[Ashish Dholakia is a Senior Advocate at the Delhi High Court, Rohan Chawla is an Advocate at the Delhi High Court, and Ria Bansal is a 4th-year B.A., LL.B. (Hons.) student at Rajiv Gandhi National University of Law]
The 2015 amendments to the Arbitration & Conciliation Act, 1996 (‘A&C Act’) dramatically changed the arbitration regime in India. A challenge to an award under section (‘u/s’) 34 of the A&C Act no longer results in an automatic stay of the award. Instead, a separate application u/s 36(2) of the A&C Act is required to be filed while challenging the award u/s 34 of the A&C Act. The question of interest on the deposit and withdrawals of amounts u/s 34 of the A&C Act often presents complex legal issues. For instance, recently, the Bombay High Court in Balmer Lawrie & Co.Ltd v. Shilpi Engineering Pvt. Ltd. ruled that when an arbitral award in the form of a money decree is challenged u/s 34 of the A&C Act, it can be stayed only upon the deposit of 100 percent of the awarded amount. Furthermore, the Sikkim High Court, in The Chief Engineer, Roads & Bridges Department, Government of Sikkim v. KMC Brahmaputra Infrastructure Ltd., addressed whether interest shall continue to accrue, where the judgement debtor makes a partial deposit until the entire amount is paid.
The issue of interest becomes inextricably linked to every application u/s 36(2) since the awarded amount (or part thereof – depending on the discretion of the court) is required to be deposited by the award debtor in court for there to be a stay. This is because the application u/s 36(2) is allowed having regard to the provisions under the Code of Civil Procedure, 1908 (‘CPC’) concerning the stay of a money decree, i.e., Order XLI Rules 1(3) and 5(3). These rules provide that the court while staying the execution of the arbitral award, has to either require a deposit of the awarded amount (or part thereof) or ask the award debtor to furnish adequate security. Now, it is well known that the time taken to dispose of the challenge u/s 34 of the A&C Act is substantial. To make up for the loss of value of the principal claim amount, it is important to determine the interest payment upon such an amount in case the challenge u/s 34 fails. The issue of interest also gains significance as sometimes, the interest portion of the award is meatier than the original sums in dispute, owing to the passage of time, coupled with the effect of compounding and the stipulation of high interest rates in the contract. Therefore, it is essential to address the nuances related to the interest on such deposits.
However, the question of interest is far from simple. Various considerations come up, such as whether the interest (as awarded by the Arbitral Tribunal) continues to run after the awarded amount has been deposited in the court adjudicating the application u/s 34 of the A&C Act. And, if the award holder withdraws the awarded amount deposited, whether interest would still continue to run. Interestingly, these issues were taken up by The Expert Committee, set up under the Ministry of Law and Justice, to Examine the Working of Arbitration Law and Recommend Reforms in the Arbitration and Conciliation Act 1996, to make it alternative in the letter and spirit (‘Vishwanathan Committee’) which submitted its report in February 2024. It recommended that “once a deposit is made, interest on the deposited amount should cease to run only if the successful party is permitted to withdraw the deposited amount unconditionally, as only that will amount to effective compliance of the award” (in paragraph 3.26.3). Therefore, the question further arises as to what exactly is an “unconditional” withdrawal, and why should the interest only cease to run from such a withdrawal? The authors address these questions in a fourfold manner by firstly addressing whether a mere deposit of the awarded amount shall lead to a cessation of interest on the awarded amount, secondly, assessing the effect of withdrawal of the deposit on the interest, thirdly analysing the view of the Vishwanathan Committee report on the issue and the lacunae thereon and lastly collating their findings, while providing solutions for the issues.
Effect of Deposit on the Cessation of Interest
Section 36(1) of the A&C Act states that an arbitral award has to be enforced in accordance with the provisions of the CPC in the same manner as if it were a decree. Accordingly, Rule 1(4) of Order XXI of the CPC states that interest shall cease to run from the date when the notice of deposit of monies in court is served to the decree-holder. Furthermore, Rule 1(5) of Order XXI states that if monies are paid out of court, then the interest shall cease from the date of payment. A culmination of the above-mentioned provisions entails that if the amount is actually paid or made available to the award holder, then according to the provisions of the CPC, interest shall not accrue anymore on it. Therefore, it is essential to determine whether the amount deposited in pursuance of section 36(2) of the A&C Act qualifies as a “payment” in satisfaction of the debt owed to the award holder.
