Dishonour, Noting and Protest

Index Roll number Name Topic Slide number 2259 Reena Begum Dishonour of negotiable instrument 3-15 2301 Shobita Rani When a notice of dishonour is unnecessary Dishonour of cheque 16-34 2307 Harinder Kaur Action to be taken by holder upon dishonour 35-43

Dishonour, of negotiable instrument

DISHONOUR OF NEGOTIABLE INSTRUMENT A negotiable instrument is said to have been dishonoured when the payment is not made on the due date of the instrument by the payer (i.e. the maker of a promissory note, drawee of a bill of exchange and drawee bank in case of a cheque). That means :- on due date ; when the payee presents the instrument ; for procuring payment ; but the payer refuses to pay ;

The instrument is said to be dishonoured The Negotiable Instrument Act, states that a negotiable instrument can get dishonoured when it is not accepted i.e., on non- acceptance. Dishonour of Negotiable Instrument Only for a bill of exchange By Non-Acceptance For all instruments bill of exchange promissory note & cheque By Non-Payment

Dishonour by Non-acceptance of Bill of Exchange :- (section-91) Since presentment for acceptance is required only of a bill exchange, it is only the bill of exchange which could be dishonoured by non- acceptance. Section 91 provides that the dishonour of a bill of exchange, by non-acceptance, may take place in any of the following ways;- When a bill of exchange is presented on acceptance and the drawee or the drawees makes default in acceptance. U/S 33 & 34, if there are several drawees (who are not partners) and all of them do not accept the bill of exchange. U/S 63, if the drawee does not accept within 48 hours of the presentation of the bill to him, the bill is deemed to be dishonoured because the drawee is entitled to only 48 hours time (exclusive of public holidays) to consider whether he will accept or not.

4) Where presentment for acceptance is excused and the bill is not accepted, for example, if the drawee cannot after a reasonable search, be found, the bill is dishonoured. 5) where the drawee is incompetent to contract, the bill is treated to be dishonoured. 6) U/S 86, when the drawee makes a qualified acceptance, the holder may treat the bill of exchange as having been dishonoured. It is expected that the drawee will make an unqualified acceptance. If the drawee makes a qualified acceptance and the holder agrees that all those parties who do not consent to such an acceptance are discharge from their liability towards the holder.

II) DISHONOUR BY NON-PAYMENT (Section 92) Under section 92 of the negotiable instruments act, 1881 : “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 makes default in payment upon being duly required to pay the same.” All negotiable instruments can get dishonored u/s 92 when :- On the maturity date i.e. due date ; The negotiable instrument is presented by payer to payee for payment i.e. the payee presents promissory note to the maker for payment.

ii the drawer presents bill of exchange to the drawee for payment . iii however a customer can anytime present cheque to the bank for payment (as a cheque is always payable on demand). On presentation of instrument for payment, the payer must pay i.e. The maker must pay to the payee The drawee must pay to the drawer The bank must pay to the customer. But when the payer refuses to pay on due date i.e. The maker of a promissory note refuses to pay to payee on due date ; The drawee of a bill of exchange refuses to pay to drawer (or indorser) on due date; The drawee bank refuses to pay to the customer, when the customer demands payment. THEN the instrument is said to have been dishonoured for non- payment.

NOTICE OF DISHONOUR MUST (Section 93) U/S 93, in both cases i.e. dishonour by non acceptance & dishonour by non- payment, notice of dishonour should be given by the holder to any prior party whom he wants to hold severally (individually) liable or to all parties whom he wants to hold jointly liable. But no notice of dishonour need be given to the party who has himself dishonoured the bill, note or cheque. That is, maker, acceptor or banker. The effect of failure to give notice is serious for the holder. He can not sue the party to whom notice has not been given or who has not received notice is discharged not only on the bill but also on the consideration. Notice of dishonour means an information about fact that the instrument has been dishonoured.

Notice of dishonour is given to the party sought to be made liable and, therefore, it serves as a warning to the person to whom the notice is given that he could noe be made liable. Such a notice also serves the purpose of enabling the person so notified to protect homself against his prior parties. Notice to be given in reasonable time Enormous delay in giving notice of dishonour may put an end to the holder’s right in respect of the dishonoured instrument. Notice of dishonour by whom ? Notice of dishonour is to be given by a person who wants to make some prior party of his, liable on the instrument. Therefore, such a notice may be given. either by the holder, or A party to the instrument who remains liable on it.

