1. Introduction: In modern time, exchange of goods and services is the basic features of every business activity. In ancient period, goods were exchanged by other goods. Due to passage of time, modes and transaction system is changed. Sometimes, goods are sold and bought by cash or otherwise by credit. These kinds of transactions mainly require flow of cash immediately of after a certain period of time. In modern business, large number of transactions involving huge sums of money takes place and it is very difficult and risky for both of the party of the transactions to make and receive payments in cash. Here, Negotiable Instruments comes into play. It’s a common practice amongst businessman to make use of certain documents as means of making payment. Some of these documents are called Negotiable Instruments. Sometimes, negotiable instruments are dishonored by non-acceptance and by non-payment. Dishonour of Negotiable Instrument means loss of honour for the instrument in question on the part of the maker, drawee, or acceptor, as the case may be, which eventually results in non-realization of payment due on the instrument.
2. Negotiable Instrument: In
business sector, negotiable instrument plays an important role. Negotiable
Instruments are used for making payments and discharging business obligations.
The term ‘Negotiable’ means transferable from one person to another and the
term ‘instrument’ means a written document by which a right is created in favor
of some person. Now the term ‘Negotiable Instrument’ means a written document
which creates a right in favor of some person and which is freely transferable.[1]
According to Duhaime’s Law Dictionary,
“A negotiable instrument is a document of an amount of money, or a title, which
is readily transferable to another.”
According to Section 13 of The
Negotiable Instruments Act, 1881, “A negotiable instrument means a promissory
note, bill of exchange or cheque payable either to order or to bearer.”
3. Essential Features of Negotiable Instruments:
a) In
writing: A negotiable
instrument must be in writing by the parties according to the rules mentioned
in The Negotiable Instruments Act, 1881 in relation to promissory notes, bill
of exchange and cheque.
b) Signature:
Negotiable Instrument
must be signed by the respective parties.
c) Parties:
There must be more than
one party.
d) Unconditional
Order: In every
negotiable instrument, there must be an unconditional order or promise for
payment.
e) Time
of payment must be certain:
Payment of money in respect of negotiable instrument must be certain.
f) Payee
must be a certain person: In whose favor the negotiable instrument is
made must be named and described with reasonable certainty. Here, the terms
person includes individual, body of corporate, trade unions, even secretary,
director or chairman of an institution. Payee can also be more than one person.
g) Easy
Transferability: A
negotiable instrument must be in nature of freely transferable. Registration,
stamp duty and this type of formality is not required for it. Mere delivery of
negotiable instrument is enough to change the ownership by valid endorsement.
h) Notice
of Transfer: To give notice
of transfer of a negotiable instrument to the party liable to pay is not
necessary.
i)
Property: The holder of
the negotiable instrument is deemed to be the owner of the property contained
therein. A negotiable instrument gives possession as well as right to property
also.
j) Title:
Negotiable instrument
confers a good title to its holder.
k) Consideration:
It is presumed that
every negotiable instrument is made, drawn and negotiated for consideration.
l)
Date: Every negotiable instrument bear the date on which
it is made or drawn.
m) Acceptance:
Every negotiable
instrument is accepted within a reasonable time after the date mentioned and
before the date of its maturity.
n) Delivery: Delivery of the instrument is essential. Any negotiable instrument like cheque of a promissory note is note complete until it is delivered to its payee.
4. Kinds of Negotiable Instruments: According
to Section 13 of The Negotiable Instruments Act, 1881, negotiable instruments
are of three kinds. Namely—
a) Promissory Note: A promissory note means “promise to pay”. It is a written promise by the maker to the payee to transfer money either on demand or at a specified future date. It is also called as pro-note of hand note. Bank note is often transferred as a promissory note. Promissory note made by a bank and payable to bearer on demand.
According to Mita’s Legal and Commercial Dictionary, “Promissory note means any instrument where by the maker engages absolutely to pay a specified sum of money to another at a time there in limited, or on demand or at sight.
According to Section 4 of The Negotiable Instruments Act, 1881, “A promissory note is an instrument in writing (note being a bank-note or a currency-note) 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.”
b) Bill of Exchange: Bill of exchange is a negotiable instrument that contains an unconditional written instruction by the drawer or maker to a certain person that is drawee to pay a certain amount of money either to the bearer of the bill, or to the order of the payee on demand or at a specified future date.[2]
According to Glossary Law Dictionary, “Bill of Exchange is an unconditional order in writing, signed by a drawer such as a buyer, and addressed to the drawee, typically a bank, ordering the drawee to pay a stated sum of money to a payee, often a seller, on demand or at a fixed or determinable future time.”
According to Black’s Law Dictionary, “Bill of Exchange is a three party instrument in which first party draws an order for the payment of a sum certain on a second party for payment to a third party at a definite future time.”
According to Section 5 of The Negotiable Instruments Act, 1881, A bill of exchange 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, or to the order of a certain person or to the bearer of the instrument.”
c) Cheque: Cheque is one of the most common negotiable instruments in modern time. A Cheque is a document that orders a bank to pay a specific amount of money from a person’s account to the person in whose name the cheque has been issued. Cheque is a very compatible instrument which can be issued to settle payments or obligations in a contractor even to give gifts.
