ADVANCED CERTIFICATE COURSE ON NEGOTIABLE

INSTRUMENTS ACT

MODULE 4 [A]

SECTION 106: Reasonable time of giving notice of dishonor

If the holder and the party to whom notice of dishonor is given carry on business or live (as
the case may be) in different places, such notice is given within a reasonable time if it is
dispatched by the next post or on the day next after the day of dishonor.

If the said parties carry on business or live in the same place, such notice is given within a
reasonable time if it is dispatched in time to reach its destination on the date next after the
day of dishonor.

Meaning

 Chapter X of Negotiable Instruments Act, 1881 deals with reasonable time giving
notice of dishonor.

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  The section provides that if the holder or a party,here in this section referring to the
person ( includes natural & artificial) by whom the dishonored chequewas issued
carrying on business or lives in different places, notice informing dishonour of
instrument providing reasonable time if such notice is dispatched on the next day after
the day of occurrence of dishonor.
 In case the said parties carry on business or live in the same place, such notice of
dishonor is given within a reasonable time which will be required for transfer of such
notice to reach such person on the date next after the day of dishonour.

Explanation

 In this Section the terms mean:

Holder and the party:- The term ‘Holder’ has been defined under section 8 of this act, which
means the person who was in possession of the instrument which got dishonored and Party
means the person who issued such cheque. Party or a holder can be an artificial person i.e;
company or organization.

Dishonour of cheque : Means a situation where the bank refuses to pay the amount
mentioned in the cheque to the holder of such cheque on the ground that either because of
the amount of money standing to the credit of that account is insufficient to honour the
cheque or that it exceeds the amount arranged to be paid from that account by
an agreement made with that bank.

Reasonable Time: Means the time which will reasonably take place based on the
circumstances of each case and the distance between the places where the instrument is made
or drawn from. In calculating reasonable time public holidays must be excluded. The term
reasonable time has been defined under sec 105, of the act.

 The section provides two specific rules for determining what is reasonable time for
giving a notice ofdishonor.

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  The first paragraph of the section provides that where the holder of instrument or the
party against whom notice is given carry on business or lives at two different places
then such notice shall be dispatched by way of next post or on the day next after the
day of dishonor.
 The second paragraph of the section determines a condition where the said parties
carry on business or live in the same place, it is sufficient if the notice is dispatched so
that it reaches its destination on the next day after the day of dishonor.
 The reasonable time taken to send the notice depends on the fact and circumstances of
each case, For example ; a delay of 10 months in sending a notice shall not be within
reasonable time. The notice of dishonor shall be made as soon as the instrument is
dishonoured.

Illustrations

‘A’ the holder of the cheque who carries on business in the same place, receives a notice for
dishonor of cheque after the delay of one month from the bank such delay shall not come
within the purview of reasonable time.

Case Laws

Indian Bank v. Boorugu Nagaiah Rajanna1

In this case it was held that the notice of dishonor must be given as soon as the instrument is
dishonoured and in all events within it must be a reasonable time there after and a reasonable
time depends on the facts and circumstances of each case. Where the defendant raises the
plea that there was not notice of dishonor , the burden of proof is on the plaintiff to prove that
the notice was issued and within reasonable time.

1
(2001) 1BC 16DB.

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Authors Note

The practical application of this section can be applied easily and the language is easily
understandable and clearly depicts out the meaning of the section.

SECTION 107: Reasonable time for transmitting such notice.

A party receiving notice of dishonour, who seeks to enforce his right against a prior party,
transmits the notice within a reasonable time if he transmits it within the same time after its
receipt as he would have had to give notice if he had been the holder.

Meaning

The section 107 protects the interest of the holder of the instrument which got dishonoured to
enforce his rights against the party issuing such instrument, by transferring the notice of
dishonor to such issuing party within a reasonable time, as if he would have done being the
holder.

Explanation

 This section provides time to the parties receiving notice of dishonor to send notice to
the other prior parties, this means that when a party receives a notice of dishonor he
gets an equal opportunity to further send the notice of dishonor within a reasonable
time which he would have got as the holder, after the dishonor.
 Thus each party is entitled to a clear day or reasonable time for transmitting the notice
and one clear day is to be allowed for each step to provide time for communication
between parties who are liable on the instrument.
 However if the holder or the indorser chooses to send notice to all the parties, he
cannot demand for as many days it will take to communicate with each party as a
reasonable time, but is bound to give notice within the same time, as he is to give
notice to his indorser.

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Illustrations: ‘Z’ holder of the bill on receiving the notice of its dishonor sends the notice to
‘Y’ who indorsed the bill for claiming the said due amount shall send such notice of dishonor
within a reasonable time.

Case Laws

Rowev. Tipper2

In this case the holder or the indorser chooses to give notice to all parties, he cannot claim as
many days as there are indorsers, but is bound to give notice within the same time, as he is to
give notice to his immediate indorser.

