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By Asok Nadhani
Dishonour of
Negotiable Instrument
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When a party to
an instrument is liable to accept or to pay an instrument, refuses to accept or
pay when duly presented, the instrument is said to be dishonoured.
5.1
Dishonour of an Instrument
i. A
Negotiable Instrument may be dishonoured due to:
·
Non-acceptance (sec. 91)
·
Non-payment (sec. 92)
ii. The true owner of an instrument may bring a suit upon it if he is in a
position to obtain a good discharge of liability for the person liable thereon.
[Assuram vs. Niranjandass], [Davvuru Jayarama Reddy vs. Revathi Mica Co.],
[Liingam vs. Vijayagopal], [Madhubai
Damel vs. Vadilal], [Anjanaiah vs. Nagappa]
5.1.1
Dishonour by non-acceptance (Sec. 91)
a.
A bill gets dishonoured by
non-acceptance in the following cases:
i.
If the bill is not accepted by the
drawee within forty-eight hours of presentment.
ii.
If there is more than one drawees (who
are not partners) and all of them do not accept.
iii.
When presentment for acceptance is
excused, and the bill is not accepted.
iv.
When the drawee :
·
is incompetent to contract;
·
is a fictitious person (or could not be
found);
·
gives a qualified acceptance.
5.1.2
Dishonour by non-payment
i. A
negotiable instrument is dishonoured when the party liable to pay the
instrument fails to pay it on maturity. (Sec.
92)
ii. An
instrument is also dishonoured when presentment for payment is excused and the
instrument when overdue remains unpaid (Sec. 76).
5.2
Notice of Dishonour
When
an instrument is dishonoured (by non-acceptance or by non-payment), the holder
must give notice to all the prior parties to inform them about their liability
for the dishonour (s.93).
5.2.1
Parties who should give Notice of Dishonour
a.
Notice of dishonour may be given by the
following parties:
i.
Holder or any prior party: The
holder of the instrument at the time of dishonour may give notice to all or any
of the parties liable on the instrument (Sec. 93).
ii.
Chain
method of Notice: To
make the prior party liable, the party receiving notice of dishonour must give
notice to prior party within a
reasonable time, unless such party otherwise receives due notice (Sec. 95).
iii.
Principal or Agent: If
an instrument deposited with an agent for presentment is dishonoured, the Agent
may give notice to his principal and the principal may give notice to the
parties sought to be held liable within a reasonable time (Sec. 96).
b.
A party receiving notice of dishonour, who seeks to
enforce his right against a prior party, transmits the notice within a
reasonable time if he transmits it within the same time after its receipt as he
would have had to give notice if he had been the holder (Sec. 107).
5.2.2
Parties to whom the Notice of Dishonour should be given
i. Notice
of dishonour must be given to:
−
all the parties whom the holder seeks
to make liable.
−
agent of the party liable.
−
the legal representative in case of a
death or insolvent party.
ii.
Notice to all parties whom the holder seeks to make
liable.
Notice
of dishonour must be given to all the parties whom the holder seeks to make
liable, but not needed to be given to acceptor, maker or a drawer as they are
primarily liable upon the instrument. (sec.93) [Commercial Finances vs.
Thressia]
iii.
Notice to party or his agent, or to legal
representative or assignee.
Notice may be
given to the agent or legal representative of the party liable in case of a
dead person, or to the assignee when the person is declared insolvent (Sec.
97).
5.2.3
Time of Notice
Notice
must be given within a reasonable time. It usually depends upon the place from
where they carry on the business. However, in calculating such time, public
holidays shall be excluded (Sec. 105).
5.2.4
Rules for giving Notice of Dishonour
i. The
notice may given in writing or orally, clearly stating the causes of dishonour
and the party who is liable, A written notice sent by post is considered good
even if it is miscarried. (s.94) [Nenu Ram v.
Shri Kishen A.I.R. 1950 Raj.55]
ii. If
the parties carry on business or live at the same place, notice must reach its
destination on the day next after the day of dishonour. (Sec. 106)
5.2.5
When Notice of Dishonour is not necessary (Sec. 98)
Notice
of dishonour is not necessary when :
a. It
is dispensed with by the party entitled to the notice.
b. a
drawer of a cheque countermanded payment.
c. the
party charged could not suffer damages for want of notice.
d. the
party entitled to notice cannot be found after due search.
e. the
drawer and the drawee are the same person.
f. the
party entitled to notice, knowing the facts, promises unconditionally to pay
the amount due on the instrument.
g. a
promissory note is dishonoured.
h. Where the party
bound to give notice is unable to give notice without any fault of his own.
i. Notice of
dishonour is not required to be given to the following parties:
§ Where a bill is
dishonoured due to non-payment, the notice of dishonour need not be given to
the acceptor.
