Dishonour of Negotiable Instrument

1. Introduction

Dishonour means failure to honour a negotiable instrument. This may be by non-acceptance, when a bill of exchange is presented for acceptance and this is refused or cannot be obtained or by non-payment, when the bill is presented for payment and payment is refused or cannot be obtained.

2. Dishonour of Negotiable Instrument

A negotiable instrument is said to be dishonoured either by non-acceptance or non-payment.

(a) Non-acceptance

A bill is said to be dishonoured by non-acceptance.

(i) When it is presented to the drawee for acceptance and he does not accept it within 48 hours from the time of presentment for acceptance.

(ii) When the drawee is incompetent to contract.

(iii) When the drawee is a fictitious person or after reasonable search cannot be found.

(iv) When presentment for acceptance is excused and the bill is not accepted.

(v) When the acceptance is a qualified acceptance

(vi) when one of several drawer not being partner makes default in acceptance on being duly required to do so.

(b) Dishonour by non-payment

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 makes default in payment upon being duly required to pay the dame.

Again a negotiable instrument is dishonoured by non-payment when presentment for payment is excused and the instrument when overdue remains unpaid.

3. Notice of Dishonour

When a negotiable instrument is dishonoured by non-acceptance or by non-payment, the holder of instrument or some party to it who is liable, must give a notice of dishonour to all the prior parties to whom he wants to make liable on instrument. If he does not give this notice, all the prior parties other than the maker or acceptor are discharged of their liability.

(i) Object of Notice

The object of giving notice is not to demand payment but to inform the party notified that the engagement on the bill or note has been broken by the principle debtor and that he being the surety, will now be liable for payment.

(ii) Requisites of Notice

A notice must clearly intimate:

(1) that a specified instrument has been dishonoured.

(2) whether the instrument has been dishonoured by non acceptance or non-payment

(3) that the holder holds the person notified liable on the instrument

(iii) Notice by whom to be given

The following persons can give notice of dishonor

(i) The holder of instrument

(ii) The indorser who, at the time of giving notice, is himself liable on the bill

(iii) Any party receiving notice of dishonor to  any prior party.

(iv) The authorized agent of the holder

(iv) Notice whom to be given

The notice of dishonour can be given to following persons

(i) Notice must be given to all parties except maker or acceptor or drawee

(ii) In case of a person who is died, a notice may be given to his legal representative

(iii) In case of insolvency of a person, it may be given to him or his official assignee.

(v) Effect of omission to give notice

Notice being a necessary part of the engagement of the drawer and the indorser omission to give notice, would discharge all parties other than maker or the acceptor. They are discharged not only on the bill or note but also in respect of the original consideration.

(vi) Mode in which notice may be given

The notice of dishonour may be written or oral. It may given personally or through messenger or through post or telephone. It may be in any form but it must intimate that the payment was demanded from the drawee but refused and that the holder holds the person notified liable on the instrument.

(vii) Reasonable Time

Notice of dishonour must be given within reasonable time. Reasonable time is defined in Section 105 as.

In determining reasonable time regard shall be had to the nature of instrument and the usual course of dealing with respect similar instrument. In calculating such time public holidays shall be excluded.

(viii) Place of Notice

Notice of dishonour is to be given at the place of business of the party and in case such party has no place of business, then it is to be given at the residence of the that party.

4. When notice of Dishonour is unnecessary

Notice of dishonour is not necessary in the following cases.

(i) When it is dispensed with by the party entitled to it.

(ii) When the drawer of a cheque has stopped the payment of cheque.

(iii) When the party charged could not suffer damage for want of notice.

(iv) When the party entitled to notice cannot after due search be found

(v) When the party bound to give notice is, for any other reason, unable without any fault of his own to give it.

(vi) When the acceptor is also a drawer.

(vii) In case of promissory note which is not negotiable

(viii) When the party entitled to notice, knowing the facts promises unconditionally to pay the amount due on the instrument.

Conclusion

A negotiable instrument is said to be dishonoured when the drawee refused to accept it or to make payment upon it. In both cases the holder is entitled to sue against the drawer and endorser. Notice of dishonour is given to all parties except maker of note, acceptor of bill or drawee of cheque. Notice of dishonour indicates that the instrument has been dishonoured and that the person served with the notice will be held liable. Notice of dishonour is not necessary to give where it is dispensed with by the party entitled to it, or where the party charged could not suffer damage for want of notice.