The seminal judgment on this issue is PSL Ramanathan Chettiar & Ors. v. ORMPRM Ramanathan Chettiar, wherein it was held that a deposit of money in court to purchase price by way of stay of execution of the decree does not transfer title to the money to the decree-holder; rather, it merely keeps the money out of the parties’ reach while the appeal is heard. It was held that such a deposit was not under Order XXI Rule 1 of the CPC. Therefore, interest continues to run, even after the deposit is made since the funds do not belong to the award holder by virtue of such deposit.
Following Ramanathan Chettiar, in Hindustan Construction Corporation v. DDA, it was held that there was a difference between a deposit made under Order XXI Rule 1 of the CPC and a deposit seeking a stay of execution proceedings. In the case of the latter, the amount is beyond the reach of the Decree Holder. It was held that the interest as per the decree continues to run till the Decree Holder actually receives the money. This reinforces the principle that the deposit upon the challenge to an award cannot be constituted as a receipt of the amount owed to the award holder.
Similarly, in Delhi Development Authority v Bhai Sardar Singh, a three-judge bench of the Supreme Court followed its dicta in Ramanathan Chettiar and held that the mere deposit by the judgment debtor did not constitute payment to the award holder unless the award holder could withdraw it. Here, the Court went one step further to establish that unless the deposit is acted upon by way of withdrawal, the same shall not constitute payment.
Therefore, these authorities make it clear that a mere deposit does not operate as funds in the hands of the award holder that can be spent. As a result, the deposit cannot be considered a payment to the award holder, and the liability remains for the award debtor. Hence, it is clear that a mere deposit of the awarded amount on a direction by the court u/s 36(2) of the A&C Act would not, ipso facto, stop the calculation of interest since the same would not amount to “payment” to the award holder. Such a deposit would not be akin to a deposit under Order XXI of the CPC.
Effect of Withdrawal on the Cessation of Interest
Now that it has been established that a deposit does not lead to a cessation of interest, it becomes vital to ascertain whether the subsequent withdrawal of the deposited funds would lead to a different outcome. The question that arises is whether the interest would stop accruing on the withdrawal of the amount by the award holder or, in other words, is the withdrawal of the amount equivalent to payment to the award holder?
In Ramanathan Chettiar, it was held that a deposit made for the purpose of stay of execution proceedings is not unconditional in nature. The decree-holder can withdraw such a deposit only if he provides security. Hence, interest can be claimed even after the deposit of monies in the court. Thus, this ruling created a distinction between conditional and unconditional deposit of monies. It clarifies the position that if the deposit is conditional, i.e., the decree/award holder has to furnish security to seek release of the amounts, then interest continues to accrue. However, if the deposit is unconditional, then interest shall cease on deposit.
This distinction has been consistently followed in numerous cases (as elaborated above). Notably, in the Supreme Court case of Nepa Limited v. Manoj Kumar Agrawal, the amounts deposited by the award debtor were permitted to be withdrawn by the award holder on a personal undertaking. The issue arose as to whether the interest continues to accrue after the withdrawal of the monies on a personal undertaking. It was held that the right of restitution of an award debtor, in case the award was set aside (which is the essence of a personal undertaking), would not make the payment to the award holder ‘conditional’ in nature. In other words, an undertaking is not a security which makes the deposit conditional in nature. It is notable that in Ramanathan Chettiar, it was held that the deposit was not unconditional, the decree-holder therein was not free to withdraw the deposited amounts. Distinguishing it, in Nepa Limited, it was held that withdrawal of the deposited amount on an undertaking is an actual payment made to the credit of the award holder, and no interest accrues from the date of withdrawal of such amount.
It is essential to note that the purpose of interest, among other things, is to compensate for the deprivation of money. Once the monies are withdrawn and the award holder has possession of them, the deprivation ends since the award debtor no longer has any right, claim, or control over the funds. As a result of this, it is only just and equitable that interest should no longer accrue. This argument is bolstered by the fact that the withdrawal occurs at the request of the award holder. Therefore, when the award holder chooses to withdraw the deposited amount based on a personal undertaking, interest should naturally cease to accrue from that date. The same would be essential to curb an unjust allocation of interest to the award holder.
