Interest and Compensation on Dishonour (Sections 79, 80 and 117)

When an instrument is dishonoured, the holder is entitled to more than the face amount. He has lost the use of his money and may have spent money presenting, noting and protesting the instrument. The Act therefore fixes how interest is calculated, both where the instrument specifies a rate and where it does not, and lays down rules for the compensation payable by the parties liable. This note explains Sections 79, 80 and 117 and how they fit with the courts' general power to award interest.

1. Interest at a Specified Rate (Section 79)

Section 79, 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.

Rate: the rate specified in the instrument.
On what: the principal sum due.
From when: the date of the instrument.
Until when: tender or realisation of the amount, or such date after the institution of a suit as the court directs.

2. Interest Where No Rate Is Specified (Section 80)

Section 80, Negotiable Instruments Act, 1881

When no rate of interest is specified in the instrument, interest on the amount due thereon shall, notwithstanding any agreement relating to interest between any parties to the instrument, be calculated at the rate of eighteen per centum per annum, from the date at which the same ought to have been paid by the party charged, until tender or realisation of the amount due thereon, or until such date after the institution of a suit to recover such amount as the court directs.

Explanation. When the party charged is the indorser of an instrument dishonoured by non-payment, he is liable to pay interest only from the time that he receives notice of the dishonour.

Rate: 18 per cent a year, raised from 6 per cent by the 1988 amendment.
Overrides side agreements: the statutory rate applies "notwithstanding any agreement relating to interest between any parties". An agreement outside the instrument cannot displace it; to fix a different rate, the parties must specify it in the instrument (Section 79).
From when: the date the amount ought to have been paid, usually maturity, not the date of the instrument.
Indorsers: an indorser of an instrument dishonoured by non-payment pays interest only from the time he receives notice of dishonour.

3. Interest During and After a Suit

Both sections stop the statutory calculation at "such date after the institution of a suit … as the court directs". From that point, the court's general power under Section 34 of the Code of Civil Procedure, 1908 governs interest pendente lite (during the suit) and future interest (from decree to payment). Where the liability arises from a commercial transaction, future interest may exceed 6 per cent a year but not the contractual rate, or, if there is none, the rate at which nationalised banks lend in relation to commercial transactions.

4. Rules of Compensation (Section 117)

Section 117 sets out how compensation is measured when an instrument is dishonoured and a party liable must pay the holder or an indorsee:

(a) Holder's claim: the amount due on the instrument, with the expenses properly incurred in presenting, noting and protesting it.
(b) Different place: where the person charged resides at a place different from the place of payment, the holder receives the amount at the current rate of exchange between the two places.
(c) Indorser who has paid: an indorser who has paid the amount is entitled to that amount with interest at 18 per cent a year from the date of payment until tender or realisation, plus all expenses caused by the dishonour and payment.
(d) Indorser at a different place: where the person charged and the indorser reside at different places, the indorser receives the sum at the current rate of exchange between them.
(e) Re-exchange bill: the party entitled to compensation may draw a bill on the party liable, payable at sight or on demand, for the amount due with expenses, accompanied by the dishonoured instrument and any protest. If that bill is dishonoured, the party dishonouring it is liable to compensate in the same manner as on the original bill.

5. Compensation Outside the Civil Suit

In a prosecution for dishonour of a cheque under Section 138, the court may impose a fine of up to twice the amount of the cheque and direct that it be paid as compensation to the complainant, and may also award compensation under the general criminal procedure law (Section 357 of the Code of Criminal Procedure, now Section 395 of the Bharatiya Nagarik Suraksha Sanhita, 2023). Interim compensation of up to 20 per cent during trial (Section 143A) and a deposit of at least 20 per cent on appeal (Section 148) were added in 2018 (Topic 50). These remedies are separate from, and in addition to, the civil claim under Sections 79, 80 and 117, though amounts actually recovered are taken into account.

⚠ Key point

Where the instrument specifies a rate, interest runs at that rate on the principal from the date of the instrument (Section 79). Where no rate is specified, interest runs at 18 per cent a year, notwithstanding any outside agreement, from the date the amount ought to have been paid, and against an indorser only from notice of dishonour (Section 80). In both cases the statutory calculation runs until payment or a date after suit fixed by the court, after which Section 34 CPC applies. On dishonour, the holder recovers the amount due with expenses of presenting, noting and protesting, at the current rate of exchange where places differ; an indorser who has paid recovers that sum with 18 per cent interest and expenses; and a re-exchange bill may be drawn (Section 117).

6. Related Topics and Provisions

Maturity and days of grace (Topic 11)
Notice of dishonour (Topic 30)
Noting and protest (Topic 31)
Interim compensation and appeal deposit (Topic 50)