JAMIA MILLIA ISLAMIA

DISHONOUR AND DISCHARGE OF

NEGOTIABLE INSTRUMENTS

SUBMITTED TO – Dr. SUKESH MISHRA

SUBMITTED BY – SHAHBAZ KHAN MEHAR
SEM – X
SEC – B
ROLL NO. – 26
TABLE OF CONTENT
• ACKNOWLEDGEMENT
• INTRODUCTION
• STRUCTURES OF NEGOTIABLE INSTRUMENT
• TWO KINDS OF NEGOTIABLE INSTRUMENT
• DISHONOUR OF A NEGOTIABLE TOOL
• LEGAL ACTION IF CHEQUE DISHONORED
• CONSEQUENCES OF DISHONOUR
• CONSTITUTIONAL VALIDITY OF SECTION 138 OF N.I.ACT, 1881
• PENALTY & FORFEITURE
• INGREDIENTS OF LIABILITY UNDER SECTION 138 OF
NEGOTIABLE INSTRUMENTS ACT, 1881
• CONCLUSION
• BIBLIOGRAPHY
ACKNOWLEGEMENT
Firstly, I would like to express my profound sense of gratitude towards the
Almighty “ALLAH” for providing me with the authentic circumstances which
were mandatory for the completion of my research work.
I am also thankful to Dr. SUKESH MISHRA, for his invaluable support,
encouragement, supervision and useful suggestions throughout this research
work. His moral support and continuous guidance enabled me to complete my
work successfully. His intellectual thrust and blessings motivated me to work
rigorously on this study. In fact this study could not have seen the light of the
day if his contribution had not been available. It would be no exaggeration to
say that it is his unflinching faith and unquestioning support that has provided
the sustenance necessary to see it through to its present shape.
INTRODUCTION
The Negotiable Instruments Act was in force in India in the year 1881. Prior to
this legislation, the provision of the English Negotiable Instrument Act was in
force in India. And, the present Act is also like based on the English Act with
the modification. Later the Act operates on subject provision of Section 31 and
32 of the Reserve Bank of India Act 1934.
Negotiable Instrument is an inclusive term and it includes a promissory note,
bill of exchange or cheque payable moreover to order or to bearer. If such
practices may be omitted by any words in the body of the tool, which designates
and purpose that the legal relations of the parties thereto shall be governed by
this Act.
• Negotiable tools are allocated to order which is expressed to be so
payable or which is specified to be payable to a specific, and does not
include disputes barring allocation or signifying an purpose that it shall
not be convenient.
• Negotiable Instruments to bearer which is articulated to be so allocated.
• Negotiable tools, also initially or by consent, is articulated to be payable
to the order of a specified individual, and not to him or his demand, it is
however billed to him or his instruction at his possibility.
A negotiable tool may be made allocated to two or more recipients together, or
it may be made allocated in the substitute to one of two, or one or some of
numerous recipients.

Revised Negotiable Instruments Bill, 2015

The government has strategic the negotiable instruments (Revision) Bill, with
an opinion to revising the act. It has been elevated by numerous investors like
Creditors, Industry, Associations, Financial Institutions. And would also
disregard the current authenticities of Cheque clearance with new system
indication of Cheque Truncation System (CTS). In new system of Cheque
Truncation system clearance occurs only through glance at copy in electronic
form and cheques are not moved physically to the delivering branch, but are
established between the facility branches of the drawee and recipient banks.
New provision positions that the holder of the cheque can file an illegal
grievance before a judge where he be inherent in and offered the cheque. For
him it’s not necessary to go where the cheque was delivered.
The main object of this piece of legislation is to inculcate faith in the efficacy of
banking operations and credibility in transacting business on negotiable
instruments. Section 138, THE NEGOTIABLE INSTRUMENTS ACT 1881 is
intended to prevent dishonesty on the part of the drawer of negotiable
instrument to draw a cheque without sufficient funds in his account maintained
by him in a bank and induces the payee or holder in due course to act upon it.
The dishonour of cheque is now a criminal offence punishable by imprisonment
up to one year or with fine up to the double the amount of dishonored cheque or
with both.
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
cheque makes default in payment upon being duly required to pay the same.1
It has been noted above that dishonour by non-acceptance could be only of a bill
of exchange, but dishonour by non-payment could be of any negotiable
instrument including a bill of exchange. When presentment for payment is made
and the maker, acceptor or drawee, as the case may be, makes default in making
the payment, there is dishonour of the instrument.
Dishonour is of two kinds:
1. Dishonour of a bill of exchange by non-acceptance.
2. Dishonour of a promissory note, bill of exchange or cheque by non- payment