Authors Note:

The present section is written in a language which cannot be easily understood and the
practical application of which requires a lot of knowledge about the law, the section cannot
be interpreted easily and thus should be explained with the help of illustrations.

SECTION 117: Rules as to compensation.

 The compensation payable in case of dishonour of a promissory note, bill of exchange

or cheque, by any party liable to the holder or any indorsee, shall be determined by
the following rules:—

(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) 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;

2
(1853) 13 CB 249.

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(c) an indorser who, being liable, has paid the amount due on the same is entitled to the
amount so paid with interest at [eighteen per centum] per annum from the date of payment
until tender or realisation thereof, together with all expenses caused by the dishonour and
payment;
(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.

Meaning

 This section provides rules for determining the compensation which the holder of the
instrument is entitled to receive in case of dishonor of a negotiable instrument.
 Such compensation shall be determined by applying following rules:-

a) The holder of the instrument is entitled to the amount mentioned in the instrument along
with the expenses incurred by him for claiming the amount.

b)When the person who is charged with the offence of dishonor resides at a different country
that at which the instrument was payable then the holder is entitled to receive such some at
the current rate of exchange between the two places.

c) The indorser along with the amount which he was entitled to pay , has to pay such amount
along with 18% p.a interest from the date of payment until realization and such other
expenses beared by the holder due to dishonor.

d) The indorser is entitled to receive the amount claimed at the current rate of exchange
between two countries, from the person charged.

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e) The party entitled to compensation is authorized to draw a bill against the liable party to be
payable, at sight or on demand, for the amount due to him. Such bill must be sent along with
the dishonoured instrument and the amount so demanded as compensation.

 If such bill is dishonoured the party liable to pay such bill shall be liable to pay
compensation in the same manner as in the case of dishonor of the original bill.

Explanation

Meaning of particular words for the purpose of this section is:-

 Holder – The person in whose possession the said negotiable instrument is.
 Indorsee– The person in whose name the negotiable instrument has been made.
 Indorser- The person who has signed or given up his interest by signing up the
negotiable instrument.
 Rate of exchange- The prevailing of rate of currency of two different countries.
 Section 117 of Negotiable Instruments Act, 1881 is divided into further 5 parts each
part by way of clauses, each clause has a different meaning and provides right to the
holder or the indorsee of the negotiable instrument i.e; Promissory note, Bill of
Exchange or cheque.
 This section helps in determining the amount of compensation holder of the
suchdishonoured instrument is entitled to receive and what are the measures can
bepplied for determining the amount for which he can sue.Such compensation can be
determined by applying following rules:-

a) This clause provides that the holder of the said negotiable instrument will be entitled to
receive the said amount due as mentioned on the negotiable instrument, along with the other
expenses incurred by him in presenting, noting and protesting, in order to claim the said
amount, which he is legally entitled to receive from the indorser.

b) This clause provides measure for the damage when the person charged for payment and
the person entitled to receive resides at two different countries and in such case the

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instrument gets dishonoured. The holder of such instrument shall be entitled to receive the
amount prevailing as the current exchange rate between two countries.

c) This clause protects the right of the intermediate indorser who was liable to pay the amount
to the other party but failed to receive the amount from the person charged with, in such case
such indorser shall be entitled to receive the amount so paid, by him along with the
prescribed interest i.e; 18% p.a( earlier the interest rate was 6%), from the date of payment
until tender or realization of the said amount, together with the expenses beared by him for
claiming the said amount.

d) This clause as well protects the right of the intermediate indorser, it provides that when the
person charged and the indorser( intermediate indorser), lives at two different countries then
in such case, the indorser( intermediate indorser) shall be entitled to receive the claimed
amount at the current rate of exchange prevailing between the two places,

e) This clause enables the party entitled to compensation to draw a bill or re-draft upon the
party liable to compensate for the amount due to him, together with expenses properly
incurred by him. Such bill or re-draft must be sent along with the instrument dishonoured and
any protest. If such re-drafted bill is dishonoured ,the party dishonouring the same is liable to
make the compensation in the same manner as in the case the bill had been originally issued.

Illustration

‘A’ indorsed a cheque in the name of ‘B’ and ‘B’ further indorsed the same cheque to be
payable to ‘C’ whom he had to pay. By doing this ‘B’ became the indorser( intermediate
indorser) for ‘C’.

When such cheque gets dishonoured and B pays the amount C was entitled to B as an
indorser for C and indorsee is now entitled to receive such amount , which he would hae
received as a holder.

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Case Laws

M. RamnarainPvt Ltd v. State Trading Corporation of India Ltd3

It was provided that where the payee is the holder of the bills of exchange and is not willing
to part with the same unless the entire amount covered by the bills is realized and the bills are
subsequently dishonoured, it is not open for the drawer to institute the suit or compensation
against the acceptor after the bills are dishonoured for clause © of section 117 of the act
which clearly provides that compensation can be only claimed by the person who is the
holder of the bill.

