Payment and Interest

Payment: Payment of the amount due on a promissory note, bill of exchange or cheque must be made to the holder of the instrument in order to discharge the maker or acceptor. Payment may also be made to some person authorized by the holder.

If the acceptor pays the amount due on the instruments to a wrong person, he may be called upon to pay a second time. However, where the promissory note is assigned and the maker receives notice of the assignment he cannot make payment to the original holder.

Payment in due course discharges the parties to the instrument. However, in case of a forged instrument, payment to a person who has forged the instrument does not discharge the parties.

Payment may be made by any liable other instruments but must be made on behalf of the maker or acceptor. Payment must be made at or after maturity, other than in case of instruments payable on demand, to discharge the parties to the instrument. Payment before maturity may operate as purchase of the instrument by party paying and may be reissued.

Payment must be made in money only i.e. by legal tender. The holder may, however, agree to take payment in other mode; for example he may agree to receive goods or a fresh note or bill in lieu of money. Such a payment will operate as a discharge. Part payment discharges the parties to the extent of the sum paid.


When the rate of interest is specified: When the rate of interest is specified for example, when interest at a specified arte is expressly made payable on a promissory note or bill of exchange interest shall be calculated at the rate specified on the amount of the principal money due thereon, from the date of the instrument, until tender or realization of such amount, or until such date after the institution of a suit to recover such amount as the court directs. When the instruments are undated, evidence may be given to prove when the instrument came into existence. The court is given final discretion to allow interest until such time as it thinks fit after the institution of the suit. The court also has powers to grant relief to the debtor on a creditor’s suit against excessive interest. However, if a debtor in his suit establishes absence of free consent, or that interest is by way of penalty the court may grant him the relief.

When is specified rate of interest not allowed? The rate of interest at the rate specified in the instrument may not be allowed by the Court in the following cases:

1) Where the rate specified is excessive and the transaction is substantially unfair:
2) Where the instrument has been obtained by coercion, undue influence fraud or misrepresentation ;
3) Where the stipulation for the payment of interest is in the nature of penalty’
4) Where the rate of interest in case of secured loan and unsecured loan is higher than that specified under Money Lending act, 1946.
5) Where the amount claimed on account of interest us greater than the principal.

When interest is mentioned but rate is not specified or when interest is not mentioned:

If interest is mentioned but no rate is specified or where instruments is silent regarding payment of interest , interest at 18 percent per annum is payable from the date of maturity till actual payment or till such date after institution of the suit as the court may direct.

It will be of interest to note the judgment in Anantacharan v Daitrio—regarding time from which interest is payable. It was held here that where no demand is made prior to the institution of the suit the date o the service of the summons on the defendant will be the date of demand and interest will be payable form the date.

Payment of interest by endorser: When the party charged is the endorser to an instrument dishonored by nonpayment he is liable to pay interest only from the time when he receives notice of the dishonor.

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