaction, the interest may exceed 6% p.a. as per Section 34 of the Code of Civil Procedure, 1908 (“CPC”) after taking into account the totality of facts and circumstances in accordance with law. The bench comprising Justices JB Pardiwala and R Mahadevan heard the case where the dispute was regarding the determination of the appropriate rate of interest payable on the enhanced valuation of shares transferred by the appellants to the State of Rajasthan in 1973. It was a case of delayed payment of fair value of shares to the Appellants by the State of Rajasthan, where the Appellant was deprived of the share's fair value for about 50 years. Briefly put, the appellants sold their shares to the State of Rajasthan in 1973 @ Rs. 11.50 per share. In 1978, the appellants filed a civil suit before the Calcutta High Court, seeking a fair valuation of their shares. Deciding belatedly on the Appellant's suit, the preliminary decree was granted in 2012, directing the valuation of shares by a Chartered Accountant firm. The accountant firm valued the shares at ₹640 per share (the original sale price was ₹11.50 per share). While the High Court upheld the valuation, it awarded only 5% simple interest. Subsequently, when the Supreme Court remanded the matter—directing the High Court to consider all objections and cross-objections regarding the share valuation—the High Court reaffirmed its earlier decision to grant 5% simple interest. This prompted the appellant to challenge the ruling before the Supreme Court once again. Issue The core issue before the Supreme Court was the rate of interest payable on the enhanced valuation of shares, as there was no agreement between the parties relating to the grant of interest for the delayed payment. Decision A feeble attempt was made by the Respondents that the transaction of sale and purchase of shares between the parties was not for profit and therefore can't be termed as a commercial transaction to empower courts to grant interest exceeding 6% as prescribed under Section 34 of CPC. Rejecting such an argument made by the Respondents, the judgment authored by Justice Mahadevan noted that the sale of shares was a commercial transaction since it involved trade and business interests. Therefore, the grant of interest on delayed payment in commercial transactions can well exceed 6% after taking into account the totality of facts and circumstances in accordance with law. The Court clarified that under Section 34 CPC, interest on the decretal amount (principal plus pre-decree interest) may be awarded from the decree date until realization, subject to a statutory cap of 6% p.a. unless superseded by contractual terms or specific legislation. However, in commercial disputes, courts retain discretion to award higher interest rates. “The above provision empowers the court to grant interest at three different stages of a money decree viz., (i) the court may award interest on the principal sum claimed at a rate it deems reasonable, for the period before the suit was filed. Such interest is generally governed by agreements between the parties; (ii) The court may award interest on the principal amount from the date of filing the suit until the date of the decree, at a reasonable rate. Here, the court has full discretion to determine the interest rate based on fairness, commercial usage and equity; and (iii)the court may grant interest on the total decretal amount (principal + interest before decree) from the date of the decree until payment, at a rate not exceeding 6% per annum unless otherwise specified in contractual agreements or statutory provisions. However, if the claim arises from a commercial transaction, courts may allow interest at a higher rate based on agreements between the parties.” However, in the absence of a rate of interest payable on commercial transactions, the Court upon placing reliance on several precedents observed that “the Courts have the authority to determine the appropriate interest rate, considering the totality of the facts and circumstances in accordance with the law."“That apart, the Courts have the discretion to decide whether the interest is payable from the date of institution of the suit, a period prior to that, or from the date of the decree, depending on the specific facts of each case.”, the Court added. Interest Rate Should Be Appropriate “Be it noted, while the discretion to award interest, whether pendente lite or post-decree, is well recognized, its...

S.34 CPC | In Commercial Transactions, Courts May Award Interest Higher Than 6% : Supreme Court

Yash Mittal

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