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negotiable-instruments:interest-when-rate-specified

Interest when rate specified

Section 79 of the Negotiable Instruments Act,1881.

When interest at a specified rate 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.

This section deals with the rate of interest stipulated in the note and the period for which such interest is to be calculated. The section is applicable to instruments payable on demand or to instruments the interest of which is payable from date and not to instruments payable on a due date i.e. a certain period after date or sight. The rule regarding the rate of the interest embodied in this section is, however, subject to the provisions of sections 16 (3), 19 A and 74 of the Indian Contract Act and the provisions of the Usurious Loans Act and also to the provisions of the Bengal Money Lender’s Act 1940 and other Provincial Acts regulating money lending and made applicable to negotiable instruments.

Rate and period of interest

Under the terms of the section the court has no option to disallow any interest specified in the instrument itself, no matter how exhorbitant that is. The interest specified in the note on demand should be calculated from the date of the instrument and not from the date of demand, until tender or date of realisation by suit. If the instrument bears no date, oral evidence may be given to prove the date of issue of the instrument. A stipulation to pay compound interest must be clear and unequivocal, so, an agreement to calculate the interest at the year end is not sufficient to constitute a contract to pay compound interest. But the plaintiff is entitled to recover compound interest if he was credited with it in the defendant’s book.

When a suit is instituted upon the note the interest at the rate specified in the bond will run not only up to the date of the institution of the suit but up to a date to be fixed by the court , generally, up to the date of the decree unless it is inequitable to allow such interest. The court will allow interest at the rate of 6 per cent per annum for period subsequent to the decree. The rate of interest that is to run from the date of the institution is discretionary with the court in spite of the contract to pay the stipulated interest until realisation. In the case of hundis which carry no interest, future interest should not be allowed, and in the case of promissory notes not admissible in evidence only reasonable rate of interest will be allowed and not the contract rate which cannot be proved. Where there is no mention of any interest in the note, interest cannot be recovered if it was not intended to be paid or if the usage of the trade did not imply it. Where the instrument does not show whether a certain rate of interest is payable monthly or yearly oral evidence may be adduced to prove the real intention of the parties. Where the defendant’s books show that plaintiff was paid compound interest he can recover the same. As has already been stated the section has to be read subject to the provisions of the Contract Act and the Usurious Loans Act and the Bengal Money Lender’s Act, and similar other Provincial Acts, that is to say, the Court can grant relief in spite of the imperative words of this section when the rate of interest is exhorbitant and unconscionable under section 16 (3), or penal in its nature under section 74 of the Contract Act or when under the provisions of the Usurious Loans Act the rate of interest is excessive and the transaction between the parties substantially unfair or when it offends against the provisions of Provincial Money Lender’s Acts. But such relief can be granted as between the immediate parties to the transaction unless the high rate of interest or the unusual character of the provisions in the note does not, by itself, put on the transferee the duty to enquire, in such cases the relief need not be confined between the immediate parties only but can be given against the transferee also.

The practice of deducting interest in advance at the time of tendering the money payable in instalments on default of which the balance of the principal amount becomes due is not illegal though hard and oppressive.

Cessation of interest

When a valid tender is made and refused, interest will cease to run from the date of such refusal. The tender to be valid must be of the whole amount due and must be made in cash or in recognised currency without any condition whatever.

Damdupat

The Hindu rule of Damdupat forbids a person to recover by way of interest an amount exceeding the principal amount lent i.e. the creditor cannot recover from the debtor more than double the amount originally advanced as loan. But this rule of Hindu law does not apply in the Mofussil nor to parties who are not Hindus, nor after a decree. It is, however, submitted that the principle of this rule has been adopted in the Bengal Money Lender's Act which provides that no court shall pass a decree for an amount more than double the amount lent.

Section 34 of CPC

In Thankachan vs Catholic Syrian Bank Ltd1) the Hon'ble Kerala High Court held that

Section 79 of the NI Act covers a situation where the rate of interest is expressly mentioned in the pro-note, bill of exchange, etc., based on which suit is instituted. As in Section 80, it is stated in Section 79 that interest at the agreed rate is payable from due date until tender or realisation of such amount, or until such date after the institution of a suit to recover such amount as the Court directs. Therefore both under Section 79 and Section 80, the rate of interest pendente lite is within the discretion of the court, which is only a recognition of the authority of the court conferred under Section 34 of the CPC.

In Central Bank Of India vs Ravindra And Ors2) Supreme Court of India observed that

Award of interest pendente lite and post-decree is discretionary with the Court as it is essentially governed by Section 34 of the CPC de hors the contract between the parties. In a given case if the Court finds that in the principal sum adjudged on the date of the suit the component of interest is disproportionate with the component of the principal sum actually advanced the Court may exercise its discretion in awarding interest pendente lite and post-decree interest at a lower rate or may even decline awarding such interest. The discretion shall be exercised fairly, judiciously and for reasons and not in an arbitrary or fanciful manner.

1)
2006 (3) KLT 53
2)
Special Leave Petition (civil) 2421 of 1993