Supreme Court Clarifies Law on Bill Discounting and Compounding Interest in Arbitration

Clause 4 of the sanction letters provides that the Drawee / Drawer agrees that normal agreed rate for providing Bill Discounting facility is 36% p.a. Second part provided for the concessional rate of 22.5% p.a. payable upfront and third part provided that concessional rate of interest would be withdrawn in the event of delay or default.

The difference between business loan and bill discounting.  Discounting Bill is a short-term financing option where a business sells its unpaid invoices to a financial institution for immediate cash.

clause 4 of the Sanction letter dated 27.12.2002 is subject to the principle of ‘verba chartarum fortius accipiuntur contra proferentem’.

Interplay of Section 74 of the Contract At and Section 31(&)(a) of the Arbitration Act, 1996.

HELD that the transaction between the parties was neither a loan nor a debt.   It was simply in the nature of a commercial transaction. The interest as mutually agreed cannot be said to be unconscionable, arbitrary or excessive in case of non-payment after the stipulation due date.  Since the compounding of interest on monthly rest was provided in the mutual agreed contract, the respondent was entitled to claim interest at 36% p.a. with monthly rest.

The business model of the Respondent was posited on the grant of such unsecured facilities for very short periods of time, thereby enabling the Respondent to repeatedly redeploy the principal plus interest in its business. In the event of default, this cycle would stand disrupted for decades, as in the present case, thereby resulting in loss to the Respondent. Hence the compensatory contractual requirement of compounding, in the case of defaulters cannot be faulted or termed as penal.

Judgment dated 4.12.2025 of the Supreme Court of India in Civil Appeal Nos.14565-14566 of 2025 of BPL Limited   Vs.  Morgan Securities and Credits Private Limited