Authors Note

In the present section there are various clarification which are to be made, as the section lacks
in providing clarification about the parties who are entitled to receive the amount. The
language used in the section is vague and cannot be interpreted easily and requires certain
words to be inserted by way amendment in the Negotiable Instrument Act, 1881.

As the main motive of this section is to make the holder of the instrument aware of the
measures which he has to take into consideration for which he is ought to sue, it should be
written in such a language which can be easily understood even by a layman, so that he can
make proper claim of his rights.

The word indorser and to which indorser section is referring should be defined by the said
act, along with certain illustrations to make the motive of the section clear.

3
1988 Bom 45.
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SECTION 138

Dishonour of cheque for insufficiency, etc., of funds in the accounts

Where any cheque drawn by a person on an account maintained by him with a banker for
payment of any amount of money to another person from out of that account for the
discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid,
either because of the amount of money standing to the credit of that account is insufficient to
honour the cheque or that it exceeds the amount arranged to be paid from that account by an
agreement made with that bank, such person shall be deemed to have committed an offence
and shall without prejudice to any other provisions of this Act, be punished with
imprisonment for a term which may extend to one year, or with fine which may extend to
twice the amount of the cheque, or with both:

PROVIDED that nothing contained in this section shall apply unless-

(a) The cheque has been presented to the bank within a period of six months from the date on
which it is drawn or within the period of its validity, whichever is earlier.

(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand
for the payment of the said amount of money by giving a notice, in writing, to the drawer of
the cheque, within fifteen days of the receipt of information by him from the bank regarding
the return of the cheque as unpaid, and

(c) The drawer of such cheque fails to make the payment of the said amount of money to the
payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of
the receipt of the said notice.

Explanation: For the purpose of this section, "debt or other liability" means a legally
enforceable debt or other liability.

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Interpretation

 This section talks about penalties in case of dishonour of the cheque due to
insufficiency of funds in the account. this section explains that when any cheque is
drawn by the person from the account which is maintained with bank with the purpose
of payment of any amount or to discharge liability , debt partially or wholly and the
cheque is returned by the bank to the cheque holder due to insufficient amount of
money in the account ;or
 In case if the amount of cheque exceeds then the amount in the account of the account
holder and bank returns the cheque due to insufficient balance in account then such
person who has issued the cheque shall be punished for imprisonment which may be
extended to two years; or fine which may extend to twice the amount of the cheque;
or with both.

Provided that;

(A) The cheque shall be presented to the bank with in prescribed time period that is six
months from the date which it is drawn or within valid time period, whichever is
earlier.
(B) The payee or the holder of the cheque shall demand for the payment of the amount of
money of cheque by giving a notice in writing to the drawer within 30 days of the
receipt of information by him regarding the return of cheque as unpaid.
(C) The account holder or drawer of the cheque has failed to make the payment of said
cheque to payee or to the cheque holder with in the receipt of the said notice.

Explanation

For the purpose of this specific section, here the debt and liability means legal loans and
legal obligation or any other liability which can be legally enforce.

Case Laws

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 Rangappa v. Mohan4

The Hon’ble Supreme Court held that the existence of section 138 that is dishonour of
cheque is depends upon the presumption under section 139 of the negotiable instrument
act 1881.

SECTION 139. Presumption in favour of holder

It shall be presumed, unless the contrary is proved, that the holder of a cheque received the
cheque of the nature referred to in section 138 for the discharge, in whole or in part, or any
debt or other liability

Interpretation

It shall be taken into assumption that the cheque received by the holder was in the nature of
discharging the liability of payee and the cheque has been dishonoured with reference to
section 138.

Case Laws

B.Girish v. S.Ramaiah5

 The Hon’ble court held that presumption under section 139 of the act have been
rebutted or not have to be considered after examining the complete record and the
payee is liable to prove his defence beyond reasonable doubt.

Shriram transport finance company limited v. Mahadevaiah6

 The hon’ble court held that the presumption can be rebutted either by direct evidence
or by conditional circumstances. Plaintiff has to prove that the cheque which got

4
AIR 2010 SC 1898
5
Criminal Appeal no. 1371 of 2007
6
RP/3882/2011
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 returned due to insufficient balance in the account or bounced was issued for
discharging legal debt or legal liability partly or wholly.

SECTION 140. Defence which may not be allowed in any

prosecution under section 138

It shall not be a defence in a prosecution of an offence under section 138 that the drawer had
no reason to believe when he issued the cheque that the cheque may be dishonoured on
presentment for the reasons stated in that section.

Interpretation

This section explains that the drawer cannot take defence as he was unaware of the fact that
the cheque which is issued by him might be dishonoured at the time of presentation of cheque
due to insufficiency of balance

Author’s note

Section 138 of Negotiable instrument act 1881 was amended by the Banking, Public
Financial institution and Negotiable instruments laws act 1988 wherein a new chapter 7 was
incorporated for penalties in case of dishonour of cheque due to insufficiency of fund. These
provisions were incorporated for the purpose to encourage the culture of use of cheques.

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