This article is written by Anupriya Mukherjee, an intern under Legal Vidhiya
ABSTRACT
What is a Negotiable Instrument? An instrument that can be exchanged for money is called a Negotiable Instrument. Its payer is typically identified on the document and it guarantees the payment of a certain sum of money, either immediately or at a certain period. A signed document committing funds to a certain person or assignee is referred to as a negotiable instrument. [1]To put it another way, it is a formal kind of a transferable, signed document that makes a promise to pay the bearer money at some point in the future or immediately upon request. An instrument should list the name of the payee, who is the individual who will receive the money. Negotiable tools are assigned to orders that are explicitly stated to be so payable or that are specifically said to be payable to a specific, and do not include disputes prohibiting allocation or designating a purpose that it shall not be convenient. The bearer of Negotiable Instruments that are expressly designated in this way. Negotiable instruments, whether initially or with assent, are said to be payable to the order of a particular person and not to him or his demand; but they may be billed to him or his instruction if he chooses. 3 kinds of Negotiable tools come under the Negotiable Instruments Act, Bills of Exchange, Cheques, and Promissory Notes. [2]
Bills of Exchange: A bill of exchange is a document that obligates one party to pay another party a specific amount of money either immediately upon demand or at a later date. Three persons are frequently involved in a bill of exchange: the drawer, who obligates the drawee to pay the payee, the payee, who receives the money, and the drawee, who pays the money.
Promissory Notes: A promissory note is a type of financial document that includes a written commitment from one party—the note’s issuer or maker—to pay another party—the note’s payee—a specific amount of money, either immediately upon demand or at a predetermined later date.
Cheque: A check is a document that instructs a bank to take money from an account and send it to the person whose name it is in exchange for a particular amount. A transaction banking account, also known as a current, cheque, chequing, or checking account, is where the drawer, the person who writes the cheque, keeps their money.
So, what is Dishonour of Negotiable Instruments? Negotiable instruments are referred to as being dishonoured if the maker, drawer, acceptor, etc., lost respect for the instrument or treated it disrespectfully, which had the effect of preventing the payment that was due on the instrument from being realised. To clarify, it means that when a bill of exchange is offered but not accepted or not obtained by the acceptor, it is referred to as dishonouring a check or any other negotiable instrument.
A Negotiable Instrument can be dishonoured in 2 ways:
- Dishonour by Non-Acceptance.
- Dishonour by Non-Payment.
- Dishonour by Non-Acceptance: Non-payment by the person who accepted the bill of exchange, promissory note, or check could result in their desecration. The sole negotiable instrument that provides a presentment for acceptance is a bill of disagreement, and its non-acceptance can result in devastation if it is not accepted. A negotiable document is not honoured, which is called dishonour. This can happen either through non-acceptance, where a bill of argument is available for receipt but it is declined or cannot be obtained, or by non-payment, where the bill is provided for payment but it is declined or cannot be obtained. Any non-acceptance or non-payment of a negotiable tool is intended to be a violation.
- Dishonour by Non-Payment: When the primary responsible party, such as the maker of a check, the acceptor of a bill, or the drawee of a check, defaults in full, the instrument is considered dishonoured by non-payment. A tool is also in violation of section 76 of the Act for non-payment if a formal presentation of information to a court for payment relief is made and the instrument, when past due, is still unpaid.
To identify the difference between dishonour caused by non-acceptance and non-payment, the drawee is not a party to the bill and so has no recourse if a bill is dishonoured by non-acceptance. When a bill is dishonoured due to non-payment, the holder may only take legal action against the drawer or endorser, if any.
BACKGROUND
STRUCTURES OF NEGOTIABLE INSTRUMENTS:
- Relaxed transferability: Every time we transfer anything to someone, we must have the formal allocation deed on file, have it registered, pay the applicable stamp duty, etc. However, when moving a negotiable instrument, such rules are not required to be followed for checks. When rights are distributed when they are ordered and given to the deliverer by legal authorisation, the rights are transformed. It is not required to notify the prior holder.
- Heading: It needs to be complete, moral, and for the transferee’s benefit in good faith. This indicates that the person who receives a negotiable document has a certain, unambiguous ownership interest in it. Furthermore, the receiver should not know if the prior holder made a mistake with his direction. He goes by the name Holder as well.
- Absolute demand: For each amount, there must be a defined capacity or instruction.
