Types and Procedure of Dishonor of Negotiable Instruments

What is Dishonor Of Negotiable Instruments?

‘Dishonor’ in mercantile law means the refusal or neglect to accept a bill of exchange or other negotiable instrument on presentation for acceptance or to not pay it at maturity. It is basically a refusal to honor the instrument.

Dishonor of a negotiable instrument can be done by two types :-

1. Dishonor by Non-Payment

2. Dishonor by Non-Acceptance

1. Dishonor by Non-Acceptance

Dishonor for non-acceptance can only be done in the case of a bill of exchange. Eg:- When the payee contacts the acceptor i.e. drawee to accept the bill of exchange, or when the drawer sends the bill of exchange to the drawee to accept the order, he refuses to do so.

This ‘refusal to accept’ can happen in many ways which are shown in Section 91 of the act. They are :-

1. When drawee makes default (more than 48 hours or the time allotted by the payee with other liable parties consent) in acceptance upon being duly required to accept the bill.
2. When the drawee is incompetent to contract, he cannot give acceptance and the bill is dishonored.
3. If the drawee has given a qualified acceptance, it can be treated as dishonor of the bill.
4. When the drawee is a fictitious person or when after reasonable search he cannot be found.

Effect of Dishonor by Non-Acceptance :-

The effect of dishonor by non-acceptance is that the holder of the bill can sue/ start an action against the drawer and the indorsers. He does not need to wait for the maturity of the bill in this case.

2. Dishonor by Non-Payment

It has been covered under Section 92 of the act. It clearly states that in case of promissory note - non-payment by maker ; in case of bill of exchange - non-payment by acceptor/drawee and in case of cheque - non-payment by the drawee of the cheque before the maturity of the instrument will constitute dishonor by non-payment. Maturity means the date on which the bill becomes due.

Notice of Dishonor :-

Now that dishonor has happened, a cause of action arises and one can file a suit. But before instituting such a suit, one will send a ‘notice of dishonor’ to the parties liable.

Object of such notice :-

The object of notice of dishonor is to inform or warn the party/ies or the person who is liable about the dishonor of the instrument. It also helps the drawer to protect himself against the drawee if he has refused to accept the bill.

Sending such notice is necessary and if not sent, will discharge the parties who needed to get the notice before the suit. In order to make a party liable, it is necessary that the notice of dishonor should have been sent to him.

Given by :-

The notice of dishonor must be given by the holder, or by any person liable on the instrument.

Notice to whom :-

The holder in due course will give the notice to all prior indorsers in case of promissory note and the drawer and all prior parties in case of bill of exchange.

The holder gets only the right to send the notice to the drawer and prior indorser in bill and prior indorser in notes.

In cheque, the notice is given to the drawer and if the indorsement of cheque has happened, then to the drawer as well as the earlier indorsers.

On reading para 2 of Section 93, we understand that the maker of a promissory note, or the drawee/ acceptor of a bill do not need to receive  a notice of dishonor. This is because the parties doing dishonor do not need the notice of dishonor.

Effect when notice is not given :-

The omission on the part of the holder to give due notice of dishonor would discharge the person to whom notice should have been served but is not served from their liability.

The holder will forfeit their right of action against all parties which are entitled to notice.

Circumstances When Notice of Dishonor Not Necessary :-

Section 98 talks about the circumstances where notice of dishonor is unnecessary. They are:-

1. Waiver

When the person who is entitled to notice, waives his right to receive notice. This can be done through facultative indorsement too where the need for notice can be dispensed with at either the time of drawing the negotiable instrument or at the time of indorsement.

2. When drawer countermanded the payment

‘Countermand’ means ‘'to command the opposite of’. In this context, it means that the drawer has given a new and opposite order to his previous one for the purpose of avoiding or suspending the payment he had to do.

In such cases, the drawer knows of the default and thus does not need a notice of dishonor.

3. When the party could not suffer more damage for want of notice

In these cases, the party charged would not suffer damage for want of notice. Eg:- A gives a cheque for 500 rupees while he knows that his account only has 150 rupees. He will suffer no damage from dishonor of the bill and does not require notice.

4. When the party entitled to notice cannot be found

When the party entitled to notice cannot be found after due search the need of giving notice is not there.

5. Promise to pay

When the party entitled to receive notice knows of the fact of dishonor and promises unconditionally to pay the rest of the amount due on the instrument. This promise can be implied or express.

Noting and Protest

Noting

After dishonor, the cause of action arises and the holder can sue at any time within a reasonable period after that. But without performing noting and protest, most of the burden of proof lies on the plaintiff (holder), impacting the case in the defendant's favor.

Noting is the making of a memorandum certifying that an instrument was presented for payment or acceptance and dishonored. It helps the court draw certain presumptions in favor of the plaintiff and thus reduces their burden of proof and strengthens their case.

Section 99 talks about the notice of dishonor. This is done by going to the ‘notary’ and to record/ note the fact of dishonor and authenticate it.

Process :-

Firstly, the person recording dishonor has to apply within reasonable time before the notary public to ‘note/record dishonor’. This is done by the notary public making a formal demand to the maker/drawee/acceptor so as to verify the fact of dishonor. When the party refuses to pay, then the notary public will record the fact of dishonor.

Particulars to be contained in noting :-

1. Fact of dishonor;
2. Date of dishonor;
3. Reason why such holder treats it as dishonored (such as non acceptance in 48 hours by the acceptor); and
4. Notary charges.

Protest

After noting, the notary will provide you with a certificate which is called ‘protest’

When a promissory note or bill of exchange has been dishonored, the holder may, within reasonable time cause such dishonor to be noted and certified by a notary public and such certificate shall be called protest.

Thus protest is the formal notary certificate attesting the fact of dishonor.

Advantage :-

When one sues with a certificate of protest, the court will draw a presumption of proof under Section 119. On presentment with a certificate of protest, the court shall presume the fact of dishonor, unless and until it is disproved. Thus the burden of proof will shift to the drawer to prove that the fact was not dishonored and this presumption is in favor of the one holding the certificate.

Content of Protest :-

Section 101 talks about the contents of a protest. They must contain :-

1. The instrument itself or a literal transcript of the instrument and of everything written or printed on it,
2. The name of the person for whom and against whom the instrument has been protested,
3. The demand of the notary public and the terms of the answer received or no answer was received or the person could not be found,
4. The place and time of dishonor,
5. The signature of the notary public, and
6. In case of acceptance for honor or payment for honor, the names of the person by whom and for whom and the manner in which such acceptance/payment was ordered and effected.

 

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