When is a negotiable instrument considered as dishonoured? What steps should be taken by the holder of a dishonoured instrument?

The law relating to the dishonour of negotiable instruments occupies Chapters VIII and IX of the Negotiable Instruments Act, 1881, and it is one of those areas where procedural exactitude has real and immediate substantive consequences. A single failure to observe the prescribed steps can wipe out the holder's entire right of recourse against the secondary parties. What follows is an authoritative account of when dishonour occurs, and what the law requires thereafter.

When is an Instrument Dishonoured?

The Act recognises two modes of dishonour — by non-acceptance under Section 91, and by non-payment under Section 92. These are distinct events with different consequences, and each deserves careful examination.

Dishonour by Non-Acceptance — Section 91

Section 91 is confined exclusively to bills of exchange, for they alone require presentment for acceptance before payment can be demanded. A bill is dishonoured by non-acceptance in any of the following situations: when the drawee, or one of several drawees not being partners, fails to accept the bill within forty-eight hours of its presentment (the period allowed to the drawee under Section 63 for deliberation), even though a proper demand for acceptance has been made; when presentment for acceptance is excused under the Act — as where the drawee is dead, fictitious, or incapacitated to contract — and the bill nevertheless remains unaccepted; and where the drawee, though present, gives only a qualified acceptance, that is, an acceptance that varies the effect of the bill as drawn.

The moment a bill is dishonoured by non-acceptance, an immediate and important consequence follows: the holder acquires at once a right of recourse against the drawer and every indorser, without waiting for the date of maturity to arrive. It is unnecessary to present the bill again for payment. The dishonour by non-acceptance constitutes a material part of the cause of action, and the holder may proceed immediately. This was confirmed by the Bombay High Court as far back as Ram Ravji v Pralhaddas (1896 ILR 20 Bom 133).

Dishonour by Non-Payment — Section 92

Section 92 is wider in its sweep — it applies to promissory notes, bills of exchange, and cheques alike. The instrument is said to be dishonoured by non-payment when the maker of a note, the acceptor of a bill, or the drawee of a cheque makes default in payment upon being duly required to pay. Two elements are critical: first, there must have been a due presentment for payment — the instrument must have been exhibited to the person liable, with an offer to hand it over upon payment; second, there must be a default on his part, a refusal or inability to pay.

The Andhra Pradesh High Court in Kanneganti Venkata Subbayya v P. Ranga Rao Tobacco Co. (AIR 1972 AP 72) took a broader and more purposive view, holding that the expression dishonour in the Act should not be read in an unduly narrow manner. Where the maker of a promissory note payable on demand deliberately avoided a registered postal notice from the holder calling upon him to make payment, the court held that there was a dishonour — the refusal to meet the liability, if proved, is itself sufficient, and the fact that the physical instrument was not placed before the maker at the precise moment of refusal does not necessarily defeat the claim.

Steps to be Taken by the Holder after Dishonour

The law does not allow the holder to passively await recovery. A structured regime of duties is prescribed, and the holder who neglects them does so at the peril of losing his rights against the secondary parties — the drawer and the indorsers. The principal debtor, that is the maker of a note or acceptor of a bill, can always be sued without these formalities — it is only the conditional liability of the secondary parties that hangs upon their performance.

Step One — Notice of Dishonour (Sections 93 to 98)

The first and most critical step is giving notice of dishonour. Section 93 lays down the fundamental rule: when any negotiable instrument is dishonoured — whether by non-acceptance or non-payment — the holder, or any party who remains liable on the instrument, must give notice of that dishonour to all parties whom the holder seeks to make liable.

The object of this notice, as clearly stated in Horne v Rouquette (1878 3 QBD 514), is not to demand payment but to warn the secondary party of his liability — and in the case of the drawer, to enable him to protect himself as against the drawee who has dishonoured his draft. The secondary parties have contracted as sureties in substance, and it would be a grave hardship if they were kept indefinitely in suspense about whether the instrument had been met. Notice closes the period of suspense and places the burden on them.

