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This article is written by Manikala Sravika Pavan of 4th Semester of Alliance School of Law, Alliance University, Bangalore, an intern under Legal Vidhiya


A legal document that certifies a right to payment or money transfer is called a negotiable instrument, and it is frequently used in business transactions. Through the simple transfer of rights and duties, these instruments offer parties a flexible and effective way to conduct financial transactions. Commercial transactions are greatly aided by negotiable documents like promissory notes and cheques. The parties’ trust that these instruments would be respected when they are offered for payment is essential to the financial system’s seamless operation. This paper examines the legal notion of dishonour of negotiable instruments and its many ramifications.

The research explores the aspects and legal terminology related to the dishonour of negotiable instruments, looking at the circumstances in which an instrument could be deemed dishonoured. The main causes of dishonour—such as inadequate money, changes, and non-adherence to protocol—are thoroughly examined.

This paper aims to analyse The Negotiable Instruments Act, 1881 and its’s provisos dealing with the dishonour of negotiable instruments and the penalties that are to be paid along with case laws. The study report also examines how changes in banking and financial practices and technology innovations affect the dishonour process. This research examines the benefits and problems associated with bringing old legal frameworks up to date with the evolving financial world, given the prevalence of electronic transactions and digital payment systems.


Cheques, Promissory Notes, Dishonour, Commercial Transactions, Penalties.


1.1. The Negotiable Instruments Act, 1881[1]

In India, the Negotiable Instruments Act was passed in 1881.The provisions of the English Negotiable Instrument Act were applicable in India prior to its passage, and the current Act is also based on the English Act with certain revisions. With the exception of the State of J&K, it covers all of India.

An important element of Indian legislation that controls the transferability of specific financial instrument types is the Negotiable Instruments Act, 1881. Negotiable instruments are contracts that promise to pay a certain amount of money, either immediately or at a later time. The act defines and governs these contracts. The Negotiable Instruments Act of 1881 was primarily created to establish a legal framework for the use and transfer of negotiable instruments, including checks, bills of exchange, and promissory notes.

Negotiable instruments may be signed in order to be endorsed for purposes of negotiation. Both full and blank endorsements are acceptable as long as the endorsee is identified. The transferability of negotiable instruments is one of their distinguishing characteristics. These instruments are freely transferable from one person to another, and the recipient of the transfer receives all related rights and advantages.

1.2. Negotiable Instruments[2]

A piece of paper that grants someone access to money and may be transferred from one person to another by simple delivery or by endorsement and delivery is known as a negotiable instrument. When money is transferred in this way, the recipient gains both the right to keep the money and the ability to transfer it again. Therefore, in the realm of commerce, negotiable instruments are quite important. The definition of negotiable instruments and the rules governing their usage in financial transactions are provided by the Negotiable Instruments Act of 1881.

According to Section 13   –

A ‘negotiable instrument’ means a promissory note, bill of exchange or cheque payable either to order or to bearer”[3]

Nemo dat quod non-habet is the legal principle that states that no one may convey a better title than they themselves have. The main rule governing property transfers is that no one may acquire ownership of any property unless they buy it from the rightful owner or with their permission[4]. Negotiable instruments, as defined by the Act, are those that may be transferred from one person to another such that the transferee, or the person to whom it is transferred, obtains a good title to it, free from any flaws in the transferor’s (the person who transfers it) title.

1.2.1. Promissory Note[5]

In many countries, including India, a promissory note is a legally recognized document under the Negotiable Instruments Act of 1881. The legal foundation for negotiable instruments—documents that indicate a right to payment of a specific sum of money and are transferable from one person to another—is provided by the Negotiable Instruments Act.

A promissory note is defined as an instrument in writing that contains an unconditional pledge, signed by the creator, to pay a certain amount of money to a designated person or to the bearer of the instrument, as per Section 4 of the Negotiable Instruments Act, 1881.

  • Promissory notes have to be written down.
  • Promise to Pay: It must include a firm commitment to make the payment.
  • Certain Sum: The payment amount must be precise and unambiguous.
  • Parties: The maker (the one making the promise) and the payee (the one to whom the payment is to be made) should be the two parties involved at the very least.

