DISHONOUR & DISCHARGE OF NEGOTIABLE INSTRUMENTS

Any type of negotiable instrument may be

dishonoured by non-payment by the drawee or
acceptor thereof. But a bill of exchange may be
dishonoured by non-acceptance as well as by nonpayment since it requires placement for
acceptance before it can be presented for
payment. The instrument stands discharged when
the liability of the party, primarily and ultimately
liable on the instrument, comes to an end.

DISHONOUR OF A NEGOTIABLE INSTRUMENT

Dishonour in relation to a negotiable instrument means loss of

honour or respect for the instrument in question on the part of
the party liable thereto, which eventually results in nonrealisation of payment due on the instrument. Any type of
negotiable instruments i.e., bill of exchange, promissory note
or cheque may be dishonoured by non-payment by the
drawee/acceptor thereof. But a bill may also be dishonoured by
non-acceptance as well because the bill of exchange is the
only negotiable instrument which requires its presentment for
acceptance and non-acceptance thereof can amount to
dishonour. A cheque being drawn on specified bank and not
expressed to be payable otherwise than on demand is never
presented to the drawee bank for acceptance and same is the
case of a promissory note. However, a pro-note made payable
at a certain period after sight is required to be presented for
sight, but it is never subject to presentment for acceptance.

Dishonour By Non-Acceptance

A bill is said to be dishonoured by non-acceptance in the following

circumstances:
1. When the drawee or one of the several drawees, not being partners,
commit default in acceptance upon being duly required to accept the bill.
The holder must, if so required by the drawee of a bill of exchange presented
to for acceptance, allow the drawee forty-eight hours (exclusive of public
holidays) to consider whether he will accept it.
[Sec. 63]
2. Where presentment is required and the bill remains unpresented.
3. Where the drawee is incompetent to enter into a valid contract.
4. If the drawee is a fictitious person.
5. If the drawee cannot be found even after reasonable search. [Sec. 61]
6. Where the drawee has either become insolvent or is dead and the holder
does not present the bill to the assignee or legal representative of the
insolvent or deceased drawee.

A promissory note, bill of exchange or cheque is said

to be dishonoured by non-payment when the maker
of the note, acceptor of the bill, or drawee of the
cheque default in payment upon being duly required
to pay. Also the holder of a bill or pro-note may treat
it as dishonoured, without placing for payment when
presentment for payment is excused expressly by
the maker of the pro-note, or acceptor of the bill and
the note or bill when overdue remains unpaid .
[Sec. 92 read with Sec. 76]

If the bill is dishonoured either by non-acceptance or

by non-payment, the drawer and all the endorsers
of the bill are liable to the holder, provided notice of
such dishonour is given to them. The drawee on the
other hand is liable to the holder only in the event of
dishonour by non-payment.

Dishonour of Cheque for Insufficiency of

Funds in the Account
A cheque drawn by a person on an account maintained by
him with a bank for payment of any amount of money to
another person can be returned unpaid for want of enough
funds in the said account. This is called dishonour of
cheques for insufficiency of funds (in the drawers account).
In such cases, the drawer is also criminally liable for this
offence and may be punished with imprisonment for a
term, which may extend to one year, or with fine that may
extend to twice the amount of the cheque, or with both.
[Sec. 138]

NOTICE OF
DISHONOUR
Notice of dishonour refers to formal communication,
oral or written, of the fact of dishonour. When a
negotiable instrument is dishonoured either by nonacceptance or non-payment, the holder should give
notice of the dishonour to all the parties, he seeks to
hold liable. A notice of dishonour has its own
significance. If it is not given to the drawer and
endorsers, it will discharge them all from liability not
only on the bill or pro-note but also with regard to the
original consideration. Such notice also enables a
person (drawer) so notified to protect himself/herself as
against the drawee or acceptor who has illegitimately
dishonoured the instrument issued by him/her.

Rules Regarding Notice of Dishonour

The rules regarding notice of dishonour may be discussed

under the following heads:
1. Notice of dishonour in case of non-acceptance. If
the drawee refuses to accept the bill duly presented to
him/her for acceptance, the bill stands dishonoured, and
the notice of dishonour must be given in accordance with
the Act.
2. Notice of dishonour in case of non-payment . Where
an instrument has been dishonoured due to nonacceptance, and proper notice of dishonour has been
served, notice of a subsequent dishonour on account of
non-payment is no more required unless the instrument in
the meantime, has been accepted. Conversely, where a
bill has been duly accepted by its drawer, but the holder
fails to get the payment, notice of dishonour by nonpayment must be given to the drawee.

3. Notice by whom. Notice of dishonour must be

given by the holder or by some party liable on the
instrument. A notice given by a stranger stands
invalid and inoperative. Moreover, where the holder
has given a notice of dishonour to any party liable
on the instrument and that party, in turn, has given
notice of dishonour to all prior parties, the holder
can treat that notice as one given by him.
4.Notice to whom?. Notice of dishonour must be
given to all parties (other than the maker of the
dishonoured promissory note, or the drawer or
acceptor of the dishonoured cheque or bill) or their
duly authorized agents who are sought to be made
liable. Where there are two or more persons, jointly
liable as drawers or endorsers, notice to any one of
them is enough if the holder seeks to make them
jointly liable on the instrument.
It is important to note that the notice of dishonour is
not necessary to the maker of a pro-note, or acceptor
of a bill or drawer of a cheque because of the

5. Form and mode of giving notice. There is no

prescribed mode or format for giving a notice of
dishonour. It may be given in any form satisfying the
requirements of law.
As per Sec. 94, the notice of dishonour may be oral
or written; if written, be sent by post; it may be in any
form; but it must inform the party to whom it is given,
either in express terms or reasonable intendment that
the instrument has been dishonoured, and that he/she
will be held liable thereon, and it must be given within
a reasonable time after dishonour, at the place of
business or (in case such party has no place of
business) at the residence of the party for whom it is
intended.
6.Reasonable time of giving notice. The
determination of reasonable time for giving notice of
dishonour depends upon the nature of the instrument.
While calculating reasonable time public holidays
must be excluded
( Sec.
105).

7.Reasonable
time
for
transmitting such notice:
A party receiving notice of dishonour,
who seeks to enforce its rights
against a prior party, transmits the
notice within a reasonable time if it
transmits the notice within the same
time after its receipt as it would have
had to give notice if it had been the
holder (Sec. 107).

DISCHARGE OF A NEGOTIABLE INSTRUMENT

When the liability of the party, primarily

and ultimately liable on the instrument,
comes to an end, the instrument is said to
be discharged. The discharge of the
instrument results in extinguishments of all
rights of action under it and the instrument
ceases to be negotiable. After discharge of
a negotiable instrument, even a holder-indue-course acquires no right under it.