How are negotiable instruments discharged?

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.