To whom notice must be given: Section 93 makes clear that notice need not be given to the maker of a note, the drawee of a cheque, or the acceptor of a bill — these are the principal debtors, who are themselves the parties who have dishonoured the instrument and are therefore already aware of the fact. Notice must be given to all other parties — the drawer and every indorser — whom the holder wishes to hold liable.

Form of notice: Section 94 is liberal in its requirements. The notice may be oral or written, may be dispatched by post, and need not be in any prescribed form. All that is necessary is that it must inform the recipient — in express terms or by reasonable implication — that the instrument has been dishonoured and in what manner, and that he will be held liable. A return of the dishonoured instrument to the drawer or indorser itself constitutes sufficient notice in point of form.

Time for notice: The notice must be given within a reasonable time after dishonour. Where the holder and the person to be notified live or carry on business in the same place, the notice must be dispatched in time to reach its destination on the day next after dishonour. Where they are in different places, the notice must be dispatched by the next available post after dishonour. Delay is fatal, and may discharge the party who was entitled to timely notice.

Chain of notice: Section 95 introduces a further duty. Every party who receives a notice of dishonour must, if he wishes to hold prior parties liable, transmit a fresh notice to those prior parties within a reasonable time. The analogy is that of a chain — each link in the chain of liability must be activated by its own notice. In the illustration given — if F is the holder and gives notice to A, that notice ensures the benefit of all parties between A and F; but each of them must in turn transmit notice upwards if they wish to preserve their own right of recourse.

When notice is not necessary: Section 98 provides a catalogue of circumstances where the notice of dishonour is dispensed with entirely. These include: when the party entitled to notice has himself waived it, expressly or by implication; when the drawer has countermanded payment, for having himself obstructed the holder, he cannot complain of want of notice; when the party charged could not have suffered any damage for want of notice — as where a drawer had no funds in the hands of the drawee at any time during the currency of the instrument; when the party entitled to notice cannot after due search be found; where the drawee is a fictitious person or one incapable of contracting; and where the party knowing all the facts unconditionally promises to pay the amount due.

Step Two — Noting and Protest (Sections 99 and 100)

Once notice of dishonour has been given, the holder has the further option — not obligation, in the case of inland instruments — of causing the dishonour to be formally authenticated through the process of noting and protest.

Noting, as prescribed by Section 99, is the process by which the holder causes the fact of dishonour to be recorded by a notary public — either upon the instrument itself, or on a paper attached to it. The note must be made within a reasonable time after dishonour, and must specify the date of dishonour, the reason assigned for dishonour, and the notary's charges. The notary proceeds to make a formal demand for acceptance or payment, and on refusal, records the minute. Noting is a convenient method of authenticating and preserving evidence of the dishonour.

Protest under Section 100 is the formal certificate by the notary, based upon the noting, which records the fact of dishonour in a legally binding form. A protest must contain the instrument itself or a literal transcript thereof, the names of the persons for and against whom the protest is made, a statement that acceptance or payment was demanded, the reply given, and the notary's signature and the date and place of dishonour.

For inland bills and notes, noting and protest are entirely optional. However, under Section 104, foreign bills of exchange — that is, bills drawn outside India — must be protested when such protest is required by the law of the place where they are drawn. The practical consequence is that most foreign bills must be protested before a right of recourse can be exercised, and Section 102 provides that when protest is required, notice of protest stands in lieu of notice of dishonour.

The Consequence of Non-Compliance

The importance of these steps cannot be overstated. As held in numerous decisions, the giving of notice of dishonour is a condition precedent to the liability of the drawer under Section 30 and every indorser under Section 35. If the holder omits to give timely notice to any party entitled to it, that party is discharged from all liability on the instrument — not merely suspended. The discharge is absolute, and the holder cannot thereafter revive the defaulting party's liability by any subsequent act. The only exceptions are those expressly carved out by Section 98.

In Bank of Allahabad v Kul Bhushan (AIR 1961 Punj 571) it was reiterated that the rule operates with full force and the court has no equitable discretion to relieve the holder from the consequences of his own default in giving timely notice. The law is strict, and the holder who holds a dishonoured instrument in his hand without taking these steps promptly, does so at his own peril, and alone bears the loss.