1
Section 92.
STRUCTURES OF NEGOTIABLE INSTRUMENT
Relaxed Transferability: On every occasion, we handover any stuff to
somebody, we need to have the on-paper allocation deed, get it listed, pay the
stamp duty etc. But for Cheque such regulations are not compulsory to do while
relocating a negotiable instrument. The allocation of rights is altered when
allocated to the deliverer by legal authorization and distribution to when
allocated to order. Not compulsory to give the notice to the previous holder.
Heading: It must be complete and moral on the transferee in decent confidence
and for a thought. Which means that an individual who in receipt of a
negotiable instrument has a definite and clear title to the instrument. And,
receiver shouldn’t have the information of the previous holder having any flaw
in his heading. He is also known as holder in due sequence.
Absolute Demand: It must be a clear capacity or instruction for each sum.
Compensation: Negotiable tool must have the convinced of amount cash only
and nothing else. i.e., he cannot make a capacity note on securities, properties or
things.
Essential is in lettering: It must be in lettering this contains computer printout,
design, script, typing etc.
The period of amount must be persuaded: Tool must be payable at a time, if
the time is not stated than it is not a negotiable tool. If the period of amount is
linked to the termination of a separate, however, a negotiable tool as decease is
certain though the period thereof is not.
Signature: All the negotiable instrument must have the valid signature of its
maker; without the signature of the maker or drawer it becomes invalid.
Distribution: Distribution is vital, any negotiable instrument such as Cheque or
promissory note is not complete until it spreads to the payee. For example, if
you matter a cheque in the name of your sister but it is not instrument till it is
handed over to your sister.
The Recipient must be convinced individual: The period ‘individual’ includes
specific, body of business, director or chairman of an institution. The payee can
also be more than one person. Favor of the negotiable instrument is made must
be named or described with rational inevitability.
Notice of allocation: Giving sign of allocation of a negotiable tool to the party
accountable to pay is not required.
Presumptions: To all negotiable instruments certain presumptions are applied.
I.e., Consideration between the transferor and the transferee. Every negotiable is
presumed to have made accepted, negotiated, endorsed or consideration for
transfer.
Stamping: This is required as per the Indian Stamp Act 1899, the value of
Stamp depends upon the nature of transaction and value, at the time of their
payment.
Payable to Order or bearer: It must be payable either to order or Bearer.
Number of Transfer: It can be transferred indefinitely till they are at maturity.
Exchange: They are considered as substitutes for money and accepted in
exchange of goods because cash be gained at any point of time. It is legal tender
payment of certain money
Presumptions: Certain conjectures put on to all negotiable tools, for instance
thought is supposed to have accepted between the transferor and the transferee.
Method for suits: In India a distinct procedure is if for suits on promissory
notes and bills of exchange.
Quantity of allocation: These tools can be moved forever till they are at
maturity.
Instruction of indication: These tools are in script and employed by the
parties, they are used as evidence of the fact of ineptness because they have
special instructions of indication.
Argument: These tools relate to payment of sure money in legal kind, they are
careful as alternates for cash and are acknowledged in conversation off goods
because money can be got at any instant by paying a small instruction.
Payable to order or bearer: It must be allocated either to order or bearer
TWO KINDS OF NEGOTIABLE INSTRUMENT
Instrument Negotiable by Statute
Under section 13 of Negotiable Instruments Act there three kinds of negotiable
tools –
These are: Bills of Exchange, Promissory Notes and Cheques
Under Section 4 – Promissory note is a tool in marks covering an unrestricted
responsibility, employed by the manufacturer, to recompense a positive quantity
of cash only to, or to the order of, a certain person, or to the bearer of the tool.
It necessity be in writing: A mere verbal promise to pay is not a promissory
note. The way of lettering is insignificant, but it must be in any arrangement that
cannot be changed simply.
It must surely a prompt promise or strong considerate to
recompense: There must be an express responsibility to pay. A simple
salutation is not sufficient.
Under Section 5 – Bill of exchange a tool in lettering covering an unrestricted
command, engaged by the maker, guiding an individual to pay a certain amount
of cash only to, or to the order of, a certain individual or to the bearer of the
tool.
A promise or command to pay is not “restricted”, within the meaning of this
section and section 4, because of the time for sum of the quantity or any
payment thereof being articulated to be on the gap of a certain period after the
incidence of a stated incident which, according to the normal anticipation of
manhood, is sure to occur, although the time of its happening may be undefined.
Under section Section 6 – Cheque is a bill of exchange drawn on a stated
financier, and not spoken to be owed then than on request”.
A cheque is a negotiable instrument used for making the payment to payee.
Account Payee and crossed cheque are issued to a payee which cannot be
transferred to any other. Cheque needs to be uncashed by depositing into
payee’s bank account. “Drawer” is the cheque issuer and “Payee” is the person
to whom the cheque is drawn. “Drawee” is the bank who is directed to pay the
amount.
However, case of cheque bounces lesser compared to earlier days due to more
online payment i.e., RTGS, NEFT, IMPS etc. Sometimes large amount bearing
cheques remain unpaid and are returned by banker on which they are drawn.
A cheque is bill of exchange with two more experiences, namely,
It is always drawn on a stated financier, and (ii) it is always owed on request.
So, all cheque are bill of exchange, but all bills are not cheque. A cheque must
content all the necessities of a bill of exchange; that is, it must be employed by
the drawer, and must comprise.
A bill of exchange drawn on a stated financier, and not articulated to be owed
then than on request
• Contains the electronic image of a truncated cheque
• Comprises a cheque in electronic form
• Delivered on a stated banker only
• The sum stated is always sure, and must be clearly declared
• The recipient is always certain.
• Must stand a date

