Dishonour by Non-acceptance and Non-payment (Sections 91 and 92)

Dishonour is the event that converts the secondary liability of the drawer and indorsers into an immediate obligation to pay. An instrument may be dishonoured in two ways: a bill by non-acceptance, and any instrument by non-payment. This note explains when each occurs, the cases where the Act deems an instrument dishonoured, and what follows from dishonour, including the special consequences for cheques.

1. Dishonour by Non-acceptance (Section 91)

Section 91, Negotiable Instruments Act, 1881

A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted.

Where the drawee is incompetent to contract, or the acceptance is qualified, the bill may be treated as dishonoured.

Default on due presentment: the drawee, or any one of several non-partner drawees, fails to accept when the bill is duly presented for acceptance (Topic 25).
Presentment excused: where presentment is excused (for example, the drawee cannot be found after reasonable search) and the bill is not accepted.
At the holder's option: where the drawee is incompetent to contract (a minor, a person of unsound mind, or a fictitious person), or the acceptance is qualified, the holder may treat the bill as dishonoured (Topic 18).
Time to decide: the bill is not dishonoured while the drawee is within the 48 hours he may require under Section 63.
Drawee in case of need: where a drawee in case of need is named, the bill is not dishonoured until he too has dishonoured it (Section 115; Topic 32).

⚠ Note

Only bills can be dishonoured by non-acceptance. Notes need no acceptance, and cheques are never accepted.

2. Dishonour by Non-payment (Section 92)

Section 92, Negotiable Instruments Act, 1881

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 makes default in payment upon being duly required to pay the same.

Default on due presentment: the maker, acceptor or drawee fails to pay when the instrument is duly presented for payment, at the right time, place and manner (Topic 26).
Presentment unnecessary: in the cases in Section 76 (prevention, absence, engagement to pay, waiver, no damage to the drawer), the instrument is dishonoured at the due date for presentment without presentment.
Part payment: payment of only part of the amount is dishonour as to the balance.

3. Dishonour of Cheques in Practice

When a bank refuses payment of a cheque, it returns the cheque (or, under the Cheque Truncation System, the image) with a return memo stating the reason. Common reasons include:

Funds insufficient or exceeds arrangement: the reasons that attract Section 138 (Topic 42).
Payment stopped by drawer, account closed and signature differs: courts have held that these can also lead to Section 138 liability if the drawer lacked funds or acted to defeat payment (Topic 42).
Technical reasons, such as amount in words and figures differs, cheque stale, post-dated, drawer's signature required or alterations require drawer's authentication.

Under Section 146, the court presumes the fact of dishonour on production of the bank's slip or memo denoting dishonour, unless it is disproved (Topic 49).

4. Consequences of Dishonour

Right of recourse: the holder may proceed at once against the drawer and indorsers, who become liable to compensate him (Sections 30 and 35; Topics 17 and 19).
Notice of dishonour: to make the drawer and indorsers liable, the holder must give them notice of dishonour within a reasonable time, unless excused (Sections 93 to 98; Topic 30).
Noting and protest: the holder may have the dishonour noted and protested by a notary public; for foreign bills, protest may be compulsory (Sections 99 to 104A; Topic 31).
Compensation and interest: the holder recovers the amount with expenses and interest (Sections 79, 80 and 117; Topic 21).
Transferees after dishonour: a person taking the instrument after dishonour, with notice, has only his transferor's rights (Section 59).
Honour and need: a third party may accept or pay for honour, and a drawee in case of need may be approached (Topic 32).
Criminal liability: dishonour of a cheque for insufficiency of funds may be an offence under Section 138 (Part J).

⚠ Key point

A bill is dishonoured by non-acceptance when the drawee, or one of several non-partner drawees, fails to accept on due presentment, or presentment is excused and it is not accepted; it may be treated as dishonoured if the drawee is incompetent or the acceptance qualified (Section 91). A note, bill or cheque is dishonoured by non-payment when the maker, acceptor or drawee fails to pay on due presentment (Section 92), or on the due date where presentment is unnecessary (Section 76). Dishonour gives an immediate right of recourse against the drawer and indorsers, subject to notice of dishonour, and for cheques may attract Section 138.

5. Related Topics and Provisions

Presentment for acceptance and payment (Topics 25 and 26)
Notice of dishonour (Topic 30)
Noting and protest (Topic 31)
Ingredients of the Section 138 offence (Topic 42)