Definition: Dishonor of Negotiable Instrument refers to the state when the party who has to pay the sum in an instrument fails to honor it. In other words, it implies the loss of honor for the instrument indicating the unsuitability of the instrument to realize funds.
Types of Dishonour
- Dishonor by Non-Acceptance
- Dishonor by Non-Payment
Note: As presentment of the instrument for the purpose of acceptance is required only in case of bills of exchange. Hence, only bills of exchange can be dishonored by non-acceptance, whereas promissory notes and cheques do not require acceptance, so they cannot be dishonored by acceptance.
Dishonor by Non-Acceptance
When a bill is duly presented for acceptance, however, it is not accepted by the party concerned, it is called Dishonour by non-acceptance. It can take place in the following ways:
- When a bill of exchange is presented before the drawee for acceptance, but it is not accepted within 48 hours from the presentment for acceptance.
- In case there is more than one drawee, acceptance by all is a must. So, even if one of them defaults in acceptance, the bill of exchange is regarded as dishonored. However, if the drawees are partners, then one partner can accept the same on behalf of all.
- In case the drawee is a fictitious person
- When the drawee is untraceable after a normal search.
- If the drawee to the instrument is not competent to contract, the bill is considered dishonored.
- Qualified or Conditional acceptance of the bill, the holder may deem it as dishonored.
- Insolvency or death of the drawee also results in dishonor by non-acceptance.
- When presentment is excused and the instrument is not accepted.
Effect: On dishonor by non-acceptance, the holder has the right to sue, all the parties thereto, even when the bill is not matured.
Dishonor by Non-Payment
Dishonor by non-payment arises when the maker of the promissory note, acceptor of the bill of exchange, and the drawee of the cheque defaults in the payment or refuses to pay the sum due on the instrument when it is being presented for payment. Dishonor of bill and note can also take place in case the instrument is expressly excused by its acceptor or maker or when it remains unpaid at or after maturity.
Effect of Dishonour
In case the negotiable instrument is dishonored, by any of the reasons mentioned above, the other parties to it are charged with liability.
Notice of Dishonour
- The notice must be given immediately to the parties whom the holder wants to make liable, regarding the refusal to make a payment or accept the instrument.
- Except for the maker and acceptor of the instrument, all the parties will be discharged if the holder fails to give notice. Notice must be given within a reasonable time after dishonor.
- The main objective behind giving notice of dishonor is to inform or warn the party or the person liable. The doctrine is based on the principle of just and equity.
Who can give notice?
The notice of dishonor can be given by the holder or any party to it who is liable afterward is required to give notice to all the previous parties, whom he wants to make liable for the same. Notice can also be given to the agent of any such party.
Note: If a stranger gives notice of dishonor, it is regarded as invalid.
An agent can also give notice to all the prior parties liable for the instrument or he can notify his principal if the instrument is deposited with the agent for the purpose of presentment and it is dishonored.
The time limit for giving notice remains the same, no matter the notice is given by whom – principal or agent.
To whom the notice is given?
It can be given to:-
- Duly authorized agent of a party,
- Legal representative of a person who has passed away,
- Receiver or official assignee of an insolvent.
No notice is given to the maker, acceptor, or drawer of the instrument, as they are the principal debtors.
In what mode notice is given?
Notice can be given in both the modes – oral or written or partly oral and partly written. For this purpose, any form can be used, however, it must inform the parties concerned to whom the notice is being served, be it expressly or impliedly. It should be noted that a written notice is sent via post.
What is the reasonable time for giving notice?
The reasonable time can be decided on the basis of the distance between the parties and the nature of communication between them. It should be noted that public holidays would be excluded at the time of counting reasonable time.
Note: In case notice is not given to any of the parties to the instrument whom it must be given within the time specified, then that party would be discharged from the liability on the instrument. To be precise, notice is excused when the notice of dishonor is not given to the drawer and endorser of the instrument.
Compensation of Dishonour of Negotiable Instrument
The compensation payable will be equal to the sum of the amount due on the instrument, expenses on noting and protesting, interest on the principal amount, and the difference in the exchange rate (if any)
A Word from Business Jargons
The two types of dishonor of negotiable instruments differ in the sense that the drawee cannot be sued in case of dishonor by non-acceptance because he is not a party to the bill, but the same party can be sued in case of dishonor by non-payment.