Negotiable tools by Practice or Technique

There are sure other tools which have established the appeal of negotiability by
the usage or custom of trade.
Circular notes, Bearer debentures, Dividend warrants, share records with blank
transmission deeds, Exchequer bills, Bank notes, share permits, etc.
Models of Non-negotiable tools
1. Currency orders
2. Deposit receipts
3. Share certificates
4. Dock warrants
5. Postal orders

DISHONOUR OF A NEGOTIABLE TOOL

When the negotiable tool is violated; the holder must give a sign of dishonor to
all the earlier parties to make them accountable. A negotiable instrument can be
violated any by nonacceptance or by non-payment. A cheque and a promissory
note can only be violated by non-payment but a bill of exchange can be violated
any by non-acceptance or by non-payment.

Dishonor by non-acceptance
Since presentment for acceptance is required only of a bill of exchange, it is
only the bill of exchange which could be dishonoured by non-acceptance.
Section 91 provides that the dishonour of a bill of exchange, by non-acceptance,
may take place in any of the following ways:-
• When a bill of exchange is presented for acceptance and the drawee or
the drawees makes default in acceptance. When there are several drawees
even if one of them makes a default in acceptance the bill is deemed to be
is honoured, unless these several drawees are partners.2 Ordinarily, when
there are a number of drawees all of them must accept the same, but when
the drawees are partner’s acceptance by one of them means acceptance by
all. If the drawee does not accept within 48 hours of the presentment of
the bill of him, the bill is deemed to be dishonoured because the drawee is
entitled to only 48 hours time (exclusive of public holidays) to consider
whether he will accept or not.3
• Where presentment for acceptance is excused and the bill is not accepted,
for example, if the drawee cannot, after a reasonable search, be found, the
bill is dishonoured.4
• Where the drawee is incompetent to contract, the bill is treated to be
dishonoured. According to section 26, a person capable of entering into a
contract can accept a bill and a person who is not competent to contract
cannot make any acceptance. Since a person incompetent cannot contact
to make any acceptance, therefore, when such a person is the drawee, the
bill is deemed to be dishonoured by non-acceptance.
• When the drawee makes a qualified acceptance, the holder may treat the
bill of exchange having been dishonoured. It is expected that the drawee
will make an unqualified acceptance. If the drawee makes a qualified
acceptance and the holder agrees to that all those parties who do not
consent to such an acceptance are discharged from their liability towards
the holder.5 It is, therefore, in the interest of the holder that when there is
a qualified acceptance by the drawee he should consider the bill to be