According to Black’s Law Dictionary, “Cheque is a draft drawn upon a band and payable on demand sign by the maker or drawer, containing an unconditional promise to pay a sum certain in money to the order of the payee.”
According to Section 6 of The Negotiable Instruments Act, 1881, A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.
5. Dishonour of Negotiable Instrument: Dishonour
of negotiable instrument means loss of honour for the instrument in question on
the part of the maker, drawee, or acceptor, as the case may be, which
eventually results in non-realization of payment due on the instrument.[3]
Negotiable instrument is always payable on demand. If the holder of negotiable
instrument does not get the payment for the insufficiency of money, defective
title, then the dishonour of negotiable instrument occurs.
6. Modes of Dishonour of
Negotiable Instruments: A negotiable instrument can be
dishonoured by two ways. Namely—
a)
By
non-acceptance;
b)
By
non-payment;
A cheque & a promissory note can
only be dishonoured by non-payment. On the other hand, a bill of exchange can
be dishonoured either by non-payment or by non-acceptance.
6.1
Dishonour by Non-acceptance: Any kind of negotiable instrument is
dishonoured by non-payment. But only a bill of exchange is dishonoured by
non-acceptance because it is the only negotiable instrument which requires its
presentment for acceptance. Non-acceptance is amount to dishonour of it.
According to Section 91 of The
Negotiable Instruments Act, 1881, A bill of exchange is said to be dishonoured
by non-acceptance when the drawee, or one of several drawees not being
partners, makes default in acceptance upon being duly required to accept the
bill, or where presentment is excused and the bill is not accepted. Where the
drawee is incompetent to contract, or the acceptance is qualified, the bill may
be treated as dishonoured.
v A bill of exchange is
said to be dishonoured by non-acceptance in the following circumstances:
a)
When
the drawee or one of the several drawees not being partners, refuse to accept
the instrument.
b)
Where
presentment is required but the bill is not presented.
c)
Where
the bill is given a qualified acceptance.
d)
If
the drawee is a fictitious person.
e)
After
a reasonable search the drawee can’t be found.
f)
Where
the drawee is either insolvent or dead and the holder of the bill does not present
it before the assignee or legal representative of the insolvent or deceased
person that is drawee.
6.2
Dishonour by Non-payment: 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 check has been denied to pay money. The holder of
a bill or pro-note may treat it as dishonoured, without placing for payment
when presentment for payment is excused expressly by the maker of the pro-note,
or acceptor of the bill and the payment in exchange of the bill and the note
remains unpaid.
According to Section 92 of The Negotiable
Instruments Act, 1881, a promissory note, bill of exchange or the 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.
When a bill is accepted, it will present
for payment if it is due. If the acceptor is failed to make payment then it
will be considered as dishonoured by non-payment. If the maker of a promissory
note is failed to make payment in due date, the note is deemed to be
dishonoured by non-payment. When the banker refuses to pay the cheque is
considered as dishonoured by non-payment.
7. Notice of Dishonour of Negotiable
Instruments: Notice of Dishonour means the actual
notice of the dishonour of the instrument either by non-acceptance or by
non-payment. In case of dishonour of negotiable instrument, liable holder
should notify all the parties of his liability by issuing a notice of
dishonour.
8. Notice by Whom: According
to Section 93 of The Negotiable Instruments Act, 1881, where a negotiable
instrument is dishonoured by non-acceptance or by non-payment, the holder of
the instrument is liable to give notice of dishonour to all the prior parties
whom he wants to make liable on the instrument.
According to Section 95 of The
Negotiable Instruments Act, 1881, Agent of any party may also be given notice
of dishonour. Notice of dishonour given by a stranger is not valid. Each party
receiving such notice must, in order to make any prior party liable, give
notice of dishonour in a reasonable time.
According to Section 96 of The
Negotiable Instruments Act, 1881, when an instrument is presented by an agent
and dishonoured, may give notice by himself to the parties liable on the
instrument or may give notice to his principal.
9. Notice to Whom:
a)
Notice
of dishonour must be given to all parties to whom the holder seeks to make
liable.
b)
Notice
of dishonour may be given to an endorser.
c)
Notice
of dishonour may be given to a duly authorized agent of the person to whom it
is required.
d)
In
case of a death person, it may be given to his legal representative.
e)
When
any person is declared insolvent, to his office or his official assignee.
f)
Party
entitled to notice of dishonour is dead, given to him a notice ignorance of his
death is sufficient.
10. Modes of Notice: According
to Section 94 of The Negotiable Instruments Act, 1881, Notice of dishonour may
be given—
a)
To
a duly authorized agent of the person to whom it is required to be given;
b)
Where
he has died, to his legal representative;
c)
Where
declared insolvent, to his assignee;
d)
It
may be oral or written;
e)
If
written, be sent by post and may be in any form;
f)
It
must inform the party to whom it is given, that the instrument has been
dishonoured and he will be held liable thereon;
g)
It
must be given within a reasonable time after dishonour at the place of business
or at the place of residence;
h)
If
the notice is duly directed and sent by post and miscarries, such miscarries
does not render the notice invalid.