Under section 95, a party who receives a notice of dishonour can also give notice of dishonour to any prior party (whom he wants to make liable) Notice of dishonour to whom ? When a negotiable instrument is dishonoured by the maker, acceptor or the drawee, the notice of dishonour is to be given to other parties who are liable on the instrument. Since the maker, acceptor or the drawee themselves are primarily liable to make the payment and it is they who dishonour the instrument by non-payment, notice to them is not required. Thus, when the acceptor dishonoures the bill, notice of dishonour may be given by the holder to the drawer and the indorsers. Notice of dishonour, therefore, is to be given to parties other than the maker, acceptor or the drawee. The holder is to give notice to those of his prior parties whom he seeks to make liable. If the holder wants to make only some of his prior parties liable and not all of them, then the notice is to be given to those only who are intended to be sued.

Modes of notice of dishonour (section 94) U/S 94, a notice of dishonour may be given to :- an agent of that person To the legal representative (in case of death) To the official assignee (in case of insolvency) Notice may be oral or written, and may be sent by post. It may be in any form. But it should inform the recipient, expressly or by reasonable intendment, that the instrument has been dishonoured and in what way dishonoured, and that he will be held liable on it. Time limit for serving notice (sections 105-107) The notice must be given within a reasonable time after dishonour. In determining what is reasonable time for giving notice of dishonour, regard shall be given to:-

Nature of the instrument ; Usual causes of dealing for that instrument ; Public holidays shall be excluded. Notice to agent U/S 96, when an instrument is dishonoured while it in the hands of an agent, the agent should give a notice of dishonour to his own principal within a reasonable time, and the principal in this turn may pass on the receipt of the notice by him. The agent may, however, give a notice of dishonour on behalf of his principal directly to those who are liable on the instrument. Place of notice (section 94 & 98) U/S 94, the place of business or (in case such party has noplace of business) at the residence of his party for whom it is intended, is the place where the notice is to be given.

U/S 98 (d) if the person who is to give the notice does not know the address of the person to whom the notice is to be given, he must make reasonable efforts to find the latter’s address, but if the party entitled to notice cannot after due search be found notice dishonour is dispensed with.

When notice of dishonour is unnecessary compensation on dishonour [section 117] Dishonour of cheque [section 138-147]

When notice of dishonour is not necessary Section 98 mentions of the following circumstances when the notice of dishonour is not necessary When it is dispensed with by the party entitled to the notice it means that the party who is entitled to the notice may expressly or impliedly waive off the same . When the drawer or the indorser while signing in that capacity adds that word notice of dishonour waived no notice of dishonour is required . When the drawer has countermanded payment no notice is required to change the drawer . The reason is obvious when the drawer is himself been responsible for getting the instrument dishonoured there is no need of informing him about the fact of dishonour.

When the party charged could not suffer any charge for want notice is not necessary in such a case When after a due search the party entitled to the notice cannot be found notice of dishonour is excused in such case. If there is some justifiable reason because of which the party is bound to give notice is not able to do the same . The reason for not giving the notice must not be some fault of the person bound to give the notice himself.

No notice is required to charge drawers when the acceptor is also the drawer no notice of dishonour is required to be given to the acceptor because he is the person primarily liable on the instrument and it is he who dishonours the bill . For this very reason when the acceptor also happens to be one of the drawers no notice is required to be given by him in the capacity of the drawer.

Prothouse v. Parker [1870] If a firm consisting of A, B , C and D as partners draws a bill on one of the partner A. A accepts the bill but subsequently dishonours the same by non payment A who is the acceptor of the bill also happens to be one of the drawers there is no need of notice of dishonour to any of the drawers in this case.

No notice is required in the case of a promissory note which is negotiable. When the party is entitled to notice knowing the facts promises unconditionally to pay the amount due on the instrument to he is deemed to have waived off the notice of dishonour.

Dishonour of a bill in which drawee in case of need is named According to section 115 where a drawee in case of need is named in a bill of exchange or in any indorsement there on until it has been dishonoured by such drawee.

Compensation On Dishonour [section 117] Rules The holder is entitled to the amount due upon the instrument together with the expenses properly incurred in presenting noting and protesting it. When a person charged resides in a place different from that at which the instrument is payable the holder is entitled to receive such sum at the current rate of exchange between the two places.

An indorser who being liable has paid the amount due in the same is entitled to the amount so paid with the interest at 18 per centum per annum with from the date of payment until tender or realisation thereof together with all expenses caused by the dishonour and payment . When the person charged and such indorser reside at different places the indorser is entitled to receive such sum at the current rate of exchange between two places. The party entitled to compensation may draw a bill upon the party liable to compensate him payable at sight or on demand for the amount due to him together with all expenses properly incurred by him . Such bill must accompanied by the instrument dishonoured and the protest thereof if such bill dishonoured the party dishonouring the same is liable for the compensation thereof in the same manner as in the case of original bill.

