Dishonour, noting and protest, acceptance for honour, material alteration, special rules of evidence and bills in sets

1. Dishonour

• By non-acceptance (s.91). A bill is dishonoured by non-acceptance when the drawee, or one of several drawees who are not partners, makes default in accepting on being duly required, or where presentment is excused and the bill is not accepted. Where the drawee is incompetent to contract, or the acceptance is qualified, the holder may treat the bill as dishonoured.
• By non-payment (s.92). A note, bill or cheque is dishonoured by non-payment when the maker, acceptor or drawee makes default in payment upon being duly required to pay.

Notice of dishonour (ss.93–98). The holder, or a party who remains liable, must give notice of dishonour to every party he seeks to make liable (s.93). It may be oral or written, sent by post, in any form, but must say that the instrument has been dishonoured, in what way, and that the party will be held liable, and it must be given within a reasonable time (s.94): by the next post or the next day where the parties are in different places (s.106). A party who receives notice must pass it on to prior parties (s.95). Notice is not needed (s.98) where it is waived, where the drawer has countermanded payment, where the party could suffer no damage for want of it, where the party cannot be found after due search, where the acceptor is also a drawer, in the case of a promissory note which is not negotiable, or where the party, knowing the facts, promises unconditionally to pay.

For a cheque, notice to the drawer is often unnecessary: not where he has countermanded payment (s.98(b)), nor where he had no funds and so could suffer no damage for want of notice (s.98(c)). The statutory notice under s.138(b) is a different thing: it is a demand for payment and a condition of prosecution.

2. Noting and protest

• Noting (s.99). When a note or bill is dishonoured, the holder may have the dishonour noted by a notary public on the instrument or an attached paper, within a reasonable time. The note records the date of dishonour, the reason given (or why the holder treats it as dishonoured), and the notary's charges.
• Protest (s.100). The holder may, within a reasonable time, have the dishonour noted and certified by a notary; the certificate is called a protest. Protest for better security: if the acceptor becomes insolvent or his credit is publicly impeached before maturity, the holder may have a notary demand better security and, on refusal, certify that fact.
• Contents (s.101): the instrument or a literal transcript; the names of the persons for and against whom protest is made; a statement that payment, acceptance or security was demanded by the notary and the answer, or that none was given or the person could not be found; the place and time of dishonour; and the notary's signature.
• Notice of protest (s.102) replaces notice of dishonour where protest is required by law, and may be given by the notary.
• When required. Protest is optional for inland instruments but useful as evidence; foreign bills must be protested when the law of the place where they are drawn requires (s.104). Noting within time is enough, the formal protest following later (s.104A). Acceptance and payment for honour require prior noting or protest (ss.108, 113).
• Evidence (s.119). On proof of protest the court presumes dishonour until it is disproved.

3. Acceptance and payment for honour, and the case in need

• Acceptance for honour (s.108). When a bill has been noted or protested for non-acceptance or for better security, any person not already liable on it may, with the holder's consent, accept it for the honour of any party, by writing on the bill (s.109). If he does not specify for whom, he is deemed to accept for the drawer (s.110).
• Liability (ss.111, 112). The acceptor for honour binds himself to all parties after the one for whose honour he accepts, to pay if the drawee does not; but he cannot be charged unless the bill has at maturity been presented to the drawee, dishonoured, and noted or protested.
• Payment for honour (ss.113, 114) after protest for non-payment, on a declaration before a notary; the payer gets the holder's rights against the party for whom he paid.
• Drawee in case of need (s.115). Where a bill names a drawee in case of need, it is not dishonoured until it has been dishonoured by him too.

4. Problem

‘A’ draws a bill of exchange on ‘B’ for Rs. 9,000. ‘B’ fails to accept it. Can ‘C’ accept the bill on behalf of ‘B’? Decide. (August 2024)

Issue. Whether a stranger to the bill can accept it when the drawee refuses, and in what capacity.

Law. No person except the drawee, all or some of several drawees, a drawee in case of need, or an acceptor for honour can bind himself by an acceptance (s.33). An agent duly authorised by the drawee may accept in his name (s.27). Acceptance for honour is possible only after the bill is noted or protested for non-acceptance, with the holder's consent, by writing on the bill, by a person not already liable (s.108).

