Dishonour, Notice of Dishonour, Noting, Protest and Days of Grace

A negotiable instrument is dishonoured when the drawee refuses to accept a bill (dishonour by non-acceptance, S.91) or when the maker, acceptor or drawee fails to pay on due presentment (dishonour by non-payment, S.92). Dishonour gives the holder an immediate right against the drawer and indorsers, but only if he gives them notice of dishonour (S.93). The time of payment is fixed by the rules on maturity and days of grace (S.22 to S.25), and dishonour may be formally recorded by a notary public through noting and protest (S.99 to S.104A).

Legal Framework

Maturity and Days of Grace (S.21 to S.25)

• Maturity (S.22): The date on which the instrument falls due.
• Days of grace (S.22): An instrument not payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable. Cheques and instruments payable on demand get no days of grace.
• Months (S.23): The period ends on the corresponding date of the month; if there is no such date, on the last day of that month. Days of grace are then added.
• Days (S.24): Exclude the day of the date, of presentment for acceptance or sight, or of the event.
• Holiday (S.25): If maturity falls on a public holiday (including Sundays and days notified by the Central Government), the instrument is due on the next preceding business day.

Notice of Dishonour (S.93 to S.98)

• Who gives: The holder, or a party who remains liable after receiving notice (S.93).
• To whom: Every party the holder seeks to make liable. Notice to one of several jointly liable parties is enough. Notice is not required to the maker of a note, the drawee or the acceptor, who are principal debtors.
• Mode (S.94): Oral or written; may be sent by post. It must inform the party, expressly or by implication, that the instrument has been dishonoured, in what way, and that he will be held liable. It must be given within a reasonable time (S.105, S.106).
• Transmission (S.95): A party who receives notice must pass it on to prior parties he wants to hold liable.
• Death (S.97): Notice sent to a party who has died is sufficient if the sender did not know of the death.
• Effect of failure: Parties not given notice are discharged; the principal debtor is not.

When Notice Is Unnecessary (S.98)

1. When the party entitled to it dispenses with it.
2. To charge the drawer, when he has countermanded payment.
3. When the party charged could not suffer damage for want of notice.
4. When the party entitled to notice cannot be found after due search, or the party bound to give it is unable to do so without his own fault.
5. To charge the drawers when the acceptor is also a drawer.
6. In the case of a promissory note that is not negotiable.
7. When the party entitled to notice, knowing the facts, promises unconditionally to pay.

Noting and Protest (S.99 to S.104A)

• Noting (S.99): On dishonour of a note or bill, the holder may have a notary public record on the instrument (or an attached paper) the fact and date of dishonour, the reason given, and the notary's charges. It must be done within a reasonable time.
• Protest (S.100): A certificate by the notary attesting the dishonour. Protest for better security: when the acceptor becomes insolvent or absconds before maturity, the holder may have it protested to obtain better security.
• Contents (S.101): The instrument or a copy, names of parties, the fact and grounds of dishonour, place and time, and the notary's signature.
• Notice of protest (S.102): Where protest is required, notice of protest must be given instead of notice of dishonour.
• Foreign bills (S.104): Must be protested if the law of the place where they are made or payable requires it.
• S.104A: Where protest is required, noting within the time allowed is sufficient and the protest may be drawn up later.
• Protest is optional for inland instruments; it serves as proof of dishonour (S.119 presumption).

Old Law to New Law: Criminal Liability for Cheques

• Until 1988, dishonour gave only a civil remedy. The Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 added S.138 to S.142.
• S.138 ingredients (K. Bhaskaran): drawing of the cheque, presentation within its validity, return unpaid for insufficient funds or because it exceeds the arrangement, written demand notice within 30 days of information from the bank, and failure to pay within 15 days of receipt of notice.
• 2002: summary trial and compounding (S.143, S.147); 2015: place of complaint (S.142(2)); 2018: interim compensation (S.143A) and deposit in appeal (S.148). See BANK-3.5.
• The S.138 demand notice is different from the S.93 notice of dishonour. The first is a condition for prosecution; the second preserves civil liability of drawer and indorsers.

Requirements

For the holder to sue prior parties after dishonour:

• Due presentment: For acceptance where needed (S.61), and for payment at the proper place and time (S.64 to S.75). A cheque must be presented within a reasonable time; if delay causes the drawer loss (for example, the bank fails), the drawer is discharged to that extent (S.84).
• Dishonour: By non-acceptance (S.91) or non-payment (S.92).
• Notice of dishonour: To each party to be charged, within a reasonable time (S.93 to S.95), unless excused (S.98).
• Noting and protest: Only where required (foreign bills, S.104; to charge an acceptor for honour).
• Within limitation: Civil suit within the three-year period under the Limitation Act, 1963.