Dishonour of cheque – Can amount to Offence [section 138-147] Under section 138 if the dishonour of a cheque is due to insufficiency of funds in the drawer’s account such person is deemed to have committed an offence The penalty for such an offence Is an imprisonment of 2 years A fine of twice the amount of cheque.

Conditions for the application of section 138 The cheque has been dishonoured due to insufficiency of funds The payment for which the cheque has been issued should have been for the discharge of a legally enforceable debt. The cheque should have been presented by the payee or the holder in the due course within 6 months from the date on which it is drawn or the period of its validity whichever is earlier.

The payee or holder in due course of cheque should have given notice demanding payment with in 30 days from the drawer on receipt of information of discourse of honour of cheque from the bank. The drawer is liable only when if he fails to make payment within 15 days of such notice period. The payee or holder in due course of dishonoured cheque should have made complaint within 1 month of the course of action arising under section 138.

Offences By Companies [section 141] Section 141 consists of the following provisions when the offence of dishonour of cheques is committed by companies. If the person committing offence under section 138 is a company every person who at the time of offence committed was in charge of and was responsible to the company for the conduct of the business of the company as well as the company shall be deemed guilty for the offence and shall be liable to be proceeded against and punished accordingly.

Provision [2] under section 141 Where any offence under this act is committed by a company and it is proved that the offence has been committed with the consent of or is attributable to any neglect on the part of any director manager ,secretary , or any other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Cognizance of offences [section 142] Section 142 makes the following provisions about what how and in what forum the cognizance of the offence committed under section 138 can be taken : Cognizance of offence : Not with standing with anything contained with the code of civil or criminal procedure 1973: No court shall take cognizance of any offence punishable under section 138 except upon a complaint in writing made by the payee or the case may be the holder in the due course of the cheque. Such complaint is made within one month of date on which the cause of action arises under clause [c] of the provision of section 138 No court inferior that of Metropolitan Magistrate or Judicial Magistrate of the first class shall try any offence punishable under section 138

Additional provisions in connection with the dishonour of cheque [section 143-147] Power to the court to try cases summarily [section 143] The offences of dishonour of a cheque shall be tried by a judicial magistrate of the first class or by Metropolitan magistrate. In the case of any conviction of a summary trial it shall be lawful of imprisonment for a term of exceeding one year and an amount of fine not more than Rs. 5000. The trial under this section shall be of day to day basis. Every trial under this section shall be conducted expeditiously as possible and endeavour shall be made to conclude the trial with in 6 months from the date of filing of the complaint.

Mode of service of summons [section 144] The summons may be duly served by the magistrate to the accused or a witness at a place where he actually resides or carries on business or personally works for gain by speed post or by courier service as approved by court of session. If the accused or witness refuses to take delivery the court issuing summons may declared the summons to be duly served.

Evidence on affidavit [section 145] The evidence of complainant may be given by him on an affidavit. Bank’s slip prima facie evidence of certain facts [section 146] On the production of bank slip or memo thereon official nark denoting that the cheque has been dishonoured the court shall presume the fact of such dishonour cheque unless and until such fact is disapproved.

Offence to be compoundable [section 147] Every offence under Negotiable Instrument Act shall be compoundable.

Action to be taken by holder upon dishonour

Action To Be Taken By Holder Upon Dishonour Once a promissory note, bill of exchange or a cheque gets dishonored, the holder [ i.e. the payee, drawer or endorser] must take the following actions to secure his payment. NOTICE OF DISHONOUR. A holder in order to make any party liable to him, must send him a notice of dishonor U/S 93. any party who does not receive such notice cannot be made liable. [Notice of Dishonor has already been explained in detail earlier in the chapter ] (2) NOTING. Under Section 99, when a promissory note or bill of exchange has been dishonored by non- acceptance or non-payment, the holder may cause such dishonor to be noted by a notary public upon the instrument, or upon a paper attached to the instrument or party upon each. [Notice has been discussed in detail later in the chapter. (3) PROTESTING UNDER SECTION 1OO, the holder of a dishonor note or bill can also cause such dishonor to be noted and certified by a public notary. Such certificate is called a PROTEST. IT Should also be done with reasonable time. The advantage of noting or protesting is that it affords authentic and satisfactory evidence of dishonor.

(3) Suit for money Once the holder has : - served the notice of dishonor to prior party (parties) Has done the noting and protesting Now the holder has sufficient legal proof to file a case i.e. sue his prior parties to recover the amount of instrument. Noting and protesting provide legal evidence for dishonor and Notice of Dishonor allow the holder to make one or all prior or parties liable to him.