- Compensation: The negotiating tool must be persuaded to offer only cash and nothing else. i.e., he is not permitted to mention the capacity of any securities, goods, or items.
- The writing is crucial: This text, which includes computer printouts, designs, scripts, and typing, must be written out.
- The amount’s time frame must be indicated: If the time frame is not expressed, the tool is not negotiable. The tool must be payable over a specific length of time. Although the duration thereof is uncertain, a negotiable tool’s demise is certain if the period of amount is tied to the termination of a separate agreement.
- The maker’s or drawer’s valid signature is required for every negotiable document: If neither is present, the instrument is void.
- Distribution: Any negotiable instrument, like a check or promissory note, is not finished until it reaches the payee, so distribution is crucial. For instance, you might issue a check in your sister’s name, but it would not be effective until your sister received it.
- The Recipient needs to be persuaded: Individual can refer to an individual, group of people, director, or chairman of an organisation. Additionally, there may be multiple payees. It is necessary to name or characterise the favour bestowed upon the negotiable instrument with logical inevitability.
- Notice of Allocation: Notifying the party obligated to pay of the allocation of a negotiating tool is not necessary.
- Presumptions: There are some presumptions that apply to all negotiable instruments. Considering both the transferor and the transferee. It is assumed that every negotiable has been accepted, negotiated, endorsed, or given consideration for transfer.
- According to the Indian Stamp Act of 1899, stamping is necessary. The cost of the stamp is determined by the type of transaction and its value at the time of payment.
- Payable: It must be payable to the order or the bearer, whichever is appropriate.
- Number of Transfers: Until they reach maturity, it may be transferred an unlimited number of times.
- They are accepted in exchange for items and are regarded as a replacement for cash because cash may be obtained at any moment. Payment with a specific amount of money is legal tender.
- Presumptions: A few assumptions are made about all negotiating instruments, such as the assumption that the transferor and the transferee will have reached an agreement.
- Suit filing procedure: Suits involving promissory notes and bills of exchange in India must follow a certain process.
- Amount allotted: Until these tools reach maturity, they can be moved indefinitely.
- Directions for indication: Because the parties utilise these tools according to a script, which includes specific directions for indication, they are used as proof of the parties’ incompetence.
- Argument: Because money may be obtained at any time by paying a modest instruction, these tools pertain to the payment of specific money in legal form, are safe as substitutes for cash, and are accepted in conversations off commodities.
- Payable to bearer or order: Both order and bearer must receive.
There are two kinds of Negotiable Instruments:
- Instrument Negotiable by Statute.
- Negotiable tools by Practice or Technique.
- Instrument Negotiable by Statute:
A tool in marks that covers an unconstrained liability and is used by the manufacturer to pay out a positive amount of cash solely to, or at the direction of, a specific person, or to the tool’s bearer, is referred to as a promissory note under Section 4. Promissory notes must be in writing; verbal promises to pay are not sufficient. Even though the manner the letters are written is unimportant, they must be in a structure that cannot be easily changed. There must be an explicit obligation to pay, together with a prompt pledge or strong consideration to make restitution. There is no need for a basic greeting.
A tool in lettering that is covered by an unconstrained command, engaged by the creator, directing a person to pay a particular amount of cash solely to, or at the request of, a specified individual, or to the bearer of the tool, is considered a bill of exchange under Section 5. A promise or order to pay is not “restricted” in the sense of this section and section 4 because the time for the sum of the quantity or any payment thereof is stated to be on the gap of a specific period after the occurrence of a stated incident that, in accordance with the normal anticipation of manhood, is certain to occur, even though the time of its happening may be ambiguous.
When you bring a check to the bank and it cannot be processed or is dishonoured for a variety of reasons, such as the drawer’s signature not matching the check, the drawer signing in the wrong spot on the check, or errors in the check’s date. Any kind of overwriting, check damage, etc. Cheque bounces are typically caused by a lack of cash in the drawer’s bank account. Bounced check is also known as a bad check or dishonoured check. [3]Cheque is a bill of exchange drawn on a named financier that is not spoken to be due before being requested, according to Section 6 of the law. A check is a negotiable instrument that is used to pay the payee. Account Payee and crossed checks are given to a payee that cannot be changed. Cheque must be cashed by transferring funds to the payee’s bank account. The individual who writes the check is known as the “Drawer,” and the recipient is known as the “Payee.” The bank that must make the payment is referred to as the “Drawee.” A check written on a designated financier that is not indicated to be payable until requested:
- Includes a digital image of a shortened check.
