DISHONOUR AND DISCHARGE
OF NEGOTIABLE INSTRUMENT
A NEGOTIABLE INSTRUMENT
MAY BE DISHONOURED BY (I) NON-ACCEPTANCE (II) NON-PAYMENT
Dishonour by non-acceptance
A bill of exchange is said to be
dishonoured, by non-acceptance in the following cases: -
1.
When the drawee or one of the several drawees (not
being partners) makes default in acceptance upon being required to accept the
bill (48 hours required).
2.
Where the presentment for acceptance is excused and the
bill is not accepted.
3.
Where the drawee is incompetent to contract.
4.
Where the drawee makes the acceptance qualified.
5.
If the drawee is fictitious person or after reasonable
search cannot be found.
Dishonour by Non-payment
A promissory note,
bill of exchange or cheque is said to be dishonoured by non-payment when the
maker, acceptor of the bill or drawee of the cheque makes default in payment
upon being duly required to pay the same . (Sec 92)
Also, a promissory note or bill
of exchange is dishonoured by non-payment when presentment for payment is excused
expressly by the maker of the note or acceptor of the bill and PN or BE remains
unpaid.
Effect of Dishonour
·
As soon as a
negotiable instrument is dishonoured (either by non-acceptance or by
non-payment) the holder becomes entitled to sue the parties liable to pay
thereon.
·
The holder MUST,
however, give notice of dishonour to all the parties against whom he intends to
proceed.
Notice of Dishonour
·
Notice of
dishonour means formal communication of the fact of dishonour.
·
Such a notice
also serves the purpose of enabling the person so notified to protest himself
against the prior parties.
Notice By Whom
·
Notice of
dishonour must be given by the holder or by some party to the instrument who
remain liable thereon;
·
Any party
receiving the notice of dishonour must also transmit the same to all prior
parties in order to make them liable to him.
·
No suit can be
filed against the prior party if he has not transmitted the fact of dishonour
of instrument.
·
One person can
give the notice only.
·
Duly authorised
person can also give notice.
Notice to Whom
·
Notice of
dishonour must be given to all parties (other than the maker of note, acceptor
of a bill or drawee of a cheque) to whom the holder seeks to make liable or
other duly authorised agents.
·
In case of death
of a person, notice must be given to his legal representative and were he has
been declared insolvent to his Official Assignee.
·
In case after
dispatch of notice and before it receipt the person dies, it will be treated as
if the notice has been served. (Not knowing the fact).
Mode of Giving Notice
·
It may be oral or
in writing. If it is in writing it must be sent by post
·
It should be
given in reasonable time.
What is Reasonable
Time?
In determining what is
reasonable time the consideration is to be given: -
1.
Nature of the
instrument
2.
The usual course
of dealing with respect to similar instruments
3.
Distance between
the parties
4.
While calculating
public holidays shall be excluded.
5.
In case a party
received the notice of dishonour is to transmit the same to his prior parties,
the transmission should be done in reasonable time.
When Notice of
Dishonour is Unnecessary
1.
Where the
indorsee while signing in that capacity adds the words ‘notice of dishonour
waived’.
2.
Where the drawer
of a cheque countermanded payment.
3.
Where the party
charged could not suffer damage for want of notice such as bank account closed
or in case of accommodation bill.
4.
Where the party
to whom the notice is to be given not traceable or the party who has to give
notice is unable to giver notice like death, accident or serious illness.
5.
When the drawer
also happens to be acceptor.
6.
In case the
Promissory Note which is not negotiable
7.
When the party
entitled to receive notice promise to pay unconditionally the amount as due
after due date.
Consequences of not
giving notice of dishonour
Any party to negotiable
instrument (other than maker of a note, acceptor of a bill or drawer of cheque)
is discharged from his obligation under the instrument unless circumstances are
such where no notice is required to be sent.
Noting
·
In case a
promissory note or bill of exchange has been dishonoured by non-acceptance or
non-payment notice, the holder may cause such dishonour to be noted by Notary
Public.
·
Noting must be
made within reasonable time after dishonour and must specify (i) the date of dishonour (ii) the reason
assigned for dishonour and (iii) the notary’s charges.
Protest
“Protest” is a formal
certificate issued by the notary public to the holder of the bill or note on
his demand (noting is merely a record of dishonour on the instrument).
Contents of Protest
1.
The instrument
itself or a literal transcript of the instrument and of every thing written or
printed thereon,
2.
The name of the
person for whom and against whom the instrument has been protested.
3.
The fact and
reason for dishonour
4.
The place and
time of dishonour
5.
The signature of
notary public
6.
In case of
acceptance for honour or payment for honour, the names of the persons by whom
and for whom it is accepted or paid.
Discharge of the
Instrument
·
A negotiable
instrument is said to be discharged when it becomes completely useless.
·
In the following
cases the instrument is deemed to be discharged: -
1.
When the party
liable to make payment on the instrument makes the in due course to the holder.
2.
When the acceptor
in his own right at or after maturity, holds the bill of exchange, which has
been negotiated,, the instrument is discharged.
3.
When the party
primarily becomes insolvent.
4.
When the holder
cancels the instrument with an intention to release the party primarily liable
thereon from liability.
Discharge of One or
More Parties.
·
A party is said
to be discharged from his liability when his liability on the instrument comes
to an end.
·
Discharge of one
or more party does not discharge the instrument and rights under it can be
enforced against those parties who continue to be liable thereon.
One or more parties to a
negotiable instrument is/are discharged from liability in the following ways:-
1.
By
cancellation-When the holder of a
negotiable instrument deliberately cancels the name of any of the party
liable on the instrument with intent to discharge him from liability.
2.
By release – If the holder of a negotiable instrument releases
any party to the instrument by any method other than cancellation of names.
3.
By payment
4.
By allowing
drawee more than 48 hours to accept
5.
By taking
qualified acceptance
6.
By not giving
notice of dishonour
7.
By
non-presentment for acceptance of bill
8.
By delay in
presenting cheque
9.
By material
alternation like:
(i)
Any alteration of
the date, the sum payable, the time of payment and place of payment
(ii)
Alteration by the
addition of anew party.
(iii)
Alteration of the
rate of interest.
(iv)
Tearing off the
material part of the instrument
Alteration not
vitiating the instrument
1.
Alteration
made for the purpose of correcting a mistake or clerical error
2.
Alteration
made to carryout the common intention of the original parties
3.
Alteration
made before the instrument is issued
4.
Alteration
made with the consent of the parties liable on the instrument
5.
Conversion of
bearer cheque into order
6.
Filling blanks in
the case of inchoate or incomplete instrument
7.
Conversion of
blank endorsement into an endorsement in full.
8.
Making qualified
acceptance
9.
Alteration which
result of the accident.
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