A promissory note may be payable to the order of a specific individual or to the bearer. It can be transferred by simple delivery if it is payable to the bearer. It can be transferred via endorsement and delivery if it is payable to order.

1.2.2. Bills of Exchange[6]

Another kind of negotiable document covered by the Negotiable Instruments Act of 1881 is a bill of exchange. A bill of exchange is defined as an instrument in writing that contains an unconditional order, signed by the maker, directing a certain person to pay a certain amount of money only to, or to the order of, a certain person or to the bearer of the instrument. This definition is found in Section 5 of the Negotiable Instruments Act, 1881.

  • Unconditional Order: There must be no restrictions on the payment. The instrument is non-negotiable if there are any payment conditions.
  • Signature: The person who created the bill, or the drawer, must sign it.
  • Certain Sum: The payment amount needs to be well-defined and quantified.
  • Parties: Usually, there are three parties: the payee (the person to whom the payment is to be paid), the drawee (the person ordered to pay), and the drawer (the creator).
  • Parties’ Liability:

Drawer’s Liability: The sum shown in the bill is the drawer’s primary obligation to pay.

Drawee’s Liability: Following acceptance, the amount owed is due on the maturity date by the drawee.

A bill of exchange, like a promissory note, can be made payable to the order of a specific individual or to the bearer. When the drawee receives the bill, they can sign across the face of it to show that they are prepared to pay. The bill becomes an approved bill of exchange upon acceptance. The due date for payment should be included on the bill of exchange. If payment is due upon demand, payment must be made in full[7].

1.2.3. Cheques[8]

Another significant negotiable instrument covered by the Negotiable Instruments Act of 1881 is a cheque. A cheque is defined as a bill of exchange drawn on a designated banker and not expressly stated to be due other than on demand under Section 6 of the Negotiable Instruments Act, 1881.

  • Unconditional command: A check, like a bill of exchange, includes an unqualified command to pay a certain amount of money.
  • Drawn on a Banker: A check payable through a financial institution is drawn on a designated banker.
  • Payable on Demand: A check that is payable on demand is one that the payee may submit for payment whenever they see fit.

Parties Concerned:

  • Drawer: The one who writes or draws the check.
  • The bank that the check is drawn on is the drawee.
  • Payee: The individual to whom the money is being sent.

Cheque Types:

  • Bearer Cheque: This type of check is payable to the bearer and is cashable by the bearer.
  • Order Cheque: Needs to be endorsed for negotiation and payable to a specific individual or their order.

It’s crucial to remember that various jurisdictions may have different regulations pertaining to negotiable instruments, such as checks. For the purpose of ensuring compliance, it is important to review the particular legislation that apply to your area. The concepts of negotiability still hold true in digital situations even if many nations have embraced contemporary payment methods and electronic transactions are becoming more widespread.


Since only bills need to be accepted, a bill might be considered dishonoured if it is not paid for. Cheques and promissory notes are only voidable by nonpayment. In order to hold the previous parties accountable on a negotiable document, the holder must notify each of them of the instrument’s   dishonour. He loses his right of action against the previous parties entitled to the notice of dishonour if he doesn’t comply, with the exception of situations when it may be forgiven (Sec. 93)[9].

2.1. Dishonour by Non-acceptance (Section 91)[10]

Any of the following scenarios constitutes non-acceptance of a bill of exchange:

1. If, despite being properly offered for acceptance, the drawee does not accept the bill within 48 hours of its presentation.

2. If many drawees (individuals who are not partners) decline and none of them accept.

3. When the bill is rejected and the presentation for acceptance is dismissed.

4. If the drawee lacks the capacity to enter into a contract.

5. Upon receiving a qualified acceptance from the drawee.

6. If the drawee is an imaginary person or cannot be located despite a thorough investigation.

If a drawee is specified in a bill in case of need, the bill is not considered dishonoured if the drawee likewise honours it in case of necessity (Section 115)[11].

2.2. Dishonour by Non-payment (Section 92)[12]

When the maker, acceptor, or drawee of a promissory note, bill of exchange, or check defaults on payment after being duly obliged to do so, it is said to be dishonoured by non-payment (Section 92). When a payment is made but the instrument is not paid when it is past due, it is also considered dishonoured by no-payment (Section 76)[13].