- Consists of an electronic check.
- Only delivered to the designated banker
The amount stated must be declared in whole and is always certain.
- Always confident is the recipient.
- Must be date-worthy.
- Negotiable Tools by Practice or Technique:
There are undoubtedly more tools whose appeal of negotiability has been built through commercial usage or custom. Share permits, bearer debentures, dividend warrants, share records with blank transmission deeds, Exchequer bills, bank notes, circular notes, and bearer debentures are a few examples.
Models of Non-negotiable tools:
Currency orders
Deposit receipts
Share certificates
Dock warrants
Postal orders
DISCREDIT OF NEGOTIABLE TOOL:
In order to hold the previous parties responsible when a negotiable instrument is violated, the holder must display disgrace. A negotiable instrument may be broken in one of two ways: by non-payment or by nonacceptance. A bill of exchange can be broken either by non-acceptance or by non-payment, unlike a check and a promissory note, which can both be broken.
DISHONOUR OF CHEQUE:
Cheques are considered to have been honoured when the payee’s bank sends the drawee bank their half of the cheque’s amount. A check is referred to as being “dishonoured” when a bank declines to pay the full amount of a check to the payee. For a number of reasons, including not having enough funds in the drawee’s checking or savings account, the drawee bank may return a check unpaid. A “Cheque Return Memo,” which explains the reasons why a check was not paid, is promptly issued by the drawee’s bank when a check is returned unpaid.
Reasons for Cheque Dishonour:
- If the signatures do not match or if one is overwritten.
- In the event that there is any cause to doubt the validity of the check.
- Even the bounced or dishonoured status of a check might be caused by an error in the account number.
- Possible outcomes of presenting a check at the wrong branch include the client’s insanity, bankruptcy, and demise.
- If the drawer requests that the bank withhold payment and refuse to pay for the already-issued check, the bank will dishonour the cheque.
- Stale checks are those that have been past their expiration date and are disregarded by the bank if the payment is made to the bank more than three months after the date that is stated on the check.
- Once the bank has been instructed by the government or the court to freeze all of that person’s accounts, the check written on that person’s account will be returned.
- The check will not be honoured if the drawer shuts his account before presenting it to the bank. The check will not be honoured if the drawer does not have sufficient funds to pay the specified amount.
According to Section 138, if a person writes a check from an account managed and maintained by that same person with a banker with the intent to repay his debt or other liability to another person in full or in part from that account, and the bank returns the check unpaid either because the amount to the account’s credit was insufficient to cover the amount that had to be paid from his own funds or because it exceeded the amount that had to be paid from his own funds, such a person would be deemed to have violated the law and would be held accountable for that violation regardless of how the other provisions of the act were applied. They would face a punishment of up to two years in prison, a fine up to twice the amount of the check, or both.[4]
LEGAL ACTION ON DISHONOUR OF A CHEQUE:
Although dishonour of a cheque is a criminal offence, an individual can seek both criminal and civil remedies.[5] A cheque can be negotiated. Cheques that have been crossed or designated as an account payee are only accessible by the recipient. The recipient’s bank account must be where the checks are deposited.
Legally, the person on whose behalf the check is written is referred to as the “payee,” the bank that will be compensated for the amount is known as the “drawee,” and the person writing the check is known as the “drawer.”
However, instances of cheque spring-back are frequent today. Rarely do large-amount checks go unclaimed and are eventually reimbursed by the bank from which they were drawn.
The drawee bank immediately notifies the payee’s banker of a “Cheque Return Memo” stating the reason for non-payment as soon as a check is breached. The misdirected check and the memo are then given to the payee by the banker of the payee. If the owner or payee believes the check will be accepted a second time, he or she may resubmit it within three months after the check’s date. However, if the person writing the check fails to deposit the money, the payee has the right to hold the drawer legally liable.
Only if the amount mentioned in the check is used to discharge an obligation or any other responsibility of the nonpayer towards the receiver, the payee may bring a lawsuit against the nonpayer/drawer to challenge the validity of the check.
