DISHONOUR OF NEGOTIABLE INSTRUMENTS

INTRODUCTION
A Negotiable Instrument is a signed document which promises the payment of specific amount
to the bearer or entity on a specified date or on demand. The most distinct feature is that the
document is transferable i.e., the final holder of the instrument gets the payment from the debtor
irrespective of the fact whomsoever was the initial bearer of the instrument.
" According to Section 13 of the Negotiable instruments Act , 1881 promissory notes , bills of
exchange and cheque fall under the category of negotiable instruments”

PROMISSORY NOTE
According to Section 4 of the Act , “ It is an instrument in writing containing an unconditional
undertaking , signed by the maker , to pay a certain sum of money only to , or to the order of, a
certain person, or to the bearer of the instrument” that is called promissory note & its dishonor is
below:
The following are the important features of a valid promissory note
• It should be in writing, signed by the maker.
• There should be a promise or an undertaking to pay. For e.g., I promise to pay Ram Rs. 10,000
for value received.
• The promise to pay must be unconditional. For e.g., I promise to pay Ram after the death of his
father. The above-mentioned example is not a promissory note as it has a condition attached with
it.
• The payment is to be made by money, and a certain amount of money is to be mentioned. For
e.g., I promise to give my house for the services received. This can't be a valid promissory note
as the payment is not made in the form of currency.
• The parties are to be mentioned. The name of the maker and the holder of the instrument are
mentioned in the promissory note.
• The promissory note is payable to the bearer or the order of the instrument.
• The amount payable must be paid in a determined future time.
BILLS OF EXCHANGE
Under Section 5 of the Act, “It is an instrument in writing containing an unconditional order ,
signed by the maker , directing a certain person to pay a certain sum of money only to , on to the
order of , a certain person or to the bearer of the instrument.”
In bills of exchange, there can be involvement of three parties:
1. Drawer: The maker of the bills of exchange i.e., the seller who sells on credit to the purchaser.

2. Drawee: The purchaser who is entitled to pay the drawer the sum of money he owes.

3. Payee: The person who receives the payment The Drawer can also be the payee if he retains
the BOE
It is to be noted that, the drawee's liability towards the payee is more in comparison with the
drawer. In case of immediate need of money, the payee can discount the bill with a bank.
The most distinct feature in bills of exchange is that two separate debts can be discharged by a
single BOE. For e.g., If A, issued BOE to B and asked him to pay the amount C, The debt owed
by B to A and the debt owed by A to C is cleared at the same time in a single BOE.
CHEQUE
According to Section 6 of the Act, “It is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand and it includes the electronic image of a
truncated cheque and a cheque in the electronic form.”
The Features of a cheque are:
• Drawn on a specific bank.
• The payment is paid via bank accounts. The transaction of currency is not done.
• It is always payable on demand on a specified date. It is also payable to the bearer.
• Involvement of Drawer, drawee and a payee. The drawee is always a bank.

DISHONOUR OF NEGOTIABLE INSTRUMENTS

DISHONOR BY NON- ACCEPTANCE
Section 91 of the Act states that a bill is considered to be dishonored in the following scenarios.
 If a drawee or one of several drawees who are not partners fails to accept the bill, the bill
becomes dishonored.
  If the bill is not presented, it stands dishonored.
 If the drawee is incompetent to contract.
 If the acceptance is qualified.
 If the drawee remains lost after reasonable search.
 If the drawee is dead or has become insolvent, and the drawer fails to present the
instrument to the representative of the drawee. Then the bill stands dishonored.
DISHONOR BY NON - PAYMENT
Section 92 of the Act states that a promissory note, bill of exchange or cheque remains
dishonored in the following circumstances:
 If there is a default in payment.
 If there is partial payment made and the remaining payment is still not made after the
maturity date.
DISHONOR OF CHEQUE DUE TO INSUFFICIENCY OF FUNDS IN THE ACCOUNT
According to Section 138 of the Negotiable instruments act, a cheque is returned by the bank to
payee drawn by the drawer due to insufficiency of funds in his account is a criminal offence. The
drawer will be imprisoned for two years and would have to pay a fine of amount which is
equivalent to twice the amount paid by him. Though this offense is of civil nature, a fine and
penal sentence is imposed due to two reasons i.e. to deter people from committing this offense &
to get back the money lost by the holder.

HOW TO FILE A CASE UNDER DISHONOR OF CHEQUE DUE TO

INSUFFICIENCY OF FUNDS
Considering the hierarchy of courts, the cases of such nature will be heard by the Judicial
Magistrate of First-Class Court of the Metropolitan Magistrate Court. The procedure to be
followed by the holder order file a case is elucidated below:
• If a cheque is dishonored the bank would inform the holder about it and the bank would also
mention the reason for the cheque being dishonored.
• The holder can send a legal notice to the drawer with the help of a lawyer within 30 days of
knowledge of the issue. The notice would make a demand to the drawer to pay the default within
15 days after the issue of notice.
• If the drawer fails to make the payment the holder can file a case within a month's time after
16th day of issue of notice.

