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To whom payment should be made

Section 78 of the Negotiable Instruments Act,1881.

Subject to the provisions of section 82, clause (c), payment of the amount due on a promissory note, bill of exchange or cheque must, in order to discharge the maker or acceptor, be made to the holder of the instrument.

The section mentions the persons to whom only payment should be made for discharging the maker or the acceptor. It applies not only to negotiable instruments but to non-negotiable ones as well. It is necessary to consider not only to whom, but by whom, and when, is such payment to be made.

Time of payment

Payment of the amount due on an instrument may be made either before or at maturity. Payment by a party to the instrument before maturity does not discharge the instrument and its negotiability does not cease. It is merely a purchase of the instrument with all the rights of negotiation.

In order to discharge the instrument the payment must be made at maturity. Otherwise the acceptor will be liable to pay it again on the instrument in the hands of a bona fide transferee for value. In the case of premature payment by the maker or acceptor he must get the instrument delivered to him so that he can make himself and all the subsequent parties liable. The questions that, therefore, require consideration are to whom and by whom is such payment as may discharge the maker or acceptor to be made.

To whom

For an effectual discharge of the instrument payment must be made to the holder thereof, or to his agent entitled to receive payment, but not to any one else even having beneficial interest in the money1) for a person, who is not an indorsee claiming under a pronote, has no right to claim payment.

In case of an instrument payable to bearer or indorsed in blank, payment to the person in possession of the instrument including a thief will discharge the maker or the acceptor as in such cases the person in possession is the holder but the position will be different in case of a payment to a person under a forged endorsement on an instrument not payable to order. This payment will not absolve the person from liability to the true owner who continues to be the holder. It will thus be seen that payment made to one who is the real owner of the instrument but not the holder nor the agent of the holder will not discharge the maker or the acceptor. Even if the holder is a benamdar payment must be made to him as the negotiable instrument does not recognise benami, the holder being the person entitled in his own name to receive the payment. The property in the note including the right to receive and recover the amount due thereon is vested in the holder. Therefore, when a pronote was executed in favour of a guardian of a minor for money lent from the estate of the latter, payment to the minor was held ineffectual for a discharge as the guardian was the holder of the note. Where two or more partners are holders of a note payment to one of them will, however, discharge the debt as each partner is an agent of the others. In some cases it was held that payment to one of the joint holders who are not partners was a good payment to discharge the debt under section 38 of the Contract Act.2) Similarly, payment to the manager of a joint Hindu family discharges the debt to the family.3) Although one of several joint holders or partners is competent to give a discharge, still a bank can refuse payment to such one or some of the holders after notice of dissolution of partnership or notice to withhold payment. It is submitted, however, that in the case of the joint holders who are not partners, in the absence of anything to the contrary in the contract itself, the right to claim performance rests jointly with them under section 45 of the Indian Contract Act and, therefore, the decisions to the contrary cited above offend against that section. Where the holder elects to treat payment to a non-holder as a discharge, the maker is released from liability.

Who can sue

There is some conflict of opinions as to whether the present section prohibits any person other than the holder of a promissory note to bring an action on the note if the former be the real owner and the latter be his benamdar. According to one view section 78 of the Act should be strictly construed and a valid discharge can be given only by the payee of a promissory note or the holder thereof there being no such thing for this purpose as a benami promissory note taken in the name of one person for the benefit of another. Therefore, a person who is the true owner is not competent to prosecute a suit on the note if he is not the holder thereof and the fact that the holder of the note has been made a party and has admitted that he is the plaintiff’s benamdar makes no difference. The property in the note including the right to receive and recover the amount due thereon is vested in the holder and cannot be transferred to the plaintiff except by the process prescribed by law. This view is in accord with English law which has been followed in the absence of any definite provision on this head in the Act. There is another view that the section does not prohibit a true owner who is not a holder from bringing a suit on the note making the ostensible holder a party.4) The view held by the Patna High Court stands superseded by the full bench decision noted earlier. There is again another view which strikes a middle course. Thus, in a suit brought by the beneficial owner against the maker and the holder the court passed a decree against the maker with a proviso that payment should be made to the plaintiff on his securing a valid discharge of the maker by the holder as this section does not, in terms, prohibit a suit by any one except the holder.5) It is submitted that in view of the object of this Act the principle of countenancing secret title to the property in the instrument leading to uncertainty and thus discouraging negotiation would appear to be repugnant to it. Therefore, the view that a suit is not maintainable by any one except the holder seems to be more in accord with the object and spirit of the Act. The Act does not expressly exclude the doctrine of representative action. Thus, if a holder is dead a person claiming representation to his estate can bring a suit to recover the debt upon a pronote or when a person is appointed a common manager of an estate he can file a suit on a promissory note on behalf of the estate.