Application. C is not the drawee and is not named as drawee in case of need. B has refused, so the bill is dishonoured by non-acceptance (s.91), and A as drawer becomes liable to the holder after notice of dishonour. C can accept in only two ways. If C is B's authorised agent, his acceptance in B's name is B's acceptance and binds B; but B has just refused, so that is unlikely on these facts. Otherwise C can accept for honour under s.108, once the bill has been noted or protested for non-acceptance and the holder consents. He would then accept for the honour of a party liable, in practice the drawer A (s.110 presumes this if he does not say), and would be liable to pay at maturity only if the bill is first presented to B, dishonoured, and noted or protested (s.112). He cannot accept “on behalf of B” in the sense of substituting himself for the drawee without these steps.

Conclusion. C cannot accept as a substitute drawee. He may accept as B's authorised agent, or for honour of A after noting or protest with the holder's consent, and his liability is then that of an acceptor for honour under ss.111 and 112.

5. Material alteration

Section 87: any material alteration of a negotiable instrument renders it void as against anyone who is a party to it at the time of the alteration and does not consent, unless it was made to carry out the common intention of the original parties. An alteration by an indorsee discharges his indorser from all liability to him.

An alteration is material if it changes the operation of the instrument or the liabilities of the parties: the date, the sum, the time or place of payment, the rate of interest, the names of the parties, or adding a new party. It is not material if it only corrects a mistake or records what was always intended.

The section is subject to ss.20, 49, 86 and 125, which are the authorised alterations:

• filling up an inchoate instrument within the authority given (s.20);
• converting a blank indorsement into a full one (s.49);
• the holder's consent to a qualified acceptance (s.86);
• crossing a cheque, or adding to a crossing, after issue (s.125).

Two protections follow. An acceptor or indorser is bound by his acceptance or indorsement despite any previous alteration (s.88). A person or banker who pays an instrument whose material alteration is not apparent, according to its apparent tenor and otherwise in due course, is discharged (s.89), Since 2002, s.89(2) treats any difference between a truncated cheque and its electronic image as a material alteration, and puts on the bank or clearing house the duty to ensure that the image is exact.

The principle is older than the Act. In Loon Karan Sethia v. Ivan E. John, 1976 INSC 253, the Supreme Court held that a material alteration made by the plaintiff to the agreement on which he sued rendered it void, so the suit failed. The same rule, applied to instruments, is s.87.

6. Special rules of evidence

Chapter XIII makes the instrument largely prove itself.

• Presumptions (s.118), until the contrary is proved: (a) consideration for making, acceptance, indorsement and transfer; (b) that a dated instrument was made on that date; (c) that acceptance was within reasonable time after date and before maturity; (d) that transfer was before maturity; (e) that indorsements were made in the order they appear; (f) that a lost instrument was duly stamped; (g) that the holder is a holder in due course, except that where the instrument was obtained by offence, fraud or unlawful consideration, the holder must prove he is one.
• Protest (s.119): proof of protest raises a presumption of dishonour.
• Estoppels (ss.120–122): the maker or drawer cannot deny original validity against a holder in due course; the maker or acceptor cannot deny the payee's capacity to indorse; an indorser cannot deny the signature or capacity of prior parties.
• In prosecutions for dishonour of cheques, s.139 presumes that the cheque was received for a debt or liability, and s.146 makes the bank's return memo prima facie evidence of dishonour.

These presumptions are rebuttable. The defendant may lead evidence or rely on the plaintiff's own case to show there was no consideration. The presumptions are why a suit on a promissory note usually succeeds on proof of signature alone.

7. Bills in sets

Foreign bills used to be drawn in sets of two or three copies sent by different routes, so that one would arrive even if a ship was lost. Section 132: bills may be drawn in parts, each numbered and providing that it continues payable only so long as the others remain unpaid. All the parts make a set, but the whole set is one bill, and is extinguished when one part, if it were a separate bill, would be extinguished. Exception: a person who accepts or indorses different parts in favour of different persons is liable on each part, and so are subsequent indorsers of each part, as if each were a separate bill.

Section 133: as between holders in due course of different parts of the same set, the one who first acquired title to his part is entitled to the other parts and to the money. The drawee should accept only one part, and pay only against the part he accepted.

How this is examined

Short notes: “Material alteration” (February 2025), “Bills in sets” (June 2025), and noting and protest or special rules of evidence in older papers. The acceptance-for-honour problem (August 2024) is answered as above. For material alteration always give the four exceptions by section number, and s.89 for the banker.