DISCHARGE FROM LIABILITY

Under the following circumstances the drawer is discharged from the liability, they are:
 If the holder cancels the name of the drawer, acceptor or indorser in the instrument.
 If the holder releases the maker, acceptor or indorser from the instrument.
 If the payment is made to the holder.
 If the holder allows the drawee more than 48 hours to accept the bill, then the bill is
discharged.
 When cheque is not duly presented or When the cheque is payable to order.
 If there is a material alteration. In such a case the negotiable instrument stands void as the
parties aren't aware of the alteration made. They wouldn't have consented to the new
alteration made.
Thus, the act governs the transaction involving negotiable instruments effectively

CASE LAWS
In Abdul Samod v. Satya Narayana Mahavir, a complaint had been filed under Section 138
and the case of the respondent was that he had stopped the payment of the cheque on account of
civil litigation pending between the parties. Hon’ble Mr. Justice A.P. Chowdhry analyzed
Section 138 of the Negotiable Instruments Act and he stated that there were 5 ingredients of the
section which must be fulfilled, which are as under: -
I. the cheque is drawn on a bank for the discharge of any legally enforceable debt or
other liability;
II. the cheque is returned by the bank unpaid;
III. the cheque is returned unpaid because the amount available in that account is
insufficient for making the payment of the cheque;
IV. the payee gives a notice to the drawer claiming the amount within 15 days (now 30
days as per Amendment 2002) of the receipt of the information by the bank;
 V. the drawer fails to make payment within 15 days (now 30 days as per Amendment
2002) of the receipt of notice. In this particular case, the contention of the respondent
was that the cheque had been returned on account of stop payment instructions and
not on account of insufficiency of funds and thus all the ingredients of the section
were not available. According to Section 138 it was only when the cheque had
bounced on account of inadequate balance in the account that a complaint was
maintainable if the said ground was not available, then the complaint was not
maintainable and the Hon’ble High Court held that there was no justification to let the
proceedings continue.
In Mrs. R. Jayalakshmi v. Mrs. Rashida, it was held that if a cheque was returned with an
endorsement “Refer to Drawer” and “payment countermanded by the drawer” then it was not an
offence
In the case of Mrs. Rama Gupta v. Brakeman’s Home Products Limited Patiala, it has been
held that if a cheque is returned with the remarks “Payment stopped” then there is no offence.
Shri Prithvi Raj S/o Amba Lal Patel v. Sh. Bhupendra S/o Shri Jasu Bahi Patel. In these
four appeals Hon’ble Mr. Justice M.S. Vaidya in his judgement dated 06.01.94 examined all the
important judgements relating to the stop payment instructions and also referred to the Division
Bench Judgement of the Bombay High Court.
A reference also made to the judgement in which it was held that the offence under the section
cannot depend on the endorsement made by the banker while returning the cheque. Irrespective
of the endorsement made by the banker, if it is established that in fact the cheque was returned
unpaid either because of the account of the money to honour the cheque or that it exceeds the
amount arranged to be paid from that account by an agreement made with the bank, the offence
will be established. The endorsement made by the banker while returning the cheque cannot be
the decisive factor.
In both the judgements it was contended that what was relevant for the purpose of determining
whether or not an offence under Section 138 of the Negotiable Instruments Act was disclosed
and whether or not the drawer of the cheque had arranged for payment or had made the payment
of the amount covered by the cheque within the period of 15 days prescribed under the said
section and not the reason for which the cheques were dishonoured by the Bank. The Bombay
High Court held that judgement given by the single in the judgement of Om Parkash Bhojraj
Maniyar v. Swati Girish Bhide, in which the case of G.F. Hunasi Katti Math v. State of
Karnataka, and the decision in case of Mrs. R. Jayalakshmi v. Mrs. Rashida, provided to
honour an interpretation which was narrow and deserved to be set aside. It was a construction of
the section where the judges had failed to take into accounts the objects and reasons behind the
amendment. The decision of division bench of the Kerala High Court was specific in observing
that where the cheque issued by the drawer was dishonoured by the bank and returned to the
drawer with the endorsement that “Payment stopped” by the drawer and in the complaint the
complainant had specifically stated that the accused had no amount in his account with the bank
for honouring cheque and that mischievously and maliciously issued an instruction to the
bankers to stop the payment, the complaint for an offence under section 138 of the Negotiable
Instruments Act cannot be quashed on the ground that the amount of money standing to the
credit of the account of the drawer was insufficient to honour the cheque or that it exceeds the
account arranged to be paid from that account by an agreement made with the bank. This is in
fact the correct view of the matter. Since there has been conflicting opinions by the different
High Courts and also because the fact that divergent opinions have been given by the different
High Court the matter was finally decided by the Hon’ble Supreme Court of India in Bhupendra
v. Prithvi Raj.