Illustrations

1. Days of grace: A bill dated 1 January is payable "three months after date". It falls due nominally on 1 April; with three days of grace it is at maturity on 4 April (S.22, S.23).

2. No corresponding day: A note dated 31 August is payable three months after date. There is no 31 November, so the period ends on 30 November; with grace, maturity is 3 December (S.23, statutory illustration).

3. Holiday (S.25): If the maturity date of 4 April is a Sunday, the bill is due on 3 April, the preceding business day.

4. Notice preserving liability: A bill drawn by D, accepted by A, endorsed by P to H is dishonoured. H gives notice to D but not to P. D remains liable; P is discharged. A, the acceptor, is liable without notice.

5. Countermand (S.98(b)): The drawer of a cheque stops payment. When the bank returns it, the holder need not give the drawer notice of dishonour.

6. Delay and bank failure (S.84): P holds a cheque for Rs.10,000 but presents it after six months. Meanwhile the bank failed, and the drawer would have been paid in full had it been presented in time. The drawer is discharged; P must claim from the bank's liquidator.

Key Cases

K. Bhaskaran v. Sankaran Vaidhyan Balan (1999) K Bhaskaran v Sankaran Vaidhyan Balan 1999

• Facts: A complaint under S.138 raised questions on where the offence is committed and when notice is served.
• Held: The offence has five components (drawing, presentation, return unpaid, notice, failure to pay within 15 days), and a complaint may be filed where any of them took place. (The place-of-filing part has since been replaced by S.142(2), 2015.)
• Principle: S.138 is complete only when all statutory steps, including notice and non-payment, are met.

C.C. Alavi Haji v. Palapetty Muhammed (2007) CC Alavi Haji v Palapetty Muhammed 2007

• Facts: The drawer claimed he never received the S.138 demand notice sent by post.
• Held: A notice sent by registered post to the correct address is presumed served (S.27 General Clauses Act). A drawer who claims non-receipt can pay within 15 days of receiving the court summons, and then cannot be prosecuted.
• Principle: Service of notice is presumed once it is properly addressed and posted.

MSR Leathers v. S. Palaniappan (2012) MSR Leathers v S Palaniappan 2012

• Facts: A cheque was dishonoured, notice was given but no complaint filed; the cheque was presented again and dishonoured again.
• Held: A prosecution can be based on a second or later dishonour, after a fresh notice, even if no prosecution was launched on the first.
• Principle: Each dishonour followed by notice and non-payment gives a fresh cause of action.

Rangappa v. Sri Mohan (2010) Rangappa v Sri Mohan 2010

• Facts: The accused admitted his signature on the dishonoured cheque but denied a debt.
• Held: S.139 presumes a legally enforceable debt; the accused must raise a probable defence.
• Principle: Once signature is admitted, the burden shifts to the drawer.

Distinctions

Criticism and Debate

• Days of grace are outdated: They made sense when bills travelled by post. Modern trade bills are paid electronically, and many writers suggest abolishing grace days as England did for most bills in 1971.
• Noting and protest rarely used: Notaries are seldom involved in inland dishonour, and courts rely on bank return memos instead. The provisions now matter mainly for foreign bills.
• S.138 overload: Lakhs of cheque cases are pending in magistrates' courts. The Supreme Court has repeatedly called for faster trial and compounding. Critics say S.138 turns a civil debt into a crime; supporters say it restored confidence in cheques.
• Conclusion: The civil rules on dishonour and notice are still sound, but the system needs modern evidence of dishonour (electronic return memos) and quicker settlement of cheque cases.

Essay Outline

Most-asked question: "When is a negotiable instrument said to be dishonoured? Explain the rules regarding notice of dishonour, noting and protest."

• Introduction: Meaning of dishonour; importance for liability of secondary parties.
• Kinds of dishonour: S.91, S.92.
• Presentment and maturity: S.61 to S.77; days of grace and holidays (S.22 to S.25).
• Notice of dishonour: By whom, to whom, mode, time (S.93 to S.97); effect of failure.
• Notice unnecessary: S.98, seven cases.
• Noting and protest: S.99 to S.104A; protest for better security.
• Cheques: S.84 delay, S.138 ingredients; K. Bhaskaran, C.C. Alavi Haji, MSR Leathers.
• Conclusion: Civil and criminal remedies together; need for reform.

Recall Check

1. Distinguish dishonour by non-acceptance and dishonour by non-payment.
2. How are days of grace calculated? Which instruments get none?
3. What happens if the maturity date is a public holiday?
4. To whom is notice of dishonour unnecessary?
5. List the seven cases in S.98.
6. Distinguish noting and protest.
7. How does the S.138 demand notice differ from notice of dishonour?

Flashcards