§ Where a cheque
is dishonoured (by non-payment), the notice of dishonour need not be given to
the drawee bank.
5.2.6
Instrument acquired after Notice of Dishonour
The
holder of a negotiable instrument, who has acquired it after notice of
dishonour has the rights of his immediate transferor (Sec. 59). The rights are
similar for instrument acquired after maturity.
5.2.7 Effect of Dishonour
Dishonour
renders the drawer and the indorsers liable to the holder. This liability can
only be invoked if the holder gives them such notice of dishonour.
5.3
Duties of the Holder upon dishonour
i. Notice of dishonour.
It is the duty
of the holder to give notice of dishonour to all the parties to the instrument
whom he seeks to make liable thereon (Sec. 93).
ii.
Noting
and protesting.
When a note or
bill is dishonoured it should be handed over to a Notary Public by the holder
(sec. 99). The holder can get instrument protested by the Notary Public (Sec.
100).
iii.
Suit
for money.
The holder may
file a suit against the party liable for the recovery of the amount due.
5.4
Noting and Protesting
i. When
an instrument is dishonoured, the holder can, after giving due notice of
dishonour, sue any or all prior parties liable thereon. But before that, he may
get the fact of dishonour authenticated by 'Noting' by a Notary Public.
ii. The
Notary then issues a formal certificate (called protesting) stating the fact of
dishonour and noting.
5.4.1
Noting (sec. 99)
i.
'Noting' means the recording of the
fact of dishonour on a bill or a note by a Notary Public.
ii.
After the dishonoured bill has been
handed by the holder to the Notary Public, the Notary makes a formal demand on
upon, maker, acceptor or drawee and then records the fact, date, reason of
dishonour and the Notary’s charges.
iii.
Noting is not compulsory for inland bill
or note. Not getting a dishonoured instrument noted does not in any way affect the
rights of the holder.
iv.
Noting specifies the following :-
−
Fact of dishonour,
−
Date of dishonour,
−
Reason of dishonour,
−
Charge of Notary Public.
5.4.2
Protest
i. A
formal certificate issued by the Notary Public stating the fact of dishonour is
called as ‘protest’ (Sec. 100). It must be made within a reasonable time of
maturity of an instrument.
ii. Protest for better security:
When the acceptor of a bill has become insolvent, the holder may request the
Notary Public to demand better security. If it is refused by the acceptor the
fact may also be noted and certified by the Notary Public and issue a
certificate called a 'protest for better security' (Sec. 100, para 2).
iii. If
the acceptor refuses to give better security, the holder has to wait till the
instrument matures.
5.4.2.1
Contents of Protest
A
protest must contain the following particulars :
i. The
instrument or a literal transcript of the instrument.
ii. The
names of the persons for whom and against whom the instrument has been
protested.
iii. The
fact and reason of dishonour.
iv. The
place and time of dishonour.
v. The
signature of the Notary Public.
vi. In
case of an acceptance or payment for honour, the name of the person accepting
or paying and the name of the person for whose honour it is accepted or paid
(Sec. 101).
vii. The fees paid to
the Notary Public making the protest.
5.4.2.2
Advantages of Protest
i. It
affords an authentic evidence of dishonour to the drawer and indorsers.
ii. In a
suit upon an instrument which has been dishonoured, the court shall presume the
fact of dishonour.
5.4.2.3
Notice of Protest
i. When
an instrument is required by law to be protested, notice of such protest must
be given in the same manner and subject to the same conditions as applicable to
the notice of dishonour.
ii. The
notice may be given by the Notary Public who makes the protest (Sec. 102).
5.4.2.4
Protest for non-payment after dishonour
Where
a bill drawn payable at a place other than the place mentioned as the residence
of the drawee, is dishonoured by non-acceptance, it need not be presented again
for payment. It may be protested at the place specified for payment (Sec. 103).
5.4.2.5
Protest of foreign bills
Foreign
bills must be protested if so required by the law of the place where they are
drawn (Sec. 104).
5.4.2.6
Difference
between Noting and Protesting
1.
Noting is
the preliminary step to “Protesting”.
2.
Noting is
made on the negotiable instrument by the Notary Public by way of memorandum,
while a protest, a formal certificate drawn up letter on the
basis of noting.
3.
Dishonoured
bills cannot be noted if there is no Notary Public and, therefore, these should
be protested (except bills of petty amounts) by the bank’s lawyer or other respectable
person in the prescribed from.
5.5
Compensation (sec. 117)
When
a negotiable instrument is dishonoured, the party liable is bound to pay the
amount due upon the instrument and compensation (expenses properly incurred in
presenting, noting and protesting the instrument) to the holder or indorsee.
5.5.1
Re-Exchange
Where
the person charged resides in a country other than where the instrument was
payable, the compensation should be calculated at the current rate of exchange
between the two countries on the date of dishonour. [Sec.117 [b)].