NOTING OF THE DISHONOUR INSTRUMENT (Section 99) Under Section 99,when a promissory note or bill of exchange has been dishonored by non- acceptance or non-payment, the holder may cause such dishonor to be noted by a notary public upon the instrument, or upon a paper attached thereto, or party upon each. Thus, noting consists in recording the fact of dishonor by the notary public. [Notary Public is a Government official]. Such note must be made within a reasonable time after dishonor. In determining what is reasonable time for noting, regard shall be had to the nature of the instrument and the usual course of dealing with respect to similarly instrument; and in calculating such time, public holidays shall be excluded. Such note must specify the date of dishonor, the reason, if any, assigned for such dishonor, or if the instrument has not been expressly dishonored, the reason why the holder treats it as dishonor and the notary’s charges.

Noting is recording the facts of dishonor on noting register; IN OTHER WORDS ; Noting is recording the facts of dishonor on noting register; Such noting is done is done the Notary public officer; Such officer generally levies Noting charges; These charges are legal charges for noting the facts of dishonor by the officer Noting serves as an authentic document in the of law NOTING MUST :- Noting must contain the facts of dishonor ; Noting must contain the date of dishonor ; Noting must contain the reason assigned for dishonor ; Noting must be made with reasonable time ; If the instrument has not been expressly dishonor, noting must specify the reason why the holder is treating it as dishonored ; Noting must specify the Notary’s charges Noting is not compulsory for bringing an action against prior parties

PROTEST ( Section 100) When before the maturity of a bill , the acceptor has become insolvent , or his credit has been publicly impeached , the holder may through a notary public , demand better security from the acceptor . The demand for better security should be made within the reasonable time after the acceptor has lost his credit and protest should also be certified within reasonable time after that . In simple word protest is formal certificate issued by the notary public certifying the dishonor of the bill or the note . According to section 100 when a promissory note or bill of exchange has been dishonored by non acceptance or non payment , the holder may cause such dishonor to be noted and certified by a notary public . Such certificate is called a protest . The protest like noting , has to be done within the reasonable time .

Rules governing protesting (i) U/ S 104 , Foreign bills of exchange , must be protested for dishonor when such protest is required by the law of law of the place where they are drawn . (ii) Noting and protest of inland bills or notes is not compulsory in the sense that the holder may bring an action against the prior parties even without noting or protest of instrument after its dishonor . (iii) U/S 109 , if a bill of exchange has to be accepted for honour its protest for dishonor by non- acceptance has to be there . U/S 113 ,Before payment for honour is made , it is essential that the bill of exchange must have been noted or protested for non payment . U/S 102 , when a promissory note or bill exchange is required by law to be protested notice of such protest must be given instead of notice dishonour , in the same manner and subject to the same conditions ; but the notice may be given by the notary public who make the protest .

U/S 104 – A where a bill or note is required to be protested within the a certain specified time , it is sufficient that the noting has been made within that though the formal protest may be drawn at a later time . The protest is deemed to relate back to the date of noting and , therefore , if the noting has been done within the specified time , the drawing of the formal protest by the notary public at the later date will also be deemed to have been made on the date of its noting . U/S 103, A bill of exchange drawn payable to some other place than the place mentioned as the residence of the drawee , and which are dishonoured by no- acceptance , may , without further presentment to the drawee be protested for non- paying in the place specified for payment , unless paid before or at maturity . protest for better security . Such protest can be made in the case of bills only. when the acceptor of a bill of exchange has become insolvent , or his credit has been publicly impeached , before the maturity of the bill , the holder may , within a reasonable time , cause a notary public to demand better security of the acceptor , and on its being refused may , within a reasonable time , cause such facts to be noted and certified .when a bill of exchange has been protested for non – acceptance or for better security , the same can be thereafter accepted for honour according to section 108 .

Contents of protest ( U/S101) A protest must contain the following particulars . Either instrument itself , or a literal transcript of the instrument and of everything written or printed upon the instrument . The name of the person for whom and against whom the instrument has been protested ; A statement that payment or acceptance, or better security as the case may be, has been demanded of such person by the notary public; the terms of the answer, if any, or a statement that he gave no answer, or that he could not be found; When the note or bill has been dishonoured, the place and time of dishonour, and when better security has been refused, the place and time of refusal. The subscription of the notary policy making the protest. In the event of an acceptance for honour or of a payment for honour, the name of the person by whom, or the person for whom, and the manner in which, such acceptance or payment was offered and effected.