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‘Interest’- Code of Civil Procedure 1908

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Aryan Dhar

Interest in simple terms can be defined as an amount of money, paid as a reward or compensation, to forego/lend the money of the creditor to the debtor/borrower at a fixed or a varying rate, depending upon the parties involved.

It can be observed in the case of State of Haryana v. M/s.S.L. Arora and Company, (AIR 2010SC 1511) that The Hon’ble Supreme Court’s Constitution Bench holds that a person who is denied of the use of money to which he is legally entitled has every right to be rewarded for that deprivation. It’s also known as interest, reward, or compensation.

This is an extremely basic definition of the term interest and the same is defined in a much more detailed sense, following the legal parlance under section 34 of the Code of Civil Procedure 1908.

SECTION 34- THE CODE OF CIVIL PROCEDURE

Section 34 of the Code is a general procedural provision. Its applicability or inapplicability or extent of applicability would depend on the factual matrix and the situation of the matter at hand, Central Bank of India v. Ravindra,(2002) 1 SCC 367.

Section 34 of the Civil Procedure Code, as it appeared before Act 104 of 1976, deals with the topic of interest in three phases. The first stage is interest from the date of institution of suit to the date of decree, the second stage is interest from the date of decree to the date of realisation of the decretal sum, and the third stage is interest from the date of decree to the date of actualization of the decretal amount. 

Section 34 specifies nothing for the first stage, but it does state that the interest to be granted shall be as the court of law finds fair for the second stage.

The court’s right to grant interest during the third period, from the date of the decree before actualization, is limited, that means, it cannot be more than 6% per annum, which was stated in the matter of Ramnik Vallabhdas Madhvani v. Taraben Pravinlal Madhvani, 2004(15)AIC510. But this rate of interest can be increased or can be more in cases where the contracted rate of interest is higher than 6 percent.

This can be seen in the case of Mahant Narayana Dossjee Varu vs The Board of Trustee, AIR 1959 AP 64 that it must be noted in cases where the debt in relation to the amount so adjudged arose from a commercial venture, the cost of any more interest may surpass 6% p.a., but not more than the contracted rate of interest. In cases where no particular contractual rate exists, the rate at which funds are borrowed or advanced by nationalized banks in relation to commercial transactions should be taken into consideration by the court of law.

Pre-lite Interest

Pre lite interest consists of that part which should be given before the institution of the suit. The Interest for the time period prior to the beginning of the case/suit is a subject of substantive law which can be classified into two parts: I where a contract/ agreement for the payment of interest at a fixed rate of interest already (contract rate) exists, and (ii) where there is no such proviso/agreement as per statutory provisions providing a certain rate of interest and in its absence as per the interest Act , from the date of demand notice, as well as the prevailing market rate of interest as per the lending banks and financial institutions.

The same can be stated in the matter of M. Rajeswar Rao & others… Vs. Chitluri Satyam (Died) & others (2013).

It can be seen that as Pre lite interest has more of a substantive application to it, this was usually decided on the basis of the principles of natural justice (justice, equity and good conscience) and by due consideration by the court of law deciding the said matter.

This was the trend followed in several precedents like Satinder Singh Vs Amrao Singh and Hirachand Kothari Vs State of Rajasthan, AIR 1961 SC 908. This along with the Interest Act had set up a base for the payment of Pre- lite interest upon the discretion and due consideration of the Court of Law. This was stated in the case of LIC of India Vs S Sindhu, 2006ACJ1804 Thus, the five-judge bench set up in the case of APSRTC Vs. B. Vijaya, (2011) 11 SCC 269 stated that the Pre lite interest should be given on the basis of equitable grounds and if the interest rate has already been agreed to or has been stipulated, the same will be used in the matter at hand with certain exceptions to be followed.

Pendent- Lite Interest/Post Lite Interst

It is the additional interest on the principal sum adjudged or declared due from the date of the suit, either at contract rate if reasonable or at such rate as the Court deems reasonable in its discretion.

There is the pre-light interest to be given on the principal amount before the institution of the suit and the pendent lite interest on the principal sum adjudged by the court of law, then in there is a third type of interest, which is the Post lite interest which is to be given on the principal sum. This interest is for the time period in between the date of the decree of the suit, till the date of the final payment of the principal amount.

In case of a mortgage decree, it should be from the date of the preliminary decree till the completion of period of redemption and thereafter till realization as the case may be in any decree for money held due with or without charge preliminary or final or partly final decree. This interest can also be given earlier depending upon the discretion of the court of law, which should not exceed more than 6 percent p.a, except when it exceeds 6 percent in cases of commercial transactions, in pre decided circumstances, as per the case of APSRTC Vs. Vijaya, (2011) 11 SCC 269.

Penal Interest

Penal interest has to be distinguished from the normal interest and its three forms in the legal proceedings. Penal interest is an extraordinary responsibility borne by a debtor as a result of his becoming a wrongdoer for failing to make a payment of his amount due when it should have been paid in favour of the party wronged, and it is unrelated to or confined to the damages sustained.

As a result, while interest responsibility is based on the doctrine of restitution, penal interest is based on the doctrine of penalty.  Penal interest can only be paid once over a single duration of penalty, and thus penal interest can’t be capitalized upon. Further interest, i.e., interest on interest, can’t be asserted on the sum of penal interest, whether plain, compound, or penal. The same principles were followed in the case of M. Rajeswar Rao & others… Vs. Chitluri Satyam (Died) & others (2013).

Interest Under Consumer Protection Act

About the fact that the Consumer Protection Act does not have a clause for interest, a string of Apex Court decisions has held that interest can be granted by referring to Sec. 34 CPC, to ensure that the parties are treated fairly. The theory is founded on right, fairness, and good faith, both of which would require the court to grant interest; otherwise, the appellant’s reward would be rendered meaningless.

As a result, In the matter of Rubi (Chandra) Dutta v United India Insurance Co. Ltd.,(2011) 11 SCC 269 it was determined that the defendant was responsible for paying the plaintiff the amount awarded by the State Commission, plus interest at the rate of 9% per p.a, from the date of filing the case before it was finally charged.

Conclusion

The bottom line is that Interest under CPC has several stages and circumstances which need to be looked at before granting the same to the aggrieved party. For Pre-lite interest it can be seen that more of the natural law principles are applicable while deciding it as it is more of a substantive law, than a procedural one.

The pendent-lite and post-lite are covered more under the procedural aspects of the Code of Civil Procedure 1908 and thus have specified ways to deal with the same. In distinguishing and granting different types of interests the judiciary needs to analyse each and every matter with utmost detail and make a decision which is in consensus with the laws of natural justice and the different judicial precedents that preceded the matters at hand.