PENALTY AND FORFEIT:
As soon as a payee or an account holder learns that a cheque has been dishonoured due to a lack of funds in the drawer’s account, he or she must send a notice to that drawer requesting that the cheque amount be paid within 30 days of receiving notice of dishonour from their bank. It is not possible to give notice under Section 138 of the Act verbally. The notice may be provided in any written form, as well as by fax, email, or any other electronic means of communication. The drawer is not regarded as having committed a crime until the disputed cheque is not paid in full within 15 days of receiving the notice. Alternatively, the payee may, within one month of the day the 15 days mentioned in the notification were up, submit a complaint in the court of a jurisdictional magistrate.
CASE LAWS:
Dashrath Rupsingh Rathod v. the State of Maharashtra & Anr (2014): The fundamental criteria for registering criminal complaints about cheque dishonour under Section 138 of the Negotiable Instruments Act, 1881 has changed as a result of the aforementioned landmark Supreme Court ruling. A complaint under Section 138 could previously only be filed by the individual who received the check at their home or company, but this has since changed. The judgement will be applied retroactively, meaning that lakhs of cases currently pending in numerous courts across the country will be subject to an interstate transfer of cheque bouncing cases and dishonouring of cases under the verdict. The complaint must be filed in the county where the branch of the bank on which a cheque was drawn is located, according to the aforementioned verdict.
Dayawati v. Yogesh Kumar Gosain (2017): A new path for resolving offences listed under Section 138 of the Act that are criminally compoundable by nature was made possible by the Delhi High Court’s ruling in 2017. This path is known as the alternate dispute resolution process. This judgement represented a change in the Indian court system as well as in how the Act was handled. The document continued by stating that as the offences mentioned under the Negotiable Instruments Act of 1881 are different from other criminal offenses, they can be given priority to be dealt with more clearly and quickly than other criminal offences.
Dalmia Cement (Bharat) Ltd. v. M/S. Galaxy Trades & Agencies Ltd. (2001): In this case, the Supreme Court handed down a landmark ruling that outlined the justification for the application of Section 138 of the Negotiable and Instruments Act of 1881. The non-payment of a check, for which a notice informing the convicted of his rights was issued, is where the facts of the case begin and stop. The deadline for filing the complaint was extended up until the moment that the complainant received it. When it happened again, the suspect again failed to provide the needed amount of money. Based on the existing facts, the court determined that Section 138 of the Act should be applied as intended in order to protect against any violation of the legal rights of a person who has not received payment. If a situation arises that makes it very difficult for the person to receive payment, Section 138 should be applied as intended in order to preserve the person’s legal rights. As a result, the court in this instance mandated that the respondent be subject to the Act’s consequences.[6]
CONCLUSION:
The crucial component of all criminal offenses, the element of purpose, or “mens rea,” does not apply in this case when it comes to the crime of dishonouring cheques. A statutory offence under Section 138 of the Negotiable Instruments Act is committed when checks are dishonoured due to insufficient cash in the account of the drawer, regardless of the circumstances surrounding the dishonour. The law, however, does not account for the many factors that contributed to a check being returned unpaid; it just considers the fact that it was returned unpaid.
When the drawee refuses to accept it or make a payment with it, a negotiable instrument is believed to be dishonoured. The holder has the right to file a lawsuit in defiance of the drawer and endorser in both situations. All parties, with the exception of the creator, acceptor, and drawee of the note or bill, are notified of the dishonour. A notice of dishonour informs a recipient that an instrument has been disregarded and that they will be held accountable. When it is given by the party who is entitled to it or when the party charged cannot be harmed for lack of notice, notice of dishonour is not required to be given.[7]
[1] Available at https://legalpaathshala.com/dishonor-of-negotiable-instrument/, last seen on 11/4/2023ss
[2] Available at https://blog.ipleaders.in/dishonour-negotiable-instrument-legal-steps-take/, last seen on 11/4/2023
[3]See https://www.complybook.com/blog/legal-remedy-in-case-of-cheque-dishonor#:~:text=Given%2015%20days%20expired%2D%20Initiate,1881%20before%20the%20concerned%20Court.&text=the%20concerned%20District-,2.,related%20to%20the%20cheque%20dishonor., last seen on 12/4/2023
[4] See https://blog.ipleaders.in/what-cheque-dishonoured/, last seen on 15/4/2023
[5] Ibid https://blog.ipleaders.in/what-cheque-dishonoured/, last seen on 15/4/2023
[6] See https://blog.ipleaders.in/what-cheque-dishonoured/#Case_laws, last seen on 15/4/2023
[7] See https://blog.ipleaders.in/dishonour-negotiable-instrument-legal-steps-take/, last seen on 15/4/2023ss
