Negotiable Instruments Act, 1881 – CMA Inter Law and Ethics Study Material

Negotiable Instruments Act, 1881 – CMA Inter Business Laws and Ethics Study Material is designed strictly as per the latest syllabus and exam pattern.

Negotiable Instruments Act, 1881 – CMA Inter Law and Ethics Study Material

Question 1.
Write Short Notes on Endorsement under Negotiable Instruments Act, 1881 (Dec 2021, 3 marks)
Answer:
Endorsement:
As per Section 15 of the Negotiable Instrument Act states that when the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negation on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as negotiable instrument he is said to indorse the same and is called the ‘indorser’.

Hence, endorsement (endorsement) means writing of a person’s name (other than maker) on the face or back of an instrument or on a slip of paper attached thereto for the purpose of negotiation. The person signing the instrument is known as endorser and the person in whose favour it is endorsed is known as endorsee.

Distinguish Between

Question 2.
How would you differentiate between negotiation and assignment? (Dec 2021, 6 marks)
Answer:
Differences between Negotiatión and Assignment are as under:

Negotiation	Assignment
1. Consideration is presumed until contrary is proved	Consideration must be proved
2. If transferee is a holder in due course, he takes the instrument free from any defects.	Assignee’s title is always subject to defenses and equities between the original debtor and assignor.
