Legal Steps for Dishonour of a Negotiable Instrument

Introduction:

In case of dishonour of a negotiable instrument, notice of dishonour must be served to all the parties by the holder for payment of dues. The term “Dishonour” means not honouring one’s obligation. Such dishonour can be caused by either non-payment or non-acceptance. The Negotiable Instrument Act that came into force in 1881 mentions the steps for the dishonour of a negotiable instrument from Section 91 to 98. When the maker or drawer fails to make payment of an instrument presented, the instrument is said to be dishonoured. Negotiable Instrument includes the following:

• Promissory Note

It is a promise in writing made to the holder by an individual or a business entity for payment of a certain sum for which the date is decided prior to its payment. It is the amount that the payer owes to the payee on the date as may be fixed by both the parties along with interest.

• Bill of Exchange

It is written document binding on both the parties wherein which one party is bound to make payment to the other within the prescribed time limit. The bills determine the date on which the payment is to be made. When financial institutions make payment through a bill of exchange, it is known as a bank draft, when individuals make payment through a bill of exchange, it is known as a trade draft. A bill of exchange can also be regarded as a promissory note in the course of international trade. The bank usually acts as a guarantee and is a third party to the transaction in order to avoid risks.

• Cheque payable to bearer

It is something that contains an unconditional order. A cheque is an instrument made in writing, signed by the depositor and handed over to the banker for demanding for a certain sum that he is required to pay to the bearer of the cheque or to any other person instructed to gain such payment.

The above instruments can be transferred as they are documents bearing signatures of the promisor to pay the promisee the amount that he owes to him as and when it is demanded by the promisee.

Kinds of Dishonour of Negotiable Instruments

Dishonour by Non-acceptance (Section 91)

All of the above-mentioned instruments can be dishonoured including a bill as no other negotiable instrument apart from a bill of exchange requires non-acceptance and presentment of acceptance. Therefore, the non-acceptance of a bill of exchange leads to its dishonour. The following are the circumstances under which a bill is dishonoured by non-acceptance:

• In case of any welsh for acceptance of the bill on part of one of more drawees, Section 63 applies. The said Section states that “The holder must, if so required by the drawee of a bill of exchange presented to him for acceptance, allow the drawee [forty-eight] hours (exclusive of public holidays) to consider whether he will accept it.”
• In the case where the bill that is to be presented is not presented due to any circumstance.
• In the case where the bill is not disqualified for acceptance.
• In case the drawee is a person who is fictitious or non-existent.
• In case where the drawee is barred from entering into the contract.
• In the case where the drawee is not traceable despite diligent search.
• In the case where the drawee has been declared insolvent or deceased and the holder of the bill fails to make payment to the legal representative or the assignee himself.

Dishonour by Non-payment (Section 92)

Apart from dishonour by non-acceptance, the above instruments can also be dishonoured when the person who makes the note fails to make payment of the amount he was ought to pay as mentioned in the instrument and fails to discharge his liability. Such a dishonour can only apply to a bill of exchange. The difference between dishonour by non-acceptance and dishonour by non-payment is that in case of non-acceptance, there is the absence of a right of action and in case of non-payment, the drawer has the right to sue the drawee as he is a party to the bill.

Notice of Dishonour (Section 93)

It means actual notification of the dishonour of instrument by non-acceptance or non-payment. The Section applies in case of non-acceptance of an instrument or default on part of the holder to give notice of dishonour. Mere knowledge of an instrument does not amount to its dishonour as it requires a formal communication regarding the dishonour of such instrument. A notice for dishonour must be given within a period of two years of its dishonour. Any notice given after lapse of such period shall not be considered. Such notice must not only be given within the time limit but also at the right place of residence of the party or at the place of business.

Mode of Notice (Section 94)

The following are the modes in which the notice can be issued under the Act:

• An authorised agent issues a notice to a person. In case of death of that person, the same is issued to his legal representative and in case of insolvency, it is issued to the assignee.
• The notice can be either in writing or oral.
• It may be sent by post.
• It may be issued within a reasonable time.
• The message of dishonour shall be well-conveyed in the notice.

In case the notice is not served in the above manner, the person serving such notice shall be held liable thereof. (Section 95)

No Notice of Dishonour is necessary (Section 98)

The following are the circumstances under which the notice of dishonour is not required:

• The notice can be waived by a party to the notice either expressly or impliedly.
• When the party to the notice is not traceable despite diligent search.
• When the damages cannot be suffered by the party to the notice.
• When the acceptor is also the drawer.
• When the promissory note is non-negotiable.
• When the party liable voluntarily pays the amount without any issuance of notice.

Dishonour of Cheque (Section 138)

The ingredients of an offence committed under Section 138 of the Act are as under:

• The drawer shall have issued the cheque for discharging legally enforceable financial liability.
• The cheque should be presented at the bank within a period of 6 months from the date on which it is issued or before the expiry of its validity, whichever is earlier.
• The cheque issued by the drawer is returned unpaid by the bank with the remark, “Insufficient Funds” to the drawee.
• The drawee of the cheque has defaulted in payment of such amount within fifteen days from the date of receipt of demand notice.
• In case the payment is not received within the prescribed time limit, the drawee has the right to initiate criminal proceedings under this Section of the Act.

Case Laws

Dashrath Rupsingh Rathod V. State of Maharashtra & Anr (2014) 9 SCC 129

In the aforesaid case, it had held that “In cases of dishonour of cheque, solely those courts among whose territorial limits the payer bank is located would have the jurisdiction to undertake the case.”

Makarand Patankar V. Sujit Saha & Anr (2011)

In the said case, it was held that “As per the provision of Section 94 of the N. I. Act the e-mail, addressed with a remark ‘special attention of Mr Gore’, cannot be treated as demand notice to the petitioner on dishonour of cheque because Mr Gore admittedly is an official of the accused-company, to whom a request e-mail was sent.”

Conclusion

Cheques can be regarded as the most secure method for payment of bills. Despite the decline in usage of cheques due to online banking, individuals yet make use of cheques for payment of various amounts such as loans, fees, pending dues, EMIs, etc. On the contrary, cheques are time-consuming and slower than most other methods of payment. Negotiable Instruments are very important for our economy as they help in the growth of the business. Our economy would be unable to function without the existence of the same.