Dishonour of Negotiable Instruments: Types, Effects & Notice

Negotiable Instruments Act 1881 is the most significant law in India regulating negotiable instruments. It governs instruments such as promissory notes, bills of exchange, and cheques, which are necessary for effective company operations. Negotiable Instruments are critical in commercial transactions because they provide a simple, portable, and enforceable mode of payment for the exchange of goods and services. However, it is critical to comprehend the nuances of Dishonor of Negotiable Instruments. Individuals and organizations engaged in financial transactions must be able to discern between these two notions in order to properly navigate the complexity of commercial law. In this article, we will discuss dishonour of negotiable instruments.

Geeky Takeaways:

• A negotiated instrument is a written contract that promises a specific payment to a defined person or holder of the instrument.
• The Negotiable Instruments Act 1881 created a legislative framework for all types of negotiable instruments.
• Dishonour of Negotiable Instruments refers to a person’s incapacity or reluctance to honor a negotiable document, such as a promissory note or cheque.
• The act provides legal avenues for parties to protect their rights and seek resolution in the event of dishonour-related disputes or breaches, as well as to ensure justice and responsibility.

Dishonour of a Negotiable Instrument

Dishonor of Negotiable Instruments refers to a person’s incapacity or reluctance to honor a negotiable document, such as a promissory note or cheque. Some probable reasons for the dishonor of negotiable instruments include a stop-payment order, insufficient funds, or a mismatch between the agreement’s provisions and the instrument itself. Dishonored negotiable instruments typically result in certain legal fines and actions, depending on the country and kind of instrument. Following are the objectives of dishonoring a negotiable instrument.

1. Determining Non-Performance: The primary purpose is to identify scenarios in which the predominantly liable party fails to meet their payment obligations as specified in the negotiable instrument.

2. Legal Recourse: The capacity to identify dishonor enables parties to take appropriate legal action against the party in default, such as filing a lawsuit to collect the underpaid money.

3. Protection of Holder’s Interests: By explicitly describing the holder’s rights and remedies in the case of dishonor, it seeks to safeguard their interests and reduce their risk of financial loss.

4. Credibility Preservation: Parties reduce reputational risks by preserving their credibility and maintaining trust in business relationships by resolving disobedient instruments and taking appropriate steps.

Types of Dishonour

1. Dishonour by Non-Acceptance

This is specified in Section 91. Dishonor by non-acceptance is the refusal to accept a negotiable instrument. In addition, it is not accepted in the event of an exchange. This is because it is the only negotiable instrument that requires an offer in order to be accepted or rejected. In the case of dishonor owing to non-acceptance, only the manufacturers and endorsers are accountable to the bill holder if the holder sends notice of dishonor.

The following are some of the scenarios that might result in dishonest invoice approval:.

• If the receiver does not accept it within 48 days of being raised for acceptance.
• If it is used as a pretense for presenting, the invoice will not be accepted.
• If the borrower lacks the necessary qualifications to enter into the contract.
• If we cannot locate the receiver after a thorough search.
• If the lottery winner is not a real person.
• If the proof is valid.

2. Dishonour by Non-Payment

This falls under Section 92. This signifies that a promissory note, such as a check or bill of exchange, has been dishonored since the creator of the note, acceptor of the bill, or drawee of the check failed to pay when he was required to do so. A promissory note, bill, or check is dishonoured if the creator, drawee, or acceptor of the cheque fails to make payment when needed. Furthermore, a holder of a promissory note or bill may declare it dishonoured if the creator or acceptor expressly excuses the presentation of payment when payment is past due. It is critical to understand that all bill endorsers and makers are accountable to the holder in the event of bill dishonor, provided the holder issues a notification of dishonor. It should be noted that a drawee is only accountable to the holder if he or she fails to pay.

Effects of Dishonour

On dishonor by non-acceptance, the holder has the right to sue all parties involved, even if the bill has not matured. If the negotiable document is dishonored for whatever reason, the other parties involved are held liable.

Notice of Dishonour

1. The notification of refusal to pay or accept the document must be issued immediately to the persons whom the holder wishes to hold accountable.

2. Except for the creator and acceptor of the instrument, all parties will be released if the holder fails to provide notice. Notice must be made within a reasonable period after the dishonor.

3. Giving notice of dishonor is primarily intended to notify or warn the party or person accountable. The philosophy is founded on the principles of justice and equality.

Notice to Whom?

The notice can be given to:

• Endorser.
• Authorized agents include party representatives, legal representatives of deceased individuals, and receivers or official assignees of insolvents.
• The maker, acceptor, and drawer of the instrument receive no notice because they are the major debtors.

Mode of Giving Notice

Notice can be provided orally, in writing, or in a combination of both. Any form can be used for this purpose; however, it must explicitly or implicitly tell the parties to whom the notice is being served. It should be emphasized that a written notification is delivered via post.