2
Sections 33 and 34.
3
Section 63.
4
Section 61, Para 2.
5
Section 86.
 dishonoured. Examples of qualified acceptance are accepting to pay a
different sum, or to pay subject to fulfillment of condition, or to pay at a
different place than stated by the drawer in the bill of exchange.
Dishonor 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
cheque makes default in payment upon being duly required to pay the same.6
It has been noted above that dishonour by non-acceptance could be only of a bill
of exchange, but dishonour by non-payment could be of any negotiable
instrument including a bill of exchange. When presentment for payment is made
and the maker, acceptor or drawee, as the case may be, makes default in making
the payment, there is dishonour of the instrument. Apart from that there are
certain circumstances when presentment for payment is excused and the
instrument is deemed to be dishonoured even without presentment.7 Thus, when
the maker, acceptor or drawee intentionally prevents the presentment of the
instrument, or cannot, after a reasonable search, be found, the instrument is
deemed to be dishonoured even without presentment.
LEGAL ACTION IF CHEQUE DISHONORED
A cheque is a negotiable tool. Crossed and account payee cheques are not
accessible by any individual other than the recipient. The cheques have to be
placed into the recipient’s bank account.
Lawfully, the writer of the cheque is called ‘drawer’, the individual in whose
service, the cheque is drawn is called ‘payee’, and the bank who is focused to
compensation the amount is recognized as ‘drawee’.
However, cases of cheque spring back are common these times. Rarely cheques
bearing big amounts continue unpaid and are repaid by the bank on which they
are drawn.
As presently as a cheque is violated, the drawee bank straight queries a ‘Cheque
Return Memo’ to the banker of the payee upholding the purpose for non-
payment. The payee’s banker then gives the violated cheque and the memo to
the payee. The holder or payee can resubmit the cheque in three months of the
date on it, if he faiths it will be delighted the second time. Though, if the cheque

6
Section 92.
7
Section 76.
issuer flops to make an amount, then the payee has the exact to prosecute the
drawer lawfully.
The payee may legally litigate the nonpayer/drawer for discredit of cheque only
if the sum specified in the cheque is towards release of an obligation or any
other responsibility of the nonpayer towards recipient.
If the cheque was delivered as a skill, towards advancing a loan or for illegal
drives, then the drawer cannot be impeached in such cases.

CONSEQUENCES OF DISHONOUR
There are two points relating to the consequences of the dishonour of the
cheques. The first is that by dishonour of the cheque the negotiability of a
cheque is lost. In the case of Sukanraja Khimraja, a firm of Merchants,
Bombay v. N. Rajagopalan8, and the facts were that after the dishonouring of a
cheque, the payee (M) endorsed it to (R) for valuable consideration. (R)
Demanded payment of the amount as per the cheque from defendants, (namely
the firm which issued the cheque and its partners), and they having neglected to
pay, the suit was filed. The Trial Court decreed the suit and it was affirmed on
appeal. In the Letter Patent Appeal it was contended for the appellants-
defendants 1 and 2 ,that the crucial point involved was, whether the alleged
cheque was negotiable after being dishonoured, and whether the endorsee (M)
who filed the suit could be a holder in due course as defined in Section 9 of the
Negotiable Instruments Act.
It was held that the plaintiff as the brother of (M) was fully aware that the
cheque had been dishonoured, and the endorsement in his favour was only after
the Bank returned it. Therefore, Ex. A-1 had lost its negotiability. Hence, he
cannot be a holder in due course. This essential characteristics having not been
comprehended and more so, when the cheque had never been thereafter
presented to the Bank for encashment, the suit as laid, could not have been
decreed at all.
The second aspect is relating to the question of limitation. In the case it was
held that in the event of a post-dated cheque given on the date of loan in
repayment of debt, being dishonoured, there is no payment at all either on the
part of the debt or the whole of it with the result that the debt in question

