Notice of Dishonour

You might have heard of a cheque bouncing due to insufficient funds. There might arise disputes in regard to acceptance of a negotiable instrument, similar to the one mentioned above. The resolution of such cases involves a procedure mandated by law. In fact, the first step to such a procedure requires the holder or the liable party to give notice of dishonour.

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Dishonour of a Negotiable Instrument

Recollect that a negotiable instrument is a document that guarantees the payment of a sum of money, either on demand or at a set time, with the payer usually named on the document.

The Negotiable Instruments Act came into existence to regulate and resolve disputes relating to the negotiable instruments in use. Appropriately, the accepted negotiable instruments include- a promissory note, bill of exchange or cheques, drafts, and certificates of deposit.

Dishonour of a negotiable instrument means the loss of honour for the instrument on the part of the maker, drawee or acceptor, which renders the instrument unsuitable for the realization of the payment.

Note that the dishonour of a negotiable instrument can be done by the maker, drawee or the acceptor depending on the case.

Further, Section 64 lays down the general rule as to presentment of negotiable instruments for payment. It says all notes, bills, and cheques must be presented for payment thereof respectively by or on behalf of the holder during the usual hours of business and of the maker or acceptor, and if at the banker’s within banking hours. To point out, the presentment of payment is excused in the case of dishonour.

Learn more about Classification of Negotiable Instruments here in detail.

Cases of Dishonour

The above means that there can be several cases leading to dishonour of a negotiable instrument, some of which are:

• When the maker, drawer or acceptor actively does something so as to intentionally obstruct the presentment of the instrument, e.g., deprives the holder of the instrument and keeps it after maturity.
• When his business place is closed on the due date.
• In a situation, when there is no person present to make payment at the specified place for payment.
• When we cannot find the person even after due searching.
• In the case of a promise to pay notwithstanding non-presentment.
• When the party entitled to presentment waives the presentment in an express or implied manner.
• When there would have been no damage to the drawer in the case of non-presentment.
• If the drawer is incompetent to contract.
• In a case where the drawer and the drawee is the same person.
• In the case of the situation that renders the presentment impossible for e.g. the declaration of war between the countries of the holder and the drawee.
• When there is a non-acceptance on some other grounds, even though the presentment has been irregular.

Browse more Topics under Negotiable Instruments Act

• Definition of Negotiable Instrument
• Classification of Negotiable Instruments
• Promissory Notes
• Bills of Exchange
• Parties of a Cheque and Essentials
• Crossing and Types of Cheque Crossing
• Liability of Parties – Cheque
• Endorsement of Instruments
• Presentment for Acceptance
• Hundi
• NEFT and RTGS

Dishonour by Non-Payment

A promissory note, bill or cheque is dishonoured if the maker, drawee or acceptor of the cheque commits default in payment upon being required to do the same.

Furthermore, a holder of a promissory note or bill may call it dishonoured if the maker or the acceptor expressly excuses the presentment of payment when payment remains overdue.

It is important to realise that all the endorsers and maker of a bill are liable to the holder in case of dishonour of the bill, provided the holder issues notice of dishonour.

Further note that a drawee is liable to the holder only in the case of dishonour by non-payment.

Dishonour by Non-Acceptance

Dishonour by non-acceptance is a situation of refusal to accept a negotiable instrument. Further, we generally observe dishonour by non-acceptance in the case of a bill of exchange.

This is because it is the only kind of negotiable instrument that requires presentment for acceptance or non-acceptance.

Also, in case of dishonour by non-acceptance, only the makers and endorsers are liable to the holder of the bill, provided the holder issues a notice of dishonour. Some circumstances that lead to the dishonour of a bill by non-acceptance are:

• When the drawee refuses to accept it within 48 of presentment for acceptance.
• In the case of an excuse of presentment, leading to a non-acceptance of the bill.
• When the drawee is incompetent to contract.
• When we cannot find the drawee after a reasonable search.
• If the drawee is a fictitious person.
• When acceptance is a qualified one.

Notice of Dishonour

In the case of dishonour of a negotiable instrument by non-acceptance or non-payment, a liable holder should notify all the parties of his liability by issuing a notice of dishonour.

Upon receiving a notice of dishonour, a party must issue a notice of dishonour to other parties rendering them liable to himself, within a reasonable amount of time.

To point out, the purpose of a notice of dishonour is to notify a party of his liability. Further, in case of a drawer, it helps to protect himself in case of a dishonour occurring at the end of a drawee or acceptor.

In fact, the notice of dishonour is so important that an omission to it discharges all parties other than the maker or acceptor.

Further, a notice of dishonour can be oral or written. However, it must be formal and should be issued within a reasonable amount of time.

Unnecessary Situations For A Notice Of Dishonour

There are certain situations where we do not require a notice of dishonour, which are:

• When it is dispensed or waived by the entitled party. For e.g., if the endorser writes along with the instrument- ‘notice of dishonour waived’.
• When the drawer himself cancels(countermands) the payment.
• In a situation where the charged party would not suffer damages for the want of notice.
• When we cannot find the party entitled to notice after a due search.
• When omission is a result of unavoidable circumstances. For example, in the case of the holder being critically ill.
• In the case of an acceptor is a drawer.
• If the promissory note is non-negotiable.
• When the party entitled to notice agrees to pay unconditionally.

 Solved Example For You

Q: What should a liable holder do in case of dishonour of the negotiable instrument?

Ans: In case of dishonour, a liable holder should issue a notice of dishonour to all the concerned parties in order to express his liability. Note that,  he should issue a notice within a reasonable period of time.