- Kinds of dishonour
- Notice for dishonour
- Mode of notice
- When notice is not required
- Dishonour of cheque
- Case Law
A promissory note, bill of exchange or cheque gets dishonoured when the person who is the maker of the note or the acceptor of the bill or the drawee of the cheque makes a default by not paying off the liability which lies upon such a person. Such a person has a liability or duty to discharge himself of the liability by making the payment as stipulated by the instrument. When he fails to do so the instrument is called to be dishonoured.
The Negotiable Instruments Act, 1881(herein after referred to as the Act) has dealt with the dishonour of instruments under chapter 8 of the Act from sections 91 to 98. When an instrument is presented for payment and the maker, acceptor or drawee fails in making the payment it is said that the instrument has been dishonoured.
It has to be borne in mind that if there is non-acceptance then the dishonour will be only for a bill of exchange, and if there is a non-payment then dishonour can be for any negotiable instrument which would include a bill of exchange.
Kinds of Dishonour
Dishonour is of two kinds:
- When there is non-acceptance of a bill of exchange then it would amount to dishonour.
- When there is a failure to pay for a promissory note, bill of exchange or cheque then there will be dishonour.
Dishonour by Non-Acceptance
Sec 91 of the act contemplates that when the drawee or several drawees where these several drawees are not partners make a default in accepting the instrument when they were under an obligation to accept it or when the instrument was excused from presentment and the bill was not accepted.
Only a bill of exchange is required to be presented for the purpose of acceptance, therefore it is only such a kind of instrument which gets dishonoured by way of non-acceptance. Dishonour by non acceptance can happen in many ways. Some of them are:
- When a bill is presented and the same is not accepted by the drawee or the drawees and when there are more than one drawees and any one makes a default in accepting the bill then it will be considered as dishonoured. It will not be called as dishonoured if these more than one drawees are partners.
- Generally if there are more than one drawees then the bill must be accepted by all of them, but if the drawees are working as or are partners then if even one accepts the bill it would amount to acceptance on behalf of others.
- As per sec 63 of the act, the drawee must be given around 48 hours to deliberate and accept the bill. However, if he does not accept the same then the bill is deemed to be dishonoured.
- Where presenting the bill for acceptance has been excused and the bill does not get accepted, Eg: if the drawee cannot be found after a proper search it is understood that the bill has been dishonoured.
- Where the drawee is not competent to enter into a contract then the bill is considered to be dishonoured. Sec 26 of the act contemplates that only a person who can enter into a contract can accept a bill then by virtue of it a person who cannot enter into a contract cannot accept a bill.
- Therefore if an individual who is not competent to contract is the drawee then the bill will be considered to dishonoured.
- Where a condition is imposed to in order to accept the presentment then it is called a qualified acceptance. A qualified acceptance in express terms varies the effect of a bill. In such cases the holder may refuse to accept the condition and consider the bill as dishonoured due to non acceptance. However, if he accepts then he does that at his risk and he discharges all the previous parties unless he obtains the consent of those parties.
- Therefore the holder shall consider the bill to be dishonoured in his best interest if there is a qualified acceptance by the drawee. Eg: Qualified Acceptance as to place i.e., it is only payable at a certain place like accepted payable at State Bank only.
Dishonour by Non-Payment
Sec 92 of the Act contemplates that a promissory note, bill of exchange or cheque is called as dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque fails to or does not pay the amount which he was liable to do as per the instrument. He fails to discharge his liability which was under an obligation to do.
As stated earlier that dishonour by way of non-acceptance can only be for a bill of exchange, however in cases of any negotiable instrument which includes a bill of exchange the dishonour can happen for non-payment.
In cases where the maker, acceptor or drawee acts with an intention to prevent the instrument from being presented, or he is not found after a reasonable search, it is deemed that an instrument is dishonoured even without presentment.
Notice for Dishonour
Sec 93 of the act contemplates that when a promissory note, bill of exchange or cheque is dishonoured either by non-acceptance or non-payment then the holder needs to give a notice to the liable parties that the instrument has been dishonoured. However, it needs to be noted that this section is not mandatory in nature and it an option provided to the holder.