8
1(1994) BC 642.
continues to exist and hence, limitation could not be counted from the date
when the cheque was dishonoured but from the date of the loan.9

CONSTITUTIONAL VALIDITY OF SECTION 138 OF

N.I.ACT, 1881
The validity of section of 138 of the Negotiable Instruments was challenged
before the Maharashtra High Court10 contending therein that the provisions of
this section are violative of Article of 14 of the Constitution of India. The Court
examined the matter in detail taking into consideration the facts of the case and
various articles of the Indian Constitution and observed that the importance of
banking section in the developing economy could not be under-rated. It is not
necessary for the purpose of this case to peep into the history of the
development of law, whether it is the Bills of Exchange Act of England of the
year 1882, the Cheque Act, 1957, and various other statutory exercises.
Further, it is the larger public interest that commercial transaction maintain the
speed and tempo and that a swift sale or a prompt purpose, is not unduly
impeded by suspicions always hovering round that part of promise to be
performed in future. The issue of a cheque carries with it assumptions which
could regulate the normal functioning of an honest citizen. At a period of time
when multitudinous persons and institutions press into services, devices and
facilities available under the Negotiable Instruments Act, it may be necessary to
ensure that those who issue such vital documents, do not adopt a casual or
careless attitude which could block the free flow of trade. It is in the light of the
experience, which the State had, that the enactment has been attempted. Court is
unable to detect any legal infirmity or constitutional incompetence.
Furthermore, no attempt has been made out as to show how Article 20 of the
Constitution can be attracted to such a situation. The statute, therefore, cannot
be struck down, merely because the petitioners desire to see its collapse. Entry
Nos 45 and 46 respectively, refer to banking. Bills of Exchange, Promissory
Notes and other instruments. The impugned provisions, would come well within
the larger ambit of the entries. It is connected with negotiable instrument, which
clearly come with the aforesaid entries dealing with legislative power.

9
Arjuna Lal Dhanji Rathod v. Dayaram Premji Padhiar, AIR 1971 Pat. 278.
10
Narayanadas Bhagwandas Partani v. Union of India, 1993 Mah LJ 1229.
Following this, the Bombay High Court held subsequently in Mayri Pulse Mills
v. Union of India11 and Tarun Kumar Bose v. Union of India as follows:
“We have no hesitation in holding that Parliament had power and
competence to enact Chapter XVI under Entries 45 and 46 of List I in the 7th
Schedule of the Constitution.” The court also observed that the mere fact that
the new sections impose absolute liability dispensing with the doctrine of mens
rea does not render the provisions invalid. The provision in Section 140 that it
would not be a defence to show that the drawer had no reason to believe when
he issued the cheque that it would be dishonoured was held to be valid.
The raising of the presumption that the drawer of the cheque is guilty till he
proves the contrary is also not arbitrary because the presumption arises only
after the basic requirements for the presumption to arise are proved.

