The Delhi High Court on Monday dismissed a review petition filed by electronics manufacturer BPL Limited against an arbitral award upholding its dues to Morgan Securities and Credits [BPL Limited v. Morgan Securities and Credits Pvt Ltd].
The judgment put an end to the two-decade-old dispute which pertained to a ‘Bill Discounting Facility.’ BPL is now saddled with paying ten times what it borrowed owing to high interest rates.
A Bench of Justices Yashwant Varma and Dharmesh Sharma said,
"In the commercial world, justifiability or reasonability of high interest rates would depend on the transparency of the terms and conditions of the contract entered into between the lender and the borrower, as well as the informed consent of the borrower."
The case originates from a business arrangement involving BPL and BPL Display Device Limited (BDDL). Both companies had requested a "bill discounting facility" from Morgan Securities to address payment delays. Morgan approved the facilities totalling to ₹13.28 crore in 2002 and 2003 via two sanction letters.
Under the terms of the facility, BDDL and BPL were jointly and severally liable for repayment. A concessional interest rate of 22.5% per annum was offered, but this would rise to 36% per annum in case of default. In 2004, the accumulated dues reached ₹25.79 crore.
Morgan Securities subsequently claimed that BPL and BDDL defaulted on repayment, and initiated arbitration in 2004 under the sanction letters’ dispute resolution clause.
In 2016, an arbitral tribunal ruled in favour of Morgan Securities. BPL was directed to pay ₹7.27 crore as principal, ₹20.62 crore in additional dues, plus interest at 36% per annum from the date of default until the award date. It was also directed to pay a post-award interest of 10% per annum until payment realisation. It is BPL’s contention that on the day the award was passed, the interest payable ballooned to ₹672 crore, taking the outstanding dues to ₹700 crore.
BPL filed a petition before the Delhi High Court challenging the award, but the same was dismissed. It filed an appeal against the order under Section 37 of the Arbitration Act, this was also dismissed in July 2024. The company subsequently filed an appeal against the order in the Section 37 plea.
The company’s main contention was that interest at 36% per annum was "usurious." BPL argued that the interest rate was against Indian law and led to an inflated claim of ₹700 crore in 2016, and has now reached ₹1,378 crore. It was contended that Section 80 of the Negotiable Instruments Act overrules contractual agreements regarding interest.
The Court said,
“Although at first glance, the charging of interest @36% could be considered as exploitative, unfair and morally blameworthy, high interest rates reflect the lenders‘ risk of default due to highly competitive and uncertain market conditions, besides the fact that high interest rates might discourage borrowers from taking unnecessary risks.”
It found that BPL Limited, having benefited from the commercial terms of the agreement, could not now challenge its enforceability.
"Consequently, the applicant/appellant cannot now dispute its substantial financial liability. Notably, the applicant/ appellant is a sophisticated entity, unaffected by illiteracy, ignorance, or economic disadvantage."
It opined that in the commercial world, the fairness of high-interest rates depends on the transparency of the contract terms and the borrower’s informed consent. The judgment further stated that ethical implications of high-interest rates must be evaluated with a nuanced perspective, considering the economic, social and regulatory context.
The Court also rejected the argument on the Negotiable Instruments Act, 1881 as the claim was based on two sanction letters of which BPL was also a party. It did not agree that the rate of interest was against India’s public policy, noting that imposition of exorbitant interest in the context of commercial practices would not be against the public policy of Indian law.
“While exorbitant interest rates may be deemed unjust or immoral in certain circumstances, particularly where beneficiaries lack equal bargaining power or suffer from illiteracy, poverty, or ignorance, the present case does not warrant such consideration,” the order stated.
BPL Ltd was represented by Senior Advocates Gopal Subramanium, Pinaki Mishra and Ashok Panigrahi. They were assisted by Advocates Aakanksha Kaul, Anmol Tayal, Dharmender Singh, Pavan Bhushan, Surajit Bhaduri, Saurabh Seth, Neelam Deol, Abhirup Rathore and Aman Sahani.
Morgan Securities was represented by Advocates Simran Mehta, Amit Ranjan Singh and Girdhar Thakur.
[Read order]