It is also important to explore the outcome where an award holder deliberately does not withdraw the deposited amount after being permitted to withdraw it upon furnishing security such as a personal undertaking, a binding promise, or an indemnity bond (a bond ensuring the holder that they would be compensated in case of perceivable loss).
The seminal authority in this regard is Cobra Instalaciones v. Haryana Vidyut Prasaran Nigam Ltd., where the Delhi High Court was dealing with a case where the awarded amount had been deposited in execution proceedings, and there was no stay of the award. The award holder was permitted to withdraw the awarded amount, with the stipulation that if the award debtor succeeded in the section 34 proceedings, then the award holder would have to return the awarded amount withdrawn by it. The amount was subsequently withdrawn by the award holder. It was held that the condition for withdrawal was obvious, and the award holder was not required to wait for the outcome of the award debtor’s objections. After referring to Ramanathan Chettiar and allied judgments, it was held that if the awarded amount had been made available to the award holder unconditionally, i.e., without any condition of furnishing security, the liability of the award debtor would cease. It was finally held that if the award holder fails to take steps to withdraw the amount, even though there were no fetters on it from withdrawing, then the same would not enure to the benefit of the award holder, and interest would cease to run.
Therefore, this case clarifies that where a choice has been provided to the award holder to withdraw the amount unconditionally, and he/she voluntarily does not withdraw it, it is still a valid payment to the award holder, and, therefore, the interest would stop running on it. This is because, at that moment, it is the inaction of the award holder himself which is preventing him from obtaining the benefit of the amount. This ruling ensures that the award holder does not get any unjust benefit by not withdrawing the amount that they are entitled to withdraw.
Analysis of the View of the Vishwanathan Committee
As mentioned above, the Report of the Vishwanathan Committee recommended that interest should stop running on the deposited amount only once the award holder is allowed to withdraw the amount unconditionally (in paragraph 3.36.3). It can be made out that these recommendations are in consonance with the Cobra Instalaciones case and provide a guiding path to ascertain the exact moment the interest ceases to run on the deposited amount. However, it is not sufficient to account for every situation regarding such a deposit and subsequent withdrawal. The term “unconditional”, which is key to constructing the appropriate time to stop the interest from running, has neither been defined within the report of the Vishwanathan Committee nor the A&C Act. The only way to define this term is through the construction of Ramanathan Chettiar and Nepa Limited. The former suggests that an unconditional deposit is one that can be withdrawn without the need to furnish any security. However, the latter rules that even if the withdrawal is based on a personal undertaking, the same would still be an unconditional deposit. Therefore, it is clear that a personal undertaking, despite having the semblance of a security, does not make the deposit unconditional.
Conclusion and Solutions
Based on the above, it is evident that a mere deposit of the awarded amount would not, ipso facto, stop interest from running since it does not amount to “payment” to the award holder. Interest would cease to run only when the award holder is permitted to withdraw the amount unconditionally. In that respect, it has also been established that a personal undertaking does not amount to furnishing security. Lastly, if the award holder is permitted to withdraw the deposited amount unconditionally, and even then, the award holder chooses not to withdraw the amount, in that event, too, the interest would cease to run.
The common lacuna found is that the term ”unconditional” finds no distinct explanation. This becomes an issue in cases like Nepa Limited, where, despite the furnishing of a personal undertaking, the withdrawal was termed unconditional. Therefore, while it is clear that a personal undertaking does not constitute a kind of “security” that would render the withdrawal conditional, it is still unclear as to which other instruments/documents would have a similar effect.
To ensure uniformity in the cessation of interest from withdrawals of deposited awarded amounts, it is essential to define the term unconditional sufficiently through legislative intervention. It is also essential to put forth instruments whose furnishing would not change the unconditional character of the deposit. This would act as a guiding path for the courts to rule on whether interest should continue to run or not despite the withdrawal of the awarded amount.
– Ashish Dholakia, Rohan Chawla, and Ria Bansal