2.3. Notice of Dishonour

In the event that a negotiable instrument is dishonoured due to non-payment or non-acceptance, the party holding the instrument or any party liable thereunder is required to notify all previous parties he wishes to hold accountable for the instrument. All previous parties liable thereto are released from obligation if he fails to provide this notification, with the exception of situations in which notice of dishonour may be excused (Section 93). Subject of a dishonourable notice. Notifying the person liable on the instrument of the responsibility that arises from the dishonour of the instrument is the purpose of the notice of dishonour.

Regardless of the instrument’s nature—that is, whether it is an accommodation bill or due at sight—notice must be given. All previous parties liable on the instrument and entitled to notice are released if the holder fails to provide such notice within a reasonable period after the date of dishonour.

2.3.1. Notice by Whom

1. The holder or any previous party’s notice. The holder or any party responsible on the instrument may provide notice of dishonour (Section 93).

 2. The chain technique for notifying someone of   dishonour. It is not necessary for the notice to always come from the holder because he is entitled to use a notice given by any party liable on the instrument. However, a party receiving notice of dishonour must give notice of dishonour to such party within a reasonable time in order to render any prior party liable to himself (Section 95). However, if a notification is delivered by an unknown party, it is meaningless.

3. A principal or agent’s notice. Either the principal or the agent may provide the notification of dishonour in the event that an instrument placed with them for presentation is returned unpaid. Both the principle and the agent may give notice to the persons they want to be held accountable within a reasonable amount of time. The agent may give notice to his principal.

2.3.2. Notice to Whom

1. Notification to every person the holder intends to hold accountable. All parties that the holder wishes to hold accountable must receive notice of   dishonour. As the parties principally responsible upon the document, the acceptor of a bill of exchange, the creator of a promissory note, and the drawee of a check do not require notice of dishonour (Section 93)[14]. By refusing to accept or pay, they are the ones who   dishonour the instrument, and any notification sent to them will just serve as a reminder of something they already know.

2. Notification to the assignee, legal representative, or party or his agent. A notice of dishonour may be served to the person who is legally responsible, to his lawfully authorized agent, to his assignee in the event of his insolvency, or to his legal representative in the event of his death (Section 94)[15]. Notice of   dishonour is adequate when it is sent to a deceased person even when the person sending it was not aware of the deceased person’s passing (Section 97)[16].

2.3.3. Rules for Giving Notice of Dishonour (Section 106)[17]

1. The notification must be sent by the next post or the day following the day of honor if the holder and the person entitled to the notice of   dishonour live in distant cities or conduct business, respectively.

2. The notification must be sent in a timely manner to ensure that it reaches its destination on the day after the day of   dishonour if these parties reside in the same location or conduct business together.

2.3.4. No notice of dishonour is necessary

 (a) when the party entitled thereto dispenses with it;

 (b) when the drawee has countermanded payment;

 (c) when the party charged could not suffer damage for want of notice;

(d) when the party entitled to notice cannot be found after a reasonable search, or the party bound to give notice is unable to give it for any other reason without his fault;

 (e) when the acceptor is also the drawer; (in the case of a promissory note which is not negotiable);

2.4. Penalties in case of dishonour of certain cheques for insufficiency of funds (Sections  138 to 142)

The Negotiable Instruments Act of 1881 now contains a new Chapter XVII thanks to the Banking, Public Financial, and Negotiable Instruments Laws (Amendment) Act of 1988. The following are some of these Sections’ key clauses:   dishonour of Check for Inadequate Funds in the Account (Section 138)[18]. A dishonoured check drawer will be considered to have broken the law.

  • the cheque has been returned because there is not enough money in his bank account to cover payments to others, he faces up to two years in prison for this offense, or he could receive both a fine and a term of imprisonment equal to twice the amount of the check.
  •  The money for which the check was issued had to have been used to pay off an entirely or partially legally enforceable debt or liability[19];
  • The check had to be presented by the payee or holder in a timely manner within six months of the date it was drawn, or within the check’s validity period, whichever came first[20];
  •  In the event that the payee or holder of the dishonoured check fails to make payment within 15 days of receiving the note, the drawer has liability only if the complaint is filed within one month of the cause of action emerging under Section 138[21].


