Navigating the Dishonour of Negotiable Instruments: Legal Insights and Procedures

A negotiable instrument – be it a cheque, a promissory note, or a bill of exchange – is built on a simple promise: that payment will be made when due. When that promise breaks down, the law steps in. Dishonour of a negotiable instrument is one of the most commercially significant events governed by the Negotiable Instruments Act, 1881 (NI Act), and understanding what triggers it, what must follow, and what legal remedies are available is essential knowledge – especially in a business or co-operative context where such instruments are used daily.

What does dishonour of a negotiable instrument mean? 🔗

Under the NI Act, dishonour occurs when a party who is legally obligated to accept or pay an instrument fails to do so. The Act recognises two distinct forms of dishonour, each arising at a different stage in the instrument’s lifecycle.

Dishonour by non-acceptance (Section 91) 🔗

Section 91 applies specifically to bills of exchange. A bill is said to be dishonoured by non-acceptance when the drawee, on being duly required to accept the bill, makes a default in doing so. Dishonour can also be established where the drawee is incompetent to contract, or where the acceptance given is a qualified one – that is, acceptance with conditions attached rather than unconditional assent. Importantly, if the drawee cannot be found after a reasonable search, the bill is treated as dishonoured even without a formal refusal.

Dishonour by non-payment (Section 92) 🔗

Section 92 covers all three instruments – promissory notes, bills of exchange, and cheques. An instrument is dishonoured by non-payment when the maker of a note, the acceptor of a bill, or the drawee of a cheque fails to make payment upon being duly required to do so. This is the most commonly encountered form of dishonour in practice, particularly in cheque transactions.

Common reasons for dishonour 🔗

While the legal text focuses on the formal definition, the practical reasons for dishonour are worth understanding. For cheques – which are by far the most frequently litigated instrument – a bank may return a cheque unpaid for reasons such as insufficient funds in the drawer’s account, a mismatch in the signature, a stale cheque (one presented beyond its validity period), a stopped payment instruction issued by the drawer, or the account having been closed. For bills of exchange, non-acceptance often arises when the drawee disputes the underlying transaction or simply refuses to engage.

Notice of dishonour: the critical legal step 🔗

Dishonour alone does not automatically create liability for all parties. To hold prior parties – drawers, endorsers – liable on the instrument, the law requires that a formal notice of dishonour be issued. Chapter VIII of the NI Act (Sections 91-98) lays out this requirement in detail.

Who must give notice, and to whom? (Section 93) 🔗

As explained under Section 93 of the NI Act, when an instrument is dishonoured by non-acceptance or non-payment, the holder or any party who remains liable on it must give notice of the dishonour to all other parties whom the holder seeks to make severally liable, or to at least one of the parties if joint liability is sought. Critically, notice need not be given to the maker of a dishonoured promissory note or to the drawee or acceptor of a dishonoured bill – they already know of their own default. Notice is primarily aimed at endorsers and drawers who need to be informed so they can act.

Form and time of notice 🔗

The NI Act does not prescribe a rigid form for notice – it may be oral or written. However, written notice is always advisable for evidentiary purposes. The notice must communicate the fact of dishonour clearly. As for timing, it must be given within a reasonable time after dishonour. Where the parties are in the same place, notice given the day after dishonour is generally reasonable. Where they are in different places, notice sent by post on the day after dishonour, or on the next business day, usually suffices.

A party who receives a notice of dishonour and wishes to hold prior parties liable must themselves pass on the notice within a reasonable period. Under Section 95 of the Act, each party in the chain of liability gets a corresponding window to relay the notice further up the chain.

When is notice of dishonour not required? (Section 98) 🔗

The NI Act also carves out situations where giving notice is unnecessary. These include cases where the party entitled to notice has waived it, where the drawer has countermanded payment, where the party charged could not have suffered any damage from the want of notice, where the instrument was made or accepted for the accommodation of the party to whom notice would otherwise be given, or where the drawer or endorser had no reason to expect the instrument would be honoured.

Noting and protest (Sections 99-104) 🔗

Beyond notice, the NI Act provides another formal mechanism to record dishonour: noting and protest. When an instrument is dishonoured, it may be presented to a notary public who makes a memorandum – called a noting – on the instrument or on a paper attached to it, recording the fact of dishonour, the date, the reason given for refusal (if any), and the notary’s charges. A protest is a formal certificate of dishonour issued by the notary public, based on this noting.

While noting and protest are not mandatory for inland bills and promissory notes under Indian law, they are required for foreign bills. In practice, protesting a bill serves as strong evidence of dishonour and is particularly useful in commercial disputes or cross-border transactions.

Dishonour of cheques and Section 138: the criminal dimension 🔗

The most significant and widely litigated aspect of dishonour in India today concerns cheques specifically. Chapter XVII of the NI Act (Sections 138-148) creates a criminal offence for dishonour of a cheque due to insufficiency of funds or where the amount exceeds the arrangement made with the bank. This chapter was inserted by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 – before which cheque bounce was only a civil wrong.

