Dishonour Of Bill

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When the drawee fails to make the payment on the date of maturity of the bill in case of dishonour, it is called dishonour of bill. Under the dishonour of the bill, the liability of the acceptor is restored. In this section, we will learn what is the treatment for the dishonour of bills and its relating effect which is shown by passing journal entries.


Dishonour of Bill of Exchange

A bill is dishonoured either by non-acceptance or by non-payment. That is, the person on whom a bill is drawn (the drawee) refuses to accept it or if he accepts the bill and agrees to pay but later fails to do so on the due date, then the bill of exchange is said to be dishonoured. As per Section 42 of the Bills of Exchange Act, 1882, when a bill is duly presented for acceptance and is not accepted within the customary time, the person presenting it must treat it as dishonoured by non-acceptance. If he does not, the holder shall lose his right of recourse against the drawer and indorses.

Dishonour of bill means that the drawee of a bill of exchange is not able to make the payment for the bill on the date of maturity. In such a case, the holder of the bill can recover the amount from the drawer or any other previous endorsers.


Dishonour by Non-Payment

A bill of exchange is said to be dishonoured by non-payment when the drawee or other drawees who are not partners, makes default in paying when it was being duly required to pay the due. 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, commits a failure in payment upon being duly required to pay the same.  

The Negotiable Act further states that when a promissory note, bill of exchange or cheque is dishonoured by non-payment, the holder or some party who remains liable must give notice that the instrument has been so dishonoured. This is done to all other parties whom the holder seeks to make severally liable and to one of several parties whom he seeks to make jointly liable.


Dishonour by Non-Acceptance

According to The Negotiable Instrument Act 1881, A bill of exchange is said to be dishonoured by non-acceptance when the drawee, not being partners, makes default in acceptance upon being duly required to accept the bill. It is said to be dishonoured where presentment is excused and the bill is not accepted.

The bill may be treated as dishonoured where the drawee is incompetent to contract or the acceptance is qualified. When a bill is duly presented for acceptance and is not accepted within the customary time, the person presenting it must treat it as dishonoured by non-acceptance. If he does not, the holder shall lose his right of recourse against the drawer.


Bill Discounted Dishonoured

Bills discounted dishonoured means the bill holder has been discounted from the bank by debiting bank charges in the form of a discount. However, at the time of maturity when the bank demanded money from drawee, drawee had no money and did not pay to the bank. Then it will be called a dishonoured bill discounted dishonoured. At the time, the bank will go to the notary office for noting this dishonoured. Now, the bank will pay the noting fees on behalf of the bill holder; later the bill holder will take the same amount from drawee who accepted the same bill for payment.

When a bill of exchange discounted with a bank gets dishonoured at the due date, in that case, the following effect is recorded as a journal entry:

In the books of Drawer:

Drawee A/C

Debit

Bank A/c 

Credit


In the books of Bank:

Drawer A/C

Debit

Bills Receivable A/C

Credit


In the books of Drawee:

Bills Payable A/C

Debit

Noting Charges A/C 

Debit

Drawer A/C

Credit


This entry overall implies that on dishonour, the drawee again becomes the debtor of the drawer and bank becomes the creditor of the drawer (due to non-payment by drawee on due date). 

Thus it can be concluded that promissory note, bill of exchange or cheque is said to be dishonoured when the maker of the note or the acceptor of the bill or the drawee of the cheque makes a default by not paying off the liability which lies upon him. Such a person has a liability or duty to discharge himself of the liability by making the payment as stipulated by the instrument. When he fails to do so the instrument is called to be dishonoured.

FAQ (Frequently Asked Questions)

Q1. What are the Noting Charges?

Ans. Noting charges are the amounts paid by the drawer to the notary, who warns the drawee of the bill to get clear in a specific time period.

Q2. Can the Bills once dishonoured be Renewed?

Ans. Bill can be renewed by the drawer even after dishonour of the bill. In this case, the acceptor is the debtor of the drawer for the amount of the bill, noting charges and interest.

Q3. What is the maturity date of a Bill?

Ans. The maturity date is the date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due. On this date, which is generally printed on the certificate of the instrument in question, the principal investment is repaid to the investor. This is done while the interest payments that were regularly paid out during the life of the bond cease to roll in.