In summary, the Negotiable Instruments Act’s   dishonour of Negotiable Instruments carries important legal ramifications and provides a safeguard for the integrity of financial transactions. The Act clearly lays out the guidelines for what happens when negotiable instruments, including promissory notes and cheques, are   dishonoured. It emphasizes how crucial it is to keep your word when making financial commitments and preserve the integrity of negotiable instruments in business transactions.

Through its provisions pertaining to   dishonour, the Act enhances the general efficacy and reliability of financial transactions. It upholds the core values of fairness and good faith, promoting an atmosphere in business where parties feel comfortable conducting financial transactions. To put it simply, the Negotiable Instruments Act is essential to maintaining the legitimacy and dependability of negotiable instruments, which in turn supports the stability and trust that exist within the financial system.


1) https://www.investopedia.com/terms/n/negotiable instrument.asp#:~:text=Key%20Takeaways ,A%20negotiable%20instrument%20is%20a%20signed%20document%20that%20promises%20a,money%20orders%2C%20and%20promissory%20notes.

2) https://cleartax.in/s/negotiable-instruments.


4) Avtar singh, laws of Banking & Negotiable Instruments 221(Eastern Book Company, Lucknow, 1st edn.,2007)

5) https://www.toppr.com/guides/business-laws-cs/negotiable-instruments-act/promissory-notes/.

6) https://byjus.com/commerce/class-11-accountancy-chapter-8-bill-of-exchange/.

7) https://byjus.com/commerce/class-11-accountancy-chapter-8-bill-of-exchange/.

8) https://abbasilegal.com/dishonour-of-cheques-under-section-138-of-the-n-i-act-1881/.  

[1] https://www.investopedia.com/terms/n/negotiable-instrument.asp#:~:text=Key%20Takeaways-,A%20negotiable%20instrument%20is%20a%20signed%20document%20that%20promises%20a,money%20orders%2C%20and%20promissory%20notes. Accessed on 02-01-2024

[2] https://cleartax.in/s/negotiable-instruments. Accessed on 02-01-2024

[3] https://www.indiacode.nic.in/bitstream/123456789/15327/1/negotiable_instruments_act%2C_1881.pdf Accessed on 02-01-2024

[4] Avtar singh, laws of Banking & Negotiable Instruments 221(Eastern Book Company, Lucknow, 1st edn.,2007)

[5] https://www.toppr.com/guides/business-laws-cs/negotiable-instruments-act/promissory-notes/ . Accessed on 03-01-2024.

[6] https://byjus.com/commerce/class-11-accountancy-chapter-8-bill-of-exchange/. Accessed on 03-01-2024

[7] https://byjus.com/commerce/class-11-accountancy-chapter-8-bill-of-exchange/. Accessed on 03-01-2024.

[8] https://abbasilegal.com/dishonour-of-cheques-under-section-138-of-the-n-i-act-1881/. Accessed on 03-01-2024.

[9] Section 93 in The Negotiable Instruments Act, 1881

[10] Section 91 in The Negotiable Instruments Act, 1881 Dishonour by non-acceptance.

[11] Section 115 in The Negotiable Instruments Act, 1881.

[12] Section 92 in The Negotiable Instruments Act, 1881 Dishonour by non-payment.

[13] Section 76 in The Negotiable Instruments Act, 1881

[14] Section 93 in The Negotiable Instruments Act, 1881

[15] Section 94 in The Negotiable Instruments Act, 1881.

[16] Section 97 in The Negotiable Instruments Act.

[17] Section 106 in The Negotiable Instruments Act, 1881.

[18] Section 138 in The Negotiable Instruments Act, 1881.

[19] Bhupinder Lima v. State of Andhra Pradesh, (2000) 99 comp. Cas 424

[20] Mallappa Sangappa Desai v. Laxmanappa Basappa whoti (1994) 3 crimes 707 (karn.)

[21] [Krishna Janardhan Bhatt v. Dattatraya G. Hegde, (2008) 4 SCC 54]

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