The intent behind criminalising cheque dishonour was to encourage the use of cheques as a reliable payment instrument and to deter fraudulent conduct. On conviction under Section 138, the drawer may face imprisonment for up to two years, a fine of up to twice the cheque amount, or both.

Conditions that must be met for Section 138 to apply 🔗

Not every returned cheque automatically gives rise to a criminal complaint. Section 138 lays down specific conditions that must all be satisfied for the offence to be complete. The cheque must have been drawn on an account maintained by the drawer with a banker. It must have been issued in discharge of a legally enforceable debt or liability – not as a gift or security for a future obligation, for instance. The cheque must have been presented to the bank within six months from its date of issue or within its period of validity, whichever is earlier. The bank must have returned it unpaid. The holder must then send a written demand notice to the drawer within 30 days of receiving the bank’s intimation of return. If the drawer fails to make payment within 15 days of receiving that notice, the cause of action to file a complaint arises. The complaint must be filed within one month of the date the cause of action arose.

The mandatory demand notice under Section 138 🔗

The demand notice is the pivotal step in the Section 138 procedure. It must be in writing and must demand payment of the cheque amount. The notice triggers a 15-day window for the drawer to make good the payment. If payment is made within this period, no criminal offence is constituted. If not, the payee can file a criminal complaint before the appropriate Magistrate. The Supreme Court, in multiple decisions, has clarified that the notice requirement is mandatory and non-compliance defeats the complaint entirely – reinforcing how seriously courts treat this procedural step.

It is also worth noting that under the Negotiable Instruments (Amendment) Act, 2018, a new Section 143A was inserted empowering courts to order the drawer to pay interim compensation – up to 20% of the cheque amount – to the complainant during the pendency of the trial. This provides financial relief to the payee without having to wait for the final outcome, and if the accused is later acquitted, the amount must be refunded with interest.

Liability of parties after dishonour 🔗

Once dishonour is established and proper notice has been given, the legal consequences for various parties crystallise. Under the NI Act, every endorser who transferred the instrument before maturity is bound to compensate any subsequent holder for loss caused by dishonour, provided due notice of dishonour was given to that endorser. An endorser after dishonour is treated as liable on an instrument payable on demand – meaning their liability is immediate. The maker of a promissory note, the drawer of a bill, and the acceptor remain liable as principal debtors, while endorsers are liable as sureties.

A holder who acquires a negotiable instrument after it has already been dishonoured – with notice of that dishonour – does not get a better title than the person who transferred it to them. Their rights are no stronger than those of their transferor, which is why the value and marketability of an instrument drops sharply once it has been dishonoured.

Role of co-operative societies in cheque dishonour cases 🔗

Co-operative societies frequently deal with dishonoured cheques – particularly when members issue post-dated cheques as security for loan repayments. The NI Act applies fully to such transactions. However, courts have consistently held that the procedural requirements of Section 138 must be strictly followed even when the complainant is a co-operative society. In a notable 2025 ruling in Rekha Sharad Ushir v. Sapthasrungi Mahila Nagari Sahkari Patsansta Limited, the Supreme Court quashed a complaint filed by a co-operative society because the society had failed to furnish relevant documents to the accused member despite her written request – underscoring that procedural fairness and transparency are non-negotiable even for institutional complainants.

Compounding of offences under Section 147 🔗

The 2002 amendment to the NI Act introduced Section 147, which makes offences under the Act compoundable. This means the parties can reach a settlement and compound the offence at any stage of the proceedings – including at the appellate stage. This provision significantly changed the landscape of cheque dishonour litigation, allowing disputes to be resolved faster without necessarily going through the full trial process. Courts have generally encouraged compounding, given the enormous volume of cheque bounce cases pending across India.

What do you think? Given that cheque dishonour cases constitute one of the largest categories of pending cases in Indian courts, do you think the current 15-day payment window under Section 138 is adequate – or should the law provide a longer opportunity for the drawer to settle before criminal proceedings begin? And with the growing adoption of digital payment systems, do you think negotiable instruments like cheques will eventually become less central to commercial and co-operative transactions in India?

References

1. https://www.indiacode.nic.in/handle/123456789/2189?locale=en
2. https://vidhijudicial.com/sec-91-to-98-chapter-viii-(of-notice-of-dishonour)-the-negotiable-instruments-act,-1881.html
3. https://www.aaptaxlaw.com/negotiable-instruments-act/section-92-93-negotiable-instruments-act-dishonour-by-non-payment-by-and-to-whom-notice-should-be-given-section-92-93-of-n-i-act-1881.html
4. https://devgan.in/nia/chapter_08.php
5. https://blog.ipleaders.in/negotiable-instruments-act-1881/
6. https://vlex.com/vid/section-138-negotiable-instruments-584547970
7. https://advocatetanwar.com/the-negotiable-instruments-act-1881-an-overview/
8. https://www.barandbench.com/view-point/sections-138-and-143a-of-the-negotiable-instruments-act-1881-strengthening-the-credibility-of-cheque-transactions
9. https://indiankanoon.org/doc/1132672/
10. https://www.taxtmi.com/article/detailed?id=14390