• Pratibha Kumari

Dishonour of Negotiable Instruments

Authored By- Pratibha Kumari


In today’s modern world, huge amounts are paid off via cheques, bill of exchange, or drafts. These are considered to be the easiest mode for clearing off huge amounts than that of cash payment. These are all types of Negotiable Instruments. NI Act, 1881 was introduced with the view to regulate and resolve any variance related to negotiable instruments. There are two ways of dishonouring the Negotiable Instruments- by non-acceptance (only in case of a bill of exchange) and by non-payment (in any kind of NI including bill of exchange). Legal action could be taken once the negotiable instrument (cheque) is dishonoured under sec. 138 of NI Act, 1881.


Negotiable Instrument means a document that assures the payment of money, either on-demand or on a prescribed period. It contains the name of the person to whom the payment is made. Promissory Notes (P.N.), Cheque, bill of exchange (B.O.E.), etc. are types of Negotiable Instruments. The provisions related to the dishonour of Negotiable Instruments are legislated under Chapter VIII (containing 8 sections Sec. 91-98) of Negotiable Instruments Act, 1881.

A Negotiable Instrument is said to be dishonoured when the maker (in case of P.N.), drawee (or cheques), or acceptor (of B.O.E.) fails in clearing off or makes default in paying off his liability which lies on him. Bouncing of cheque, if the maker, acceptor, or drawee of N.I. intentionally keeps the instrument to himself till the maturity period, thus, depriving the holder of getting the payment of the amount prescribed in the instrument, etc. Bill of exchange can be dishonoured by either non-acceptance or non-payment and cheque and Promissory Notes could be dishonoured through non-payment only. In case if negotiable instrument is dishonoured, the party defaulted should be charged with such liability.

Types of NI

1. Promissory Notes- Sec. 4 of NI Act,1881 defines this term as a document (but neither a banknote nor a currency note) carrying an unqualified undertaking, inscribed by its maker, promising/ assuring the payment of a prescribed amount to the bearer of the instrument.

2. Bill of Exchange- Sec. 5 of NI Act, 1881 defines BOE as a written document containing an unconditional order inscribed by its maker, giving direction to the particular person to pay a specified amount to the bearer of that instrument. Two different debts can be discharged by a single BOE.

3. Cheque- Sec. 6 prescribes that a cheque is a B.O.E. drawn upon a particular banker, payable on demand, includes an electronic image of a curtailed cheque and a cheque in the electronic form. The payment through cheque is always made via a bank account.

Legal Provisions

Kinds of Dishonour

1. By Non-Acceptance- Under the Act of 1881, sec. 91 specifically deals with the dishonour done by non- accepting the Negotiable Instrument. This section provides that dishonour by non-acceptance could only be done of a bill of exchange. Non-acceptance is generally a condition where a person denies accepting the negotiable instrument. Sec. 91 says that when a drawee/s (not partners) defaulted in accepting the bill of exchange (within 48 hours of the period when the bill is presented for acceptance) or bill is not presented, or drawee cannot be traced out after having reasonable search or drawee is not in the capacity to contract or acceptance of bill is qualified, then the bill is said to be dishonoured.

2. Dishonour by Non-Payment- This provision is covered under Sec. 92 of Act, 1881. When the accountable party i.e. receptacle of Promissory Notes or acceptor of a bill of exchange or drawee of cheque defaulted in making payment of a particular sum (mentioned in their respective negotiable instruments) till the date prescribed. The dishonour can also be said to be done if the answerable party makes the part payment and the rest amount is not paid even till the maturity period expires.

Legal procedures in case of Dishonour

1. Notice of Dishonour (Sec. 93 of Act, 1881)- After the dishonour of a negotiable instrument had been done, the holder of NI should send notice of dishonour to all the parties (whose liability to pay was there) regarding his liability. There must be an official communication of the dishonour of NI. Providing mere knowledge does not include under the notice of dishonour. The notice must be given within a reasonable period. Omission to send Notice of dishonour will discharge all the parties except maker or acceptor.

2. Mode of sending the notice (Sec. 94)- Notice may be oral or written (sent by post) or partly oral and written. The notice could be sent at the place of residence or business of the person whom it is intended. The notice must expressly inform the defaulted party regarding dishonour.

3. Sec. 95- On receipt of notice of dishonour by one party, he should serve the notice of dishonour, within a reasonable period, to other parties making them liable to him.

4. Sec. 97- Notice of dishonour is said to be sufficient even if the party in whose name the notice is send-off is dead and the party sending it is ignorant about the fact of his death

5. Redundant situations for notice of dishonour (Sec.98)- There are certain cases where the notice of dishonour is not required. These are- When the entitled party himself waives the notice, drawer himself abandons the payment, the entitled party cannot find out after reasonable search if acceptor is himself drawer, if the omission is done due to unavoidable circumstances, or party charged could not suffer the damages for want of dishonour notice.

Compensation in case of dishonour (Sec. 117)

The following rules are laid down under sec. 117 of Act, 1881 regarding the liable person paying compensation to the holder of NI-

1. Holder or bearer of NI is entitled to get the amount due together with the expenses incurred in presenting, noting, and protesting it.

2. If the charged person’s resident differs from the place where the instrument is payable, the holder should be entitled to receive a sum at the current rate of exchange between the two places, set on the date of dishonour.

3. Endorsers having liability who had already paid the due amount given in the instrument will be entitled to the amount paid at the rate of 18% per annum.

4. When the charged person and an endorser reside in different places, then, the endorser would be entitled to get the sum at the current rate of exchange between those two places.

5. The party liable to get damages makes a bill (for the due amount plus all expenses incurred by him) upon the party liable to pay damages to the former, which will be payable on demand. Along with the bill, NI and protest (if any) should be attached. If such a bill is dishonoured, the one who is dishonouring the bill should be made liable to pay compensation in the same way as in the primary bill.

Dishonour of Cheque

Sec. 138- When a cheque is given by a drawer, whose account had been maintained in the bank, to the person entitled to get the payment, for the discharge of any financial liability (like debt, etc.) and because of the desired amount for payment is insufficient in the account or the payment amount exceeds the total sum deposited in the bank account, bank dishonour the cheque, the drawer of that cheque would be liable for such offence and sentenced with the imprisonment which may exceed up to 2 years or with fine payable up to twice the amount mentioned in cheque or both.

The cheque must be presented to the bank within 6 months, counted from the date of drawal or period of its validity, whichever is prior. Within 30 days from the date of the cheque return memo, the person who received it must show the sign (of unpaid) from the bank. Notice shall be given to the drawer within 15 days for reimbursement of the due amount to the holder of the cheque.

In, Dalmia Cement (Bharat) Ltd. v. m/s Galaxy Trades and Agencies Ltd.[1], SC held that sec. 138 of NI Act bounds the person with strict obligation as far as the cheque is concerned. The statute related to NI is basically for the business sphere, enforceable to facilitate the person with an adequate remedy in case of any problem, and the amount mentioned in the instrument could be redeemed.


Negotiable Instruments provides an easier way to make payments than cash. But a dishonour of NI is said to be done when either it is not accepted or not paid. In either case, the holder had the remedy to file a case and demand a due amount. Notice is given to the person who has the obligation of payment, to acknowledge him that NI had been dishonoured and the latter was held liable.

[1] (2001)INSC-0074