Dishonour of negotiable instrument | Definition | Types of dishonor

Dishonour of negotiable instrumentsWhat is a Dishonour of negotiable instrument?

Dishonour of negotiable instrument means loss of honour or respect for the instrument in question on the part of the maker, drawee, or acceptor, as the case may be, which eventually results in non-realization of payment due on the instrument.

Dishonour by non-acceptance:

Any type of , i.e., bill of exchange, promissory note, or cheque may be dishonoured by non-payment by the drawee/acceptor thereof. But a bill may also be dishonoured by non-acceptance because bill of exchange is the only negotiable instrument which requires its presentment for acceptance and non-acceptance thereof, can amount to dishonour.

When is a bill said to be dishonoured by Non-Acceptance?

A bill is said to be dishonoured by non-acceptance in the following circumstances.

  1. When the drawee or one of the several drawees, not being partners, commit default in acceptance upon being duly required to accept the bill. In this regard Section 63 expressly provides that the holder must, if so required by the drawee of a bill of exchange presented to for acceptance, allow the drawee forty-eight hours (exclusive of public holidays) to consider whether he will accept it.
  2. Where presentment is required and the bill remains unrepresented.
  3. Where the drawee is incompetent to enter into a valid contract.
  4. Where the bill is given a qualified acceptance.
  5. If the drawee is a fictitious person.
  6. If the drawee cannot be found even after reasonable search.
  7. Where the drawee has either become insolvent or is dead and the holder does not present the bill to the assignee or legal representative of the insolvent or deceased drawee.

It is relevant to note that where a drawee-in-case-of-need is named in a bill of exchange or in any endorsement thereon, the bill is not dishonoured until it has been dishonoured by such drawee.

Dishonour of negotiable instrument 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 commit default in payment upon being duly required to pay the same. Also the holder of a bill or pro-note may treat it as dishonoured, without placing for payment when presentment for payment is excused expressly by the maker of the pro-note, or acceptor of the bill and the note or bill when overdue remains unpaid.

Dishonour by non-acceptance vs Dishonour by non-payment:

If a bill is dishonoured either by non-acceptance or by non-payment, the drawer and all the endorsers of the bill are liable to the holder, provided notice of such dishonour is given to them. The drawee, on the other hand, shall be liable to the holder only in the event of dishonour by non-payment.

Dishonour of Cheque for insufficient of funds in the account:

A cheque drawn by a person on an account maintained by him with a bank for payment of any amount of money to another person can be returned unpaid for lack of enough funds in the said account. This is called dishonour of cheques for insufficiency of funds (in the drawer’s account). In such cases, the drawer is also criminally liable for this offense and may be punished with imprisonment for a term, which may extend to one year, or with fine that may extend to twice the amount of the cheque, or with both.

Dishonour of cheque vs promissory note:

A cheque being drawn on specified bank and not expressed to be payable otherwise than on demand is never presented to the drawee bank for acceptance and same is the case of a promissory note. However, a pro-note made payable at a certain period after sight is required to be presented for sight, but it is never subject to presentment for acceptance.

How is a party to a negotiable instrument discharged?

A party to a negotiable instrument is discharged in the following ways

  • By cancellation of the name of a party to the instruments
  • by release of any party to the instruments
  • by payments
  • by allowing drawee more than 48 hours to accept
  • by delay in presenting a cheque for payment
  • by payment in due course of a cheque (payable to order)
  • by taking qualified acceptance
  • by non-presentment for acceptance of a bill of exchange
  • by operation of law
  • by material alteration

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