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Presentment, Discharge and dishonour of Negotiable instruments

Presentment

Sec.   70.   Effect   of   want   of   demand   on   principal   debtor.   – Presentment  for  payment  is  not  necessary  in  order  to  charge  the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to  pay  it  there  at  maturity,  such  ability  and  willingness  are equivalent  to  a  tender  of  payment  upon  his  part.  But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers.

MEANING OF PRESENTMENT FOR PAYMENT

  • Production of a bill of exchange to the drawee for his acceptance, or to the drawee  or  acceptor  for  payment  or  the  production  of  the promissory note to the person liable for payment of the same
  1. Personal demand for payment at the proper place.
  2. With the bill or note in readiness to exhibit it as required and to receive payment and surrender it if the debtor is willing to pay.

PRESENTMENT FOR PAYMENT NOT NECESSARY TO CHARGE PERSONS PRIMARILY LIABLE

  • It cannot be validly claimed that it is presentment of the bill which is the operative act that makes the acceptor liable under his acceptance

PAYABLE AT A SPECIAL PLACE

  • If the bill is payable at the PNB, is it necessary to make presentment for payment to X in order to charge him? No, the rule is the same.  The only effect is that if, X is able and willing to pay the bill at the PNB at  maturity,  it  is  equivalent  to  a  tender  of  payment  on  the  part  of drawee X.

PRESENTMENT NECESSARY TO CHARGE PERSONS SECONDARILY LIABLE

NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE IN BILLS OF EXCHANGE

  1. In the three steps required by law, presentment for acceptance to the drawee or negotiation within reasonable time after acquisition unless excused
  2. If the bill is dishonored by non-acceptance, notice of dishonor by non-acceptance must  be  given  to  persons  secondarily  liable unless  excused  and  in  case  of  foreign  bills,  protest  for  dishonor by non-acceptance must be made unless excused.
  3. But if  the  bill  is  accepted,  or  if  the  bill  isn’t  required  to  be presented  for  acceptance,  it  must  be  presented  for  payment  to the persons primarily liable unless excused.
  4. If the  bill  is  dishonored  by  non-payment,  notice  of  dishonor  by non-payment must be also be given to person secondarily liable unless excused, and in case of foreign bills, protest for dishonor by non-pay7ment must be made unless excused

 NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE

  • Presentment for payment must be made within the period required to the person primarily liable unless excused.
  • If the note is dishonored by non-payment, notice of dishonor by non-payment must be given to the person secondarily liable unless excused.

Discharge of Negotiable instruments

Discharge of a Negotiable Instruments

When the liability of the party, primarily and ultimately liable on the instrument, comes to an end, the instrument is said to be discharged. The discharge of the instrument results in extinguishment of all rights of action under it and the instrument ceases to be negotiable. After discharge of a negotiable instrument, even a holder-in-due-course acquires no right under it and he cannot bring a suit on the face of it.

Ways in which Negotiable Instruments are discharged?

A negotiable instrument may be discharged in any one of the following ways.

  • By payment in due course
  • By the principal debtor becoming the holder
  • By renunciation of the rights by the holder
  • By cancellation of the instrument
  • By an act that would discharge an ordinary contract

1. By payment in due course

Payment-in-due-course, is the payment made in good faith and in accordance with the apparent tenor of the instrument to the rightful holder thereof. Accordingly, it is the payment made in money only on maturity of the instrument and of the entire amount due on it and the person to whom it is made should be in possession of the instrument. It may be noted that a payment of a post-dated cheque before maturity is not according to the apparent tenor of the instrument and hence, does not discharge the instrument unless the instrument is cancelled or the fact of payment is duly recorded on the instrument to prevent its further negotiation.

The person making the payment is entitled to have the instrument delivered back to him upon payment or if the instrument is lost or cannot be produced, to be indemnified against any further claim thereon against him. Moreover, in order to discharge a negotiable instrument by payment-in-due-course, the payment should be made by the party who is primarily liable on the instrument. So if a party, who is not primarily liable, makes payment, the instrument is not discharged. The payment-in-due-course discharges not only the negotiable instrument in question but also the parties who are primarily and ultimately liable on the instrument as well.

2. By the principal debtor becoming the holder

When the acceptor of a bill of exchange becomes its holder on or after maturity thereof, all rights of actions thereon are extinguished. As a result, the instrument is discharged. An acceptor may become the holder of a bill by the process of negotiation back. But in order to discharge the bill it is essential that this happens after maturity because if he becomes holder of the bill before maturity, he may again endorse the same. Thus, a negotiable instrument is discharged if the acceptor has become the holder of the instrument at or after maturity in his own rights, i.e., not in any other capacity such as agent, executor, trustee, etc. For instance, A accepts a bill drawn on him by B. B later on transfers the instrument to C, and C endorses it to D, who endorses it to A. The instrument-in-question stands discharged by acceptor (A) becoming holder of it. This rule is based on the principle that a present right and liability united in the same person cancel each other.