What is a Reasonable Time?

The appropriate time can be determined based on the distance and kind of communication between the parties. It should be mentioned that public holidays will be eliminated from the calculation of acceptable times. If notice is not delivered to any of the parties to the instrument within the period required, that party will be freed from obligation under the instrument. To be more specific, notice of dishonor is excused when it is not sent to the drawer and endorser of the instrument.

When is Notice of Dishonor Unnecessary?

Notice of Dishonor is not required in some cases, such as:

• When it is distributed or waived by the appropriate party. For example, if the endorser signs the instrument ‘notice of dishonor waived’.
• When the drawer cancels or countermands the payment.
• In a circumstance where the accused party would not suffer damages due to a lack of notification.
• When we cannot locate the party entitled to notice after a thorough search.
• Omission is due to unforeseen circumstances. For example, suppose the holder is gravely ill.
• In the case of an acceptor, a drawer.
• If the promissory note is not negotiable.
• When the party receiving notice agrees to pay unconditionally.

Noting under Negotiable Instruments Act

• When a promissory note or bill of exchange is dishonoured due to non-acceptance or non-payment, the holder may have it documented by a notary public on the instrument, a paper attached to it, or both.
• Such a note must be written within a reasonable period following dishonor and must include the date of dishonor, the cause, if any, assigned for such dishonor, or, if the instrument has not been formally dishonoured, the reason why the holder considers it dishonoured, and the notary’s fees.

Protest under Negotiable Instruments Act

As specified under Section 100 of the Negotiable Instruments Act 1881, when a promissory note or bill of exchange is dishonoured due to non-acceptance or non-payment, the holder may, within a reasonable period, have the dishonor documented and confirmed by a notary public. Such a certificate is known as a Protest.

Protest for Improved Security: When the acceptor of a bill of exchange becomes insolvent or his credit is publicly impeached before the bill’s maturity date, the holder may, within a reasonable time, cause a notary public to demand better security from the acceptor, and if that is refused, the facts may be noted and certified as aforesaid. Such a certificate is known as a protest for improved security.

Contents of the Protest

• A protest under Section 100 must contain the following:
• Either the instrument itself or a copy of the instrument and everything written or printed thereon.
• The name of the person for whom and against whom the instrument has been protested.
• A declaration that payment or acceptance, or better security, as the case may be, has been required of such person by the notary public; the conditions of his answer, if any, or a statement that he offered no answer or could not be located.
• When the note or bill has been dishonoured, the location and time of dishonor; when greater security has been rejected, the place and time of rejection.
• The subscription of the notary public making the protest.
• In the event of an acceptance for honor or a payment for honor, the name of the person by whom, the person for whom, and the method in which such acceptance or payment was given and executed.
• A notary public may make the demand indicated in clause (c) of this section in person, through his clerk, or by registered letter, as allowed by agreement or use.

Conclusion

In summary, dishonoring Negotiable Instruments under the Negotiable Instruments Act has significant legal repercussions and serves as a protection for financial transaction integrity. The act explicitly defines what occurs when negotiable instruments, such as promissory notes and cheques, are dishonoured. It highlights the importance of keeping one’s word while making financial commitments and maintaining the integrity of negotiable instruments in commercial transactions. The Act improves the overall efficacy and dependability of financial transactions by addressing dishonor. It supports the essential ideals of fairness and good faith, creating a business environment in which parties feel comfortable conducting financial transactions. Simply expressed, the Negotiable Instruments Act is critical to preserving the legality and reliability of negotiable instruments, which in turn contributes to the financial system’s stability and confidence.

Dishonour of Negotiable Instruments- FAQs

Which act covers the provision regarding the dishonor of negotiable instruments?

The Negotiable Instruments Act 1881 covers the provisions regarding the dishonor of negotiable instruments. The provisions are included under Chapter VIII of the Act.

What criminal recourses does the holder have in cases of dishonor?

When a negotiable instrument is dishonored, the holder has the option of seeking legal action, filing a lawsuit, requesting a charge from the defaulter, or seeking damages for losses incurred as a result of the dishonor.

What are a few normal causes of a negotiable device’s dishonor?

A negotiable device can be dishonoured for a variety of reasons, including insufficient money, mismatched signatures, outdated devices, prevent-price orders, and unapproved changes.

What precautions can be taken to shield against dishonor in the course of commercial enterprise transactions?

Parties should ensure that negotiable papers are properly completed, contain comprehensive and accurate information, and are backed by sufficient money or credit to avoid dishonor in commercial business transactions.

Will a notice of dishonor by Stanger be considered valid?

If a stranger gives notice of dishonor, it will be regarded as invalid in the eyes of the law.

Note: The information provided is sourced from various websites and collected data; if discrepancies are identified, kindly reach out to us through comments for prompt correction.