Security Deposit and Interest under the Arbitration and Conciliation Act 1996

The Arbitration and Conciliation Act, 1996 enables a dissatisfied party to the proceeding to challenge an award by preferring an application for setting aside of the award under Section 34 of the Arbitration and Conciliation Act, 1996 (“the said Act”).

Post the 2015 amendment to the said Act, a party who takes recourse to Section 34 has to also make a separate application to stay the operation of the award under Section 36(2) of the said Act.

The Court, on its satisfaction and subject to conditions as it may deem fit, may grant a stay on the operation of the award. Once a stay has been granted by an order of the court, the award, in effect becomes unenforceable until a final decision is passed by the Court by either allowing or rejecting the Section 34 application.

The proviso to Section 36 (3) of the said Act provides that where the award is for the payment of money, the Court must have due regard to the provisions under the Code of Civil Procedure, 1908 (“CPC”) for the grant of stay of a money decree. Thus, the terms and conditions for granting a stay of an award may be understood to be similar to the requirement of furnishing security or imposition of other conditions for the grant of stay of a money decree.

The scope of “subject to conditions it may deem fit” under Section 36 (3) of the said Act has effectively been interpreted as the requirement of depositing a security amount before a stay is granted. Such security is, in effect, a cushion to the award holder. It protects the award holder from being rendered remediless or having to bear the delay in enjoying the fruits of the award in the event the challenge to the award fails. (Nitu Shaw vs. Bharat Hitech Cements Pvt. Ltd)

Section 31 (7) of the said Act empowers the Tribunal to grant interest on the awarded amount. In this backdrop, the issue that crops up is that when a stay is granted against the deposit of a security amount, does the interest component of the award:

1. keep running even after the deposit and stop only after the final payment of the awarded amount by the award holder?

   OR

2. does it stop running from the date of deposit, considering that the award debtor has performed his end of the bargain in receiving an order of stay in its favour, in which case the award remains stayed post such security deposit and the interest, being a part of the award, would necessarily also be stayed?

   An allied view would be that the deposit of the security amount, in essence, transpires into the fulfillment of the debt in terms of the award, that is, the payment of the awarded amount and hence, the payment of post-award interest is also satisfied with such a deposit. In such a situation, the interest cannot be deemed to be running even after the deposit of security.

   OR

3. whether it comes to an absolute stop only when the money is made over to the award holder, that is, withdrawn from the Court, as the case may be?

In Gurpreet Singh vs. Union of India, (2006) 8 SCC 457, the Supreme Court held that once an amount has been deposited, interest would cease to run on the deposited sum. The Court clarified that the deposit of security is in the nature of payment or securing the payment and, hence, interest cannot continue to run on the amount already paid.

Again in Himachal Pradesh Housing and Urban Development Authority Vs. Ranjit Singh Rana, (2012) 4 SCC 505, the Court held that the liability of post-award interest on the part of the award debtor ceased from the date when the award amount was deposited. The Court clarified that an amount deposited in the court is actually to the credit of the decree-holder and, hence, any interest cannot accrue on such an amount after the deposit has been made.

However, alternatively, it can be seen in Delhi Development Authority vs. Bhai Sardar Singh & Sons, 2009 SCC OnLine Del 519, that the Delhi High Court held that depositing the money to furnish security does not transfer the title or right of the money to the decree-holder. As such, it cannot be said that the payment was in satisfaction of the decree. Hence, the interest would continue to run from the date of deposit, the High Court said.

In Bharat Heavy Electrical Limited vs. R.S. Avtar Singh and Company, (2013) 1 SCC 243 again, the Supreme Court held that interest would cease to run on the deposited amount. However, the distinguishing factor in this case was that the judgment holder had withdrawn the deposited amount on the date of notice.

Interest was again not granted by the Supreme Court in Nepa Limited vs. Manoj Kumar Agarwal, 2022 SCC OnLine SC 1736, where the security furnished by the award debtor was later withdrawn by the award holder against an undertaking of a similar amount. Later, the award holder sought interest for the period during which the amount was lying with him on the ground that the amount did not create a right in his favour, since it would have to be returned if the award debtor became successful in having the award set aside. According to the award holder, the payment was conditional. The Court held that the right of restitution cannot be held to be a conditional payment. Further, a person who has already handed over the amount to the award holder, either by himself or by a court order, cannot be subjected to payment of interest on such amount. The Court held that the claim for interest on the withdrawn amount could not be granted to the award holder.

Regarding post-award Interest, Union of India vs. M.P. Trading and Investment RAC. Corporation Limited, (2016) 16 SCC 699, seems to clear the murky waters for understanding the implications of accrual of interest on the awarded amount at different stages.

The Court clarified that in case a security amount has been deposited, the award holder would be entitled to1) interest on the awarded principal amount from the date of the award till the date of deposit of amount as security; 2) interest accrued on the amount that was deposited and; 3) the balance of the awarded amount, if any, that was not deposited as security, in terms of the award.

A rightful owner of an amount is entitled to interest on the amount for the period during which such person stays departed from the amount.

Thus, the question of entitlement in situations of deposit of amount in the nature of interest-bearing fixed deposits with the Court Registry is quite clear. In the event the award is allowed, the award holder becomes the rightful owner of the amount along with interest, being bereft of having enjoyed the money during the pendency of litigation.

As a natural corollary, if the award is set aside, the security amount along with interest should be returned to the depositor who had to pay such amount as a price to prevent execution.  

The logical view that the Courts may follow is thus to permit the interest to run even after the furnishing of the amount as security, but curbing the interest component where the deposited amount has already been withdrawn.  

It can be seen that post the 2015 Amendment, an award debtor, often ends up paying a hefty amount as security for the stay of enforcement of the award. Such security is more often monetary in nature and in the form of cash security, although security in alternate forms, such as land for exceptional cases, is also not unheard of (Nitu Shaw- Supra).

However, where the security is in a form other than cash, then most likely, the post award-interest will continue to accrue.

A general trend is being noticed of a mechanical deposit of an amount to secure a stay of the award, subsequent withdrawal of the amount, and lingering of the petition challenging the award for years, now that the award is stayed and award holder has also received part or whole amount from security deposit.

Such a situation is also contradictory to the mandate of Section 34 (6) of the said Act which stipulates that an application under Section 34 of the said Act “shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in sub-section (5) is served upon the other party.” 

Thus, an endeavour may be made for a stricter enforcement of Section 34 (6) of the Act so as to enable the rightful owner of the money to enjoy his stock instead of locking the same as security, even if the same is with interest, or for the award holder to continue to potter around without angst of returning the withdrawn amount in case the award is ultimately set aside.  

About the authors: Amit Meharia is a Managing Partner and Paramita Banerjee is a Senior Associate at MCO Legals.