3. By renunciation of the rights by the holder

If the holder of a negotiable instrument expressly gives up or renounces his rights against all the parties, the instrument is discharged. The renunciation can be made by surrendering or delivering the instrument to the party who is primarily liable thereon or declaring in writing the fact of renunciation. Such renunciation discharges the instrument as well as all the parties thereto.

4. By cancellation of the instrument

If the holder intentionally cancels the name of the drawer or acceptor of a promissory note or bill of exchange, the instrument is automatically discharged. It is important to note that the cancellation should be made with an intention to release the party primarily liable on it, which in turn would discharge the other parties thereto. Cancellation of the instrument can be executed either by physical destruction or by crossing out signatures of drawer, acceptor, etc., on the instrument.

5. By an act that would discharge an ordinary contract

A negotiable instrument may also be discharged by an act that would discharge a simple contract for payment of money. This is technically called discharge of negotiable instrument by operation of law. Such a discharge may occur due to expiry of period prescribed for recovery of sum of money due on the instrument, or by substitution of another negotiable instrument for the original instrument or by an agreement between the parties in the form of novation. It may also take place by way of merger of one or more debt into another or by the debtor being adjudicated insolvent.

Dishonour of Negotiable instruments

Dishonour of negotiable instrument means loss of honour or respect for the instrument in question on the part of the maker, drawee, or acceptor, as the case may be, which eventually results in non-realization of payment due on the instrument.

Dishonour by non-acceptance:

Any type of negotiable instruments, i.e., bill of exchange, promissory note, or cheque may be dishonoured by non-payment by the drawee/acceptor thereof. But a bill may also be dishonoured by non-acceptance because bill of exchange is the only negotiable instrument which requires its presentment for acceptance and non-acceptance thereof, can amount to dishonour.

When is a bill said to be dishonoured by Non-Acceptance?

A bill is said to be dishonoured by non-acceptance in the following circumstances.

  1. When the drawee or one of the several drawees, not being partners, commit default in acceptance upon being duly required to accept the bill. In this regard Section 63 expressly provides that the holdermust, if so required by the drawee of a bill of exchange presented to for acceptance, allow the drawee forty-eight hours (exclusive of public holidays) to consider whether he will accept it.
  2. Where presentment is required and the bill remains unrepresented.
  3. Where the drawee is incompetent to enter into a valid contract.
  4. Where the bill is given a qualified acceptance.
  5. If the drawee is a fictitious person.
  6. If the drawee cannot be found even after reasonable search.
  7. Where the drawee has either become insolvent or is dead and the holder does not present the bill to the assignee or legal representative of the insolvent or deceased drawee.

It is relevant to note that where a drawee-in-case-of-need is named in a bill of exchange or in any endorsement thereon, the bill is not dishonoured until it has been dishonoured by such drawee.

Dishonour of negotiable instrument 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 commit default in payment upon being duly required to pay the same. Also the holder of a bill or pro-note may treat it as dishonoured, without placing for payment when presentment for payment is excused expressly by the maker of the pro-note, or acceptor of the bill and the note or bill when overdue remains unpaid.

Dishonour by non-acceptance vs Dishonour by non-payment:

If a bill is dishonoured either by non-acceptance or by non-payment, the drawer and all the endorsers of the bill are liable to the holder, provided notice of such dishonour is given to them. The drawee, on the other hand, shall be liable to the holder only in the event of dishonour by non-payment.

Dishonour of Cheque for insufficient of funds in the account:

A cheque drawn by a person on an account maintained by him with a bank for payment of any amount of money to another person can be returned unpaid for lack of enough funds in the said account. This is called dishonour of cheques for insufficiency of funds (in the drawer’s account). In such cases, the drawer is also criminally liable for this offense and may be punished with imprisonment for a term, which may extend to one year, or with fine that may extend to twice the amount of the cheque, or with both.

Dishonour of cheque vs promissory note:

A cheque being drawn on specified bank and not expressed to be payable otherwise than on demand is never presented to the drawee bank for acceptance and same is the case of a promissory note. However, a pro-note made payable at a certain period after sight is required to be presented for sight, but it is never subject to presentment for acceptance.

How is a party to a negotiable instrument discharged?

A party to a negotiable instrument is discharged in the following ways

  • By cancellation of the name of a party to the instruments
  • By release of any party to the instruments
  • By payments
  • By allowing drawee more than 48 hours to accept
  • By delay in presenting a cheque for payment
  • By payment in due course of a cheque (payable to order)
  • By taking qualified acceptance
  • By non-presentment for acceptance of a bill of exchange
  • By operation of law
  • By material alteration
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