Mode of Notice
Sec 94 of the act contemplates that:
- A notice is to be given to the authorised agent of such a person for whom the notice has been made and if the person has died to his legal representative and if the person is insolvent to the assignee;
- The notice can be oral or in writing;
- The notice needs to be sent by post or communicated by any other manner;
- The notice should convey that the instrument has been dishonoured;
- A reasonable time and place be given for removal of dishonour or making of payment.
When Notice is not required
As per sec 98 of the act notice of dishonour is not required when:
- It is waived by the party which is entitled to do so;
- In cases where the drawer has revoked payment then to charge him;
- When the party who is charged cannot suffer damages due to notice;
- When the party to whom the notice is to be sent is not found after reasonable search;
- To charge drawer when acceptor is also a drawer;
- When the instrument is a promissory note and the same isn’t negotiable;
- In cases where the party to whom the notice is to be made unconditionally promises to pay the amount which is due as per the instrument.
Dishonour of cheques
Sec 138 of the act contemplates that if a cheque is dishonoured due to insufficiency of funds in a person’s account where a person draws a cheque on an account which was maintained by him with a banker for the purposes of payment of an amount to some person to discharge in complete or part any liability which he owed to another person then same would constitute an offence.
A cheque would also get dishonoured if the amount on the cheque is more than the amount allowed by the bank. A person would be liable to imprisonment for two years or by payment of fine amounting to twice the amount of the cheque.
There are certain conditions which need to be met:
- The cheque must have been presented within six months from the date on which it was issued;
- The payee or holder in due course must have sent a notice in writing about the dishonour within thirty days from the date on which he was informed of the dishonour;
- The drawer of the cheque fails to pay the money of the cheque within a period of fifteen days from the date when he received the notice or demand.
- In the case of Barendra Kumar Bera v. Chottan Mukherjee 2009 (83) AIC 795 (Calcutta HC), it was held that the term notice in terms of sec 94 of the act means to intimate or instruct someone to do something. It is not necessary that the notice be in writing. When the statute does not provide that the notice be in writing then it may be verbal.
- In the case of Rakesh Nemkumar Porwal vs Narayan Dhondu Joglekar1994 (3) BomCR 355 , it was held that the conditions and facts under which dishonour takes place need to be completely ignored. The law is only concerned with the fact that the payment was not done irrespective of the reasons behind it. Had it not been the case then the legislature would have given exceptions to the section and offence therein.
- There is an absence of any such intention which can be made out to provide any exceptions or carve out exceptions. However, an exception has been made out which is that a period of fifteen days is provided to a person to make good the liability that he has incurred and the dishonour for its payment. It a last opportunity that is granted to make the payment and the legislature has adopted a no nonsense approach.
- In the case of Dashrath Rupsingh Rathod v. State of Maharashtra (2014) 9 SCC 129, it was held that in a case where a of dishonour of cheque has taken place, the courts under whose territorial jurisdiction the drawee bank is located would have the jurisdiction to adjudicate upon the case.
- In the case of F. Hunsikathimath v. State of Kerala 1991 (1) Crimes 227, it was held that a penal provision needs to be construed strictly and not liberally. A cheque which is dishonoured on the ground of ‘account closed’ cannot be construed as dishonoured for insufficiency of funds or exceeding arrangement as laid down in sec 138 of the act.
Thus it can be concluded that a promissory note, bill of exchange or cheque is said to be dishonoured when the maker of the note or the acceptor of the bill or the drawee of the cheque makes a default by not paying off the liability which lies upon him. Such a person has a liability or duty to discharge himself of the liability by making the payment as stipulated by the instrument. When he fails to do so the instrument is called to be dishonoured.
A bill of exchange gets dishonoured when it is not accepted and a promissory note, bill of exchange or cheque get dishonoured when the amount mentioned in the instrument is not paid.
In cases of cheque a cheque gets dishonoured when there are insufficient funds in the account of a person or when the amount on the cheque exceeds the arrangement with the bank. The holder needs to inform the party of such a dishonour and them give him time of fifteen days to make good the liability.