Section 81 of the Negotiable Instruments Act,1881.
The section is primarily meant for the protection of the debtor making payment against double liability. The debtor has a right to have the instrument delivered to him on payment, for, if the debtor does not take back the instrument from the holder, he may be liable to pay the amount again to a holder in due course who takes the instrument without knowledge of the payment. Possession of the instrument is prima facie evidence of the possessor being the holder. Therefore, if the holder refuses to deliver the instrument to the debtor at the time of payment, the debtor may refuse payment. It is the duty of the holder, when he asks for payment, to exhibit the instrument to the person from whom payment is demanded, and on receiving payment, to deliver it up to the party making the payment. The holder may be compelled to deliver the note if, after payment, he refuses to do so. The acceptor paying the bill has a right to the possession of the instrument for his voucher and discharge protanto in his account with the drawer.
In M.Laxminarayan Setty vs B.Murali S/O. B. Gurappa3) Hon'ble Karnataka High Court held that:
“On plain reading of the above said provision Section 81(1), it abundantly make it clear that, if any person who is liable to pay any debt or liability under any promissory note, bill of exchange or cheque, he is duty bound and has a right before payment entitled to have it shown to him and on payment he is entitled to have it delivered or if instrument is lost or cannot be produced, then there should be an indemnification by the holder of the said cheque that he has no further claim thereon against the said person.”
The court further held that:
“In view of the provisions under Section 81 of N.I. Act, even after the payment of debt by the accused if he has not taken back the disputed cheque nor having taken any indemnification from the complainant, he has to blame himself.”
A suit is maintainable on a lost instrument upon proof of loss and giving indemnity. The onus of proof of loss lies on the plaintiff and mere admission of execution by the defendant does not amount to an admission that it was lost by the plaintiff.
When the holder who is entitled to payment cannot produce the note either because it has been lost or because it has been destroyed the person paying has a right to be indemnified against any possible claim against him in future. It will be quite unsafe for the payer to make the payment without indemnity, for, a person may bona fide come into the possession of the instrument subsequently and become a holder in due course with a right to enforce payment against all prior parties including the person who has already made payment.4) It is to provide against such eventuality that the provision for indemnity has been made. The section, however, does not lay down that an indemnity bond has got to be executed by the holder The section entitles the payer to be indemnified against loss in future even if no bond has been executed.
Where the maker of a promissory note paid money to an agent to retire it and the creditor having mislaid the note could not deliver it up, and the money not being paid, the agent became bankrupt, it was held that the maker was still liable to pay the amount of the note, but no interest was recoverable from the date of the tender.5)
Where the indorser pays the holder he must take back the instrument so that he may recover the amount from the maker. If on payment a prior endorser gets possession of the instrument from his immediate endorsee without endorsement he may recover thereon.6)
When the person liable pays the amount due to the holder he is entitled to have delivered up to him the instrument as well as the security, if any, given by the maker.7)
When half of a note has been lost and the other half is with the holder he is entitled to maintain a suit on the half note in his possession and a bank may make payment on production of a half note without any indemnity as the person who has taken the lost half note has taken it with notice and at his peril and cannot be a holder in due course.8)
A tender of payment accompanied by a condition which prevented it from being a perfect and complete tender does not stop the interest from running.
In the case of Alapati Venkata Krishnaiah v. Vemuri Manikyaraw9) Rajamanner J. (as the then was) had occasion to consider the plea of discharge with reference to s. 81 of the Negotiable Instruments Act. The case put forward by defendant No. 1 was that he had paid the entire amount due on the pronote to defendant No. 2 and had obtained a receipt which had been marked as Ex. D-1 and that the promissory note was not duly endorsed with the discharge because it was not available at that time. In dealing with that defence the learned judge held as follows:
“But there is certainly negligence on the part of defendant 1. When he made the payment, it is clear that the promise was unable to produce the promissory note and make an endorsement of payment and even deliver it up to him cancelled. Under s. 81, Negotiable Instruments Act, defendant 1 was before payment entitled to have the promissory note shown to him and on payment entitled to have the promissory note shown to him and on payment entitled to have it delivered up to him, or (as is now alleged by him), if the instrument cannot be found, to be indemnified against any further claim thereon against him. This is what he should have done and if he did not act as indicated in the section, he has to blame himself. In any event, his ultimate claim must be only against the promise whom he had paid and he cannot be allowed to plead any defence to an action by a holder in due course.”
A single judge of the Kerala High Court in the case of K. K. Koran v. T. Tara Bai10) explained the scope and the application of s. 81 of the Negotiable Instruments Act, in the following terms:
“The normal rule is that the document on which the suit is based should be produced along with the plaint. The production of the basis document is thus insisted on to afford protection to the person liable under it against a similar claim in a subsequent suit brought by a party who might claim to have legally acquired the rights under the document and produce it is support of his claim. The possibility of such risk is greater in the case of negotiable instruments which may change hands frequently by successive endorsements. Against the claim preferred by a holder in due course of such an instrument, the person liable under it may not be entitled to set up a plea that the amount due under the instrument has already been paid. Possession of the instrument by the holder in due course will be prime facie evidence of the liability not having been discharged.”