Payment by whom

Although for effectual discharge payment must be made to the holder there is no hard and fast rule under the Indian law as to who should make the payments. When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor6) Therefore, a payment made by a third party satisfies a debt. But such payment by a third party must be on behalf of the person liable to pay i.e. the maker or the acceptor. Thus, when a father sent on behalf of his son who was the debtor a cheque to the creditor for an amount less than what was due in full settlement of the claim and the creditor had the cheque cashed, the debt was held to have been satisfied. When, however, a stranger makes payment, not on behalf of the debtor, he is generally deemed to be a purchaser of the instrument and the debt does not stand satisfied, and consequently there is no discharge, all the prior parties remaining liable. It is essential, therefore, for the discharge of the debt, that the payment by the third party should be made on the authority or assent of the debtor, and for, or on account of the debtor.

If there is no previous assent or authority for payment it may be ratified subsequently by the debtor. When a person became a surety on a hundi without the consent of the drawer and paid the amount on the refusal of the drawer to pay the same, the payer was held to be a holder for value and not a surety entitled to be indemnified by the drawer and, therefore, he had no other rights than those of a holder.7)

In a bill not drawn for the accommodation of the drawer or the indorser, the acceptor remains liable to the drawer or the indorser for the payment made by either of them of the money due on a bill and there is no discharge of the debt , but it is discharged when the party for whose accommodation the bill is drawn pays the amount. When payment is made by the drawer or the indorser of a bill not drawn for accommodation of either and there is no discharge as stated above, the bill does not cease to be negotiable. When the drawer or the indorser pays the holder, the acceptor remains liable to the drawer or the endorser and the bill is not discharged. But can the holder, who has been paid off, in such circumstances, make the acceptor still liable in an action against him. The better opinion is that he can, but only as trustee for the drawer or the indorser who has made the payment to him. A payment by the indorser does not affect the position of the prior parties but discharges the subsequent parties.

Medium of payment

Ordinarily the holder who is to recover the amount due on the instrument is entitled to ask for payment in cash or other currency which is recognised as a legal tender. A cheque is not a legal tender. But this does not prevent the holder from entering satisfaction of the debt by acceptance of any form whether that is recognised as a legal tender or not , so that if the holder chooses he can give discharge of the debt by means other than cash or any other legal tender, as for instance, by setting off one debt against another, by taking a fresh bill in lieu of the old one, or by accepting satisfaction in some other way. Thus, when before his death the holder of a pronote sent for the makers, discharged their liability under the note and directed them to apply the sum in their hands for the benefit of his children the note was held to have been discharged.

Where a note or a bill is given in payment of a debt it is a question of fact whether the parties intended the same as an absolute or conditional payment, and the presumption as to the effect of giving and taking a note or a bill is that the debt is conditionally paid. The fact that a comparatively high rate of discount, as 24 per cent was allowed to the plaintiff taken along with the other circumstances was held to prove that the plaintiff had accepted the hundi as absolute payment and was not entitled to sue upon the original debt.8)

Part payment

Although insufficient tender does not discharge a debt9), part payment may, if agreed to by the holder. In case a valid tender is refused by the holder interest will cease to run from the time of such refusal.10)

Payment when complete

Payment is complete when the money is placed on the counter for payment to a person11) he cannot recover even if the banker has no money of the drawer, or if it is paid in ignorance of a countermand order. There is an equitable right of restitution. Money paid to a wrong person, as where a bill is paid on presentation by a different person of the same name to whom it is really payable, will not discharge the acceptor of the bill who remains liable to the true owner though he may recover from the person wrongly paid. The acceptor may refuse to make such payment but in so doing he will act on his own responsibility as possession of the bill prima facie shows the presenter’s right to the money. When money is paid through a mistake it may be recovered if the mistake is discovered and money is claimed before the person to whom payment has been made loses his remedy against others. Money once paid cannot be recovered when both the giving and taking are bona fide and the position of the holder has altered. No money which is voluntarily paid or paid under a mistake of law is recoverable, but when the mistake is one of fact between the same parties in the same transaction, money is recoverable.

Royal Bank vs Rahim 1925 Bom. 369
Barber Maran vs Ramana
Violet Das v Banarasi
Brojolal v Budhnath
Sewram v Hotilal
Indian Contract Act, section 41.
Zujya vs Mon Mohan, 1940 Bom 164
Jambu Palaniappa, 26 Mad. 526
Haji Abdul vs Haji Moor
Indian Contract Act, Sec 38
Chambers vs Miller