PENALTY & FORFEITURE

On getting the complaint, along with an affirmation and relevant paper track,
the court will matter order and get the substance. If found mortified, the debtor
can be disciplined with financial consequence which may be double the quantity
of the cheque or custody for a term which may be long to two years or both. The
bank also has the correct to stop the cheque book ability and close the
explanation for replication crimes of bounced cheques.
If the drawer makes sum of the cheque quantity within 15 days from the date of
receiving of the sign, then drawer does not obligate any crime. Then, the payee
may continue to file a grievance in the court of the jurisdictional judge within
one month from the date of finish of 15 days agreed in the sign.
In the case of Dalmia Cement(Bharat) Ltd. V Galaxy Traders and Agencies
Ltd.5, the Apex Court referred to the article of Section 138 of the Act. The
court detected that the Act was passed and section 138 thereof combined with a
stated object of making a distinct capability by counting a strict responsibility so
far as the cheque, a negotiable instrument, is concerned. The law connecting to
the negotiable instruments is the law of commercial world passed to ease the
actions in trade and commerce making founding of giving sanctity to the
instruments of credit which could be estimated to be redeemable into cash and
effortlessly drivable from one person to one more.

11
6 ibid.
The wrongdoing under section 138 is not a usual crime like offended or killing.
It is an offence shaped by a lawful fiction in the law. It is a public obligation
altered into an illegal obligation, under limited circumstances by way of an
alteration to the Act, which is carried into force only in 1989. Till then, the
criminal acts mentioned to in section 138 established only a pure civil
obligation. Legally, the legislature thought it fit to deliver for passable
protections in the Act to defend truthful drawers from unnecessary annoyance.
Though, the sections 138 to 142 of the alleged Act were, originally missing in
dealing with disgrace of cheques. According to this, the Negotiable Instruments
Act, 2002, put in the ground, modified sections 138, 141 and 142 and offered
new segments 143 to 147 in the said Act.

INGREDIENTS OF LIABILITY UNDER SECTION 138 OF

NEGOTIABLE INSTRUMENTS ACT, 1881
The ingredients of liability under the section have been stated in terms of the
following points:
• The cheque is drawn on a bank for the discharge of any legally
enforceable debt or other liability.
• The cheque is returned by the bank unpaid.
• The cheque is returned unpaid because the amount available in the
drawer’s account is insufficient for paying the cheque.
• The payee has given a notice to the drawer claiming the amount within 15
days of the receipt of the information by the bank.
• The drawer has failed to pay within 15 days from the date of receipt of
notice.
CONCLUSION
The people who issue cheques knowingly well that cheque is not going to be
honoured on presentation, try to create circumstances in which the banks return
the cheque with such endorsements as “Stop payment”, “Refer to Drawer” and
“A/c closed”. This is with a view to escape from the criminal liability. „Account
Closed‟ cannot afford a ground for taking penal action under the Act. Except
the two ground i.e. the insufficiency of the funds or, because the cheque exceeds
the amount arranged to be paid there is no third eventuality contemplated under
the Act. Further, the main object of Section 138 was to inculcate faith in the
efficacy of banking operations and credibility in transacting business on
negotiable instruments.
Despite civil remedy, the present day economies of the world which are
functioning beyond the international boundaries are relying to a very great
extent on the mechanism of the Negotiable Instruments such as cheques and
bank drafts and also the oriental bill of exchange as the business activities have
increased, the attempt to commit crimes and indulge in activities for making
easy money has also increased. Thus besides civil law, an important
development both, in internal and external trade is the growth of crimes and we
find that banking transactions and banking business is every day being
confronted with criminal actions and this has led to an increase in the number of
criminal cases relating to or concerned with the Banking transactions.
Whenever a cheque is dishonoured, the legal machinery relating to the
dishonour of a cheque comes into motion. It is in the larger public interest that
commercial transaction maintains the speed and tempo and that a swift sale or a
prompt purpose, is not unduly impeded by suspicions always hovering round
that part of promise to be performed in future. The issue of a cheque carries
with it assumptions which could regulate the normal functioning of an honest
citizen.
BIBLIOGRAPHY
STATUTES
• Negotiable Instruments Acts, 1881.
BOOKS
• Commentary on The Negotiable Instrument Act- Dutta, 2009 Edition.
• Bhashyam & Adiga, The Negotiable Instruments Act, Bharat Law House,
New Delhi
ARTICLES
• http://www.legalserviceindia.com/article/l277-Dishonour-Of-
Cheque.html
• http://taxindia.pz10.com/2013/04/cheque-signature-mismatch-may-lead-
to_29.html