Dishonour and Discharge of Negotiable Instrument

Negotiable instruments such as Cheques, Promissory notes, and Bills of exchange are frequently used in commercial transactions. Negotiable Instruments Act, 1881 provides legal recognition to these instruments and also governs what happens when these instruments are dishonoured or discharged.

Dishonour of Negotiable Instrument:

A negotiable instrument is said to be dishonoured when the party primarily liable on it refuses or fails to make payment when it is duly presented.

Types of Dishonour:

a) Dishonour by Non-Acceptance

This applies primarily to bills of exchange. It is said to be dishonoured by non-acceptance when the drawee refuses to accept the bill when it is presented.

• This may occur due to insolvency, dispute, or a lack of authority to accept.

• No further liability arises until the bill is dishonoured.

b) Dishonour by Non-Payment

All types of negotiable instruments are said to be dishonoured by non-payment when the party responsible for making the payment refuses to do so upon due presentation.

• In the case of a cheque, dishonour by non-payment typically occurs due to insufficient funds, account closure, or payment stop instructions.

🔹 Notice of Dishonour (Section 93)

When an instrument is dishonoured, the holder must give notice to all parties whom they intend to make liable, except the drawer in some cases.

• It must be given within a reasonable time.

• The notice may be oral or written, sent by post or delivered in person.

🔹 Noting and Protesting (Sections 99–100)

• Noting: A formal noting by a Notary Public on the dishonoured instrument mentioning the date, reason, and time of dishonour.

• Protesting: A formal certificate issued by a notary attesting that the instrument was dishonoured.

• These are not mandatory for all instruments but strengthen legal claims in case of disputes or lawsuits.

Discharge of Negotiable Instrument:

Discharge refers to the point when the instrument ceases to be legally enforceable, i.e., all liabilities under the instrument are extinguished.

Modes of Discharge:

a) By Payment in Due Course (Section 78)

If the instrument is paid in full to the holder at the right time, by the right person, the liability is discharged.

• This is the most common and ideal mode of discharge.

• Payment made in good faith and without dispute completes the transaction.

b) By Holder Cancelling the Instrument (Section 82(a))

If the holder voluntarily cancels the instrument or strikes off the name of a party, that party is discharged from liability.

• The cancellation must be intentional and clear.

• It may be done physically or by endorsement.

c) By Release (Section 82(b))

When a party to the instrument is expressly released from liability through an agreement or contract, that party is discharged.

• A release may be written or oral, but it must be unambiguous.

d) By Allowing More than 48 Hours for Acceptance (Section 83)

In the case of bills of exchange, if the holder allows the drawee more than 48 hours (without consent of prior parties) to decide whether to accept the bill, it can discharge the prior parties from their liability.

e) By Delay in Presentment or Non-Presentment (Sections 64–66)

If the holder fails to present the instrument within a reasonable time, and due to this delay loss is caused, the instrument may be discharged. Timely presentation is important to preserve the right to claim.

f) By Material Alteration (Section 87)

If the negotiable instrument is materially altered without the consent of all parties involved, it becomes void and the parties are discharged. Examples include altering the date, amount, name of the payee, etc.

g) By Operation of Law

In some cases, discharge occurs automatically by operation of law.

• For example, if the debtor is declared insolvent, or

• By merger of rights where the debtor and creditor become the same person.

Effects of Dishonour and Discharge:

• Dishonour gives the holder the right to sue the liable parties and claim damages or compensation.

• Discharge ends the legal enforceability of the instrument and the liability of parties.

• Once an instrument is discharged, no further claims can be made based on it.