5.5.2
Compensation to indorser
The
indorser is entitled to the amount so paid with interest at 18 per cent annum
together with all expenses caused by the dishonour and payment. But he can
recover the amount only if at the time of payment he was liable on the
instrument [Sec. 117 (c)].
If
the indorser are residents of different countries, the current rate of exchange
between the two countries shall apply [Sec. 117(d)].
5.5.3 Compensation to holder
1.
The holder is entitled to the amount due upon the
instrument, together with expenses incurred in presenting, noting and
protesting it.
2.
When the person charged resides at a place
different from that at which the instrument was payable, the holder is entitled
to receive such sum at the current rate of exchange between the two place.
5.5.4
Re-draft
The
party entitled to compensation can draw a new bill upon the party liable to
compensate him, for the amount due to him together with all expenses incurred
by him. Such a bill is called a 'redraft'.
If
the re-draft is dishonoured the liability of compensation is in the same manner
as in the case of the original bill [Sec. 117 (e)].
5.6
Dishonour of cheques (Secs. 138 to 142)
− Dishonour of cheque for insufficiency of fund
− Dishonour of cheque due to stop payment
− Dishonour of cheque due to other reasons
− Presumption of holder’s right
− No Defence
− Offences by companies
− Cognizance of offences.
5.6.1 Dishonour of cheque for
insufficiency of fund (sec. 138)
a. If a
cheque is dishonoured due to insufficiency of fund, the drawer of the cheque
shall be held liable and in such a case the drawer shall be punished with
imprisonment for a term which may extend to two years, or with a fine which may
extend to twice the amount of the cheque or with both provided. [Joseph Jose v. Baby, Puthuval Puravidom poothoppu], [Mosaraf Hossain Khan v. Bhagheeratha Engg.Ltd.],
[B.Mohan Krishna v.Union of India India
b. The following
conditions must be satisfied for aforesaid punishments :-
i. the
cheque has been dishonoured due to insufficiency of funds
ii. the
payment should have been made to discharge a debt or liability
iii. the
cheque should have been presented within its validity (or within six months
whichever is earlier) by the payee or the holder in due course
iv. the
notice must be given by the payee or the holder in due course demanding payment
within thirty days
v. If
the drawer fails to make payment within 30 days of such notice.
vi. The payee or
holder in due course of the dishonoured cheque, should have made a complaint
within one month of cause of action. [C V Alexander vs. Joseph Chacko], [P.K.Koya Moideen v.G.Hariharan]
5.6.2
Dishonour of cheque due to stop payment
If there is sufficient balance in drawer’s bank
account but the drawer instructs the banker to stop payment it will attract s.138.
5.6.3
Dishonour of cheque due to other reasons
If the cheque is returned due to structural defect
(impower or overwriting in signature, date, name etc.), it may not amount to
offence u/s 138. [Babulal Nainmal Jain v. Khimji Ratanshi Dedhia],
[C.S.Rejikumar v.E.S. Sukumaran]
5.6.4
Presumption of holder’s right (Sec. 139)
It
shall be presumed unless contrary is proved that the holder received the cheque
for discharge, in whole or in part, of any debt or other liability.
5.6.5
No Defense (Sec. 140)
At
the time of issue of cheque the drawer have no reason to believe that the
cheque may be dishonoured and in such case there is no defense of prosecution
of an offence u/s 138.
5.6.6
Offences by companies (Sec. 141)
i. In
case of offences caused by a company (including Firm), the person responsible
for the conduct of the business of the company (including Directors / Partners
/ Nominated Director) as well as the company, shall be deemed to be guilty for
such an offence and will be proceeded against and punished accordingly.
ii. However, a person will not be held liable
where –
he can prove the offence was committed
without his knowledge or
has exercised necessary steps to
prevent such offense.
5.6.7
Cognizance of offences (Sec. 142)
Notwithstanding
anything contained in the Code of Criminal Procedure, 1973, [Plywood house v. Wood Craft Products Ltd.]
complaint other than writing will not
be granted by any Court in case of cognizance of any offence punishable u/s 138;
such complaint is made within one month
of the date on which the cause of action arises u/s 138 ;
no Court inferior to that of a
Metropolitan Magistrate or a Judicial Magistrate of the First Class shall try
any offence punishable u/s 138.
5.7 Place of payment governs dishonoured Cheques
Where a
promissory note, bill of exchange or cheque is made payable in a different
place from that in which it is made or indorsed, the law of the place where it
is made payable regarding dishonoured is applicable. (Sec. 135)
For more details, refer
to Business & Corporate Laws by Asok Nadhani, BPB Publications, www.bpbonline.com,
bpbpublications@gmail.com
