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negotiable-instruments:note:compensation

Rules as to compensation

Section 117 of the Negotiable Instruments Act,1881.

The compensation payable in case of dishonour of a promissory note, bill of exchange or cheque, by any party liable to the holder or any indorsee, shall be determined by the following rules:

(a) the holder is entitled to the amount due upon the instrument together with the expenses properly incurred in presenting, noting and protesting it;
(b) when the person charged resides at a place different from that at which the instrument was payable, the holder is entitled to receive such sum at the current rate of exchange between the two places;
(c) an indorser who, being liable, has paid the amount due on the same is entitled to the amount so paid with interest at eighteen per centum per annum from the date of payment until tender or realisation thereof, together with all expenses caused by the dishonour and payment;
(d) when the person charged and such indorser reside at different places, the indorser is entitled to receive such sum at the current rate of exchange between the two places;
(e) the party entitled to compensation may draw a bill upon the party liable to compensate him, payable at sight or on demand, for the amount due to him, together with all expenses properly incurred by him. Such bill must be accompanied by the instrument dishonoured and the protest thereof (if any). If such bill is dishonoured, the party dishonouring the same is liable to make compensation thereof in the same manner as in the case of the original bill.

This section lays down the rules for determining the amount of compensation which the holder or an indorsee of a negotiable instrument may claim from a party liable on the same. Under this section what is realisable is not the debt but only compensation. This difference is noticeable. Thus, where the manager of a Hindu joint family incurred a debt for the benefit of the family and executed a promissory note for the same which was endorsed by the payee to a third party without assigning the debt as well, the endorsee could sue on the pronote alone and not the debt and the decree obtained by him on the pronote against the maker being one for compensation and not for the debt could not be executed against the other members of the family by invoking the principles of Hindu law.1)

In G R Ramesh vs Sri M Puttanna2) the Hon'ble Karnataka High Court held that:

Section 117 of the Negotiable Instrument Act provides for civil remedy if the cheque is dishonoured for insufficiency of funds. It permits the payee under the cheque to seek compensation in case of dishonour of a negotiable instrument.”

The Court further held that:

Initiation of criminal prosecution under Section 138 of the Act is to visit the drawer whose cheque has been dishonoured, with penal action, while the object of Section 117 is to compensate the payee apart from enabling him to recover the amount covered under the cheque.”

Holder's amount

Clause (a) deals with the amount the holder is entitled to have The holder is entitled to the amount due upon the instrument together with all the legitimate expenses incurred in presenting, noting and protesting it. It does not matter if the holder has paid a less amount for the instrument than what is due upon it. The amount due on the instrument means the principal amount plus interest at the rate specified in the instrument3) or where no rate is specified at the rate of eighteen per cent.4)

Expenses

All the expenses properly incurred for making presentment for acceptance and for payment as well as the notarial and other charges incurred for noting and protesting it are recoverable from the person liable on the instrument. This section is wider than the corresponding section of the Bills of Exchange Act under which a holder can recover expenses of protest only if such protest is necessary.5) Thus, under the English law an inland bill does not require protest for better security and any expenses incurred for the protest of such bills will not be chargeable against the person liable. There is, however, no such restriction under the Indian Law and, therefore, such expenses will be recoverable here. Expenses incurred for notice of dishonour to the drawer and to the endorsers or any loss which is not the result of non-payment of the bill are not recoverable. Commission allowed to an agent for collection of the bill is recoverable but the section is silent on the point.

Re-Exchange

Clause (b): Where a bill is drawn or indorsed and made payable in the same place, the question of any loss on this head, by dishonour, does not arise as the payment has to be made in the same currency. But when a bill is drawn or indorsed in one country and is payable in another, its dishonour will necessarily cause some loss owing to the difference in the currency between the countries and the measure of such loss is called Re-Exchange. If the person liable on the instrument resides in a country different from the country where the bill is payable, the holder is entitled to receive the sum at the current rate of exchange “between the two countries“.

The holder is entitled in such a case to an amount due on the instrument in the currency of the country where it is payable and he should not suffer any loss on account of the difference in the rate of exchange between the two countries. If an ordinary bill of exchange is drawn in one country the holder, who has contracted for the transfer of funds from one country to the other, almost necessarily sustains damages by the dishonour of the bill. He must take other means to put himself in funds in the country where the bill was payable. Hence the right to re-exchange which is the measure of those damages.

The current rate of exchange may vary from day to day. The question that, therefore, arises is “to current rate of what date is the holder entitled ?”. The date of dishonour, or the date of demand or the date of suit or judgment ?

Although the section is silent on this point it is now settled law that it should be the rate current on the day of dishonour and the holder in such a case is entitled to receive from the drawer or the endorser the value at the rate of exchange on the day on which the bill was dishonoured. The rate of exchange can be fixed by special agreement by an instrument but no oral agreement is admissible.

Indorser’s right to compensation

Under clause (c) an indorser who, having a subsisting liability under the instrument, has made payment of the same is entitled to recover the amount he has paid with interest at the rate of eighteen per cent per annum from the date of payment until tender or realisation of the amount along with all costs caused by the dishonour and non-payment.

An endorser who has no subsisting liability, as for instance, one who has been discharged from liability by the failure of the holder in giving him notice, or an indorser without consideration and not liable to the indorsee, making the payment is not entitled to recover the amount. A party, not liable under the instrument, can suffer no damage by dishonour and non-payment and, therefore, the question of compensation of such a party cannot arise.

An indorser can charge all the expenses incurred from his prior party but in the absence of any contract for indemnity or of a request by the prior party to defend the action by the holder against the indorser he is not entitled to the costs of the case.

Indorser's Right to Re-Exchange

Clause (d): The indorser like the holder under clause (b) is entitled to re-exchange. The rules laid down in the section will apply to the drawer as well.

Drawing bill for compensation

Clause (e): Under this clause the person who is entitled to compensation for dishonour as laid down in the previous clauses can draw a bill payable at sight or on demand, on any party who is liable to compensate him for the amount due to him, together with all the expenses properly incurred by him. The bill will also cover the difference of exchange between the two countries when the bill dishonoured was drawn in one country and made payable in another. A bill so drawn for the compensation money and incidental charges above referred to is called a redraft.

Such a bill must be accompanied by the instrument dishonoured and the protest if any, otherwise it will not be enforceable. The position of the newly drawn bill will be similar to that of the dishonoured bill in relation to the question of compensation. A dishonoured redraft may give rise to another on the same terms and conditions set forth above. An endorser who pays a redraft may, in like manner, draw a bill on an antecedent party, the bill being negotiated at the place where the dishonoured bill was payable. For compensation payable by a banker for dishonouring a customer's cheque see section 31.

1)
Ramanathan v Nuthuraman, 1942 Mad 161 201 IC 3
2)
R.F.A. 1113/2012
3)
Section 79
4)
Section 80
5)
Sec 57(1) clause (c)

Created on 2021/03/02 18:51 by LawPage • Last modified on 2021/04/09 22:26 (external edit)