11. Place of Notice: The
place of business or the place of residence of the party, for whom it is
intended, is the place where the notice is to given. If the whereabouts of the
party to whom the notice is to be given is not known, must make reasonable
efforts to find the address. If the entitled party is not found after due
search, the notice of dishonour is presumed to be delivered.
12. Reasonable Time concerning Notice of Dishonour:
In calculating
reasonable time, public holidays shall be excluded. According to Section 106 of
The Negotiable Instruments Act, 1881—
a)
When
the holder and the party to whom notice is due carry on business or live in
different places, the notice of dishonour must be sent by the next post or on
the day next after the day of dishonour.
b)
When
the parties live and carry on business in the same place, notice of dishonour
should reach its destination on the day next after dishonour.
13. When Notice of Dishonour is unnecessary: Section
98 of The Negotiable Instruments Act, 1881 states the situation when notice of
dishonour is unnecessary. Situation are mentioned below—
a)
When
it is dispensed with by the party entitled thereto;
b)
When
the drawer has countermanded payment;
c)
When
the party charged could not suffer damage for want of notice;
d)
When
the party entitled to notice cannot after due search be found;
e)
When
the party bound to give notice is unable for any other reason to give it;
f)
To
charge the drawers, when the acceptor is also a drawer;
g)
In
case of a promissory note which is not negotiable;
h)
When
the party entitled to notice, knowing the facts, promises unconditionally to
pay the amount due on the instrument;
14. Duties of the Holder upon Dishonour: There
are some duties of the holder of negotiable instrument upon dishonour. Those
are mentioned below—
a) Notice
of Dishonour: When a
promissory note, bill of exchange or cheque is dishonoured by non-acceptance or
by non-payment, the holder must give notice of dishonour to all the parties to
the instrument whom he wants to make liable thereon.[4]
b)
Noting & Protesting: According to Section 99 of The
Negotiable Instruments Act, 1881, when a promissory note or bill of exchange
has been dishonoured by non-acceptance or non-payment, the holder may cause
such dishonour to be noted by a notary public upon the instrument, or upon a
paper attached thereto, or partly upon each.
Such note must be made within a
reasonable time after dishonour, and must specify the date of dishonour, the
reason, if any, assigned for such dishonour, or, if the instrument has not been
expressly dishonoured, the reason why the holder treats it as dishonoured, and
the notary's charges.
According to Section 100 of the
Negotiable Instruments Act, 1881, when a promissory note or bill of exchange
has been dishonoured by non-acceptance or non-payment, the holder may, within a
reasonable time, cause such dishonour to be noted and certified by a notary
public. Such certificate is called a protest.
c) Suit
for Money: After the
formality of noting and protesting, the holder may bring suit against the
parties liable for the recovery of the amount due on the instrument.[5]
15. Effects of Dishonour of Negotiable
Instruments: When a negotiable instrument is
dishonoured either by non-acceptance or by non-payment, the other parties
thereto can be charged with liability. If the acceptor of a bill dishonors the
bill, the holder may bring an action against the drawer and the endorsers. The
holder of a negotiable instrument can take steps, which are as following—
a) The holder is entitled to file a suit
for the recovery of the amount due from the parties liable to pay.
b) Subject to certain exception, he must
give notice of dishonour to parties against whom he intends to proceed.
c) He may also have the instrument noted
and protested before a notary public.
16. Compensation for Dishonour of Negotiable
Instruments: Section 117 of The Negotiable
Instruments Act, 1881 deals with the rules for determining the amount of
compensation payable to the holder or endorsee in case of dishonour of
negotiable instrument. Those rules are mentioned below—
a)
The
holder is entitled to the amount due upon the instrument together with the
expenses properly incurred in presenting, noting and protesting it;
b)
An
endorser who has paid the amount due on the instrument is entitled to the
amount so paid with the interest at 6% per annum from the date of payment until
realization along with all expenses caused by dishonour and non-payment;
c)
When
the person charged resides at a place different from that at which the
instrument was payable, the holder is entitled to receive such sum at the
current rate of exchange between the two places;
d)
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 the two
places;
e)
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 be
accompanied by the instrument dishonoured and the protest thereof (if any). If
such bill is dishonoured, the party dishonouring the same is liable to make
compensation thereof in the same manner as in the case of the original bill.
17. Conclusion: In modern times ‘negotiable instrument’ plays a significant role in the business sector. Almost a significant portion of the transaction takes place by negotiable instrument. Sometimes it is difficult to make transactions by negotiable instrument due to dishonor of it. It is happened either by the drawer side or by the payee, because of not duly endorsement of it, not presentment of it before the drawee. If both the party is aware of their duties, and makes the negotiable instrument as per the rules prescribed. Then it will be inferable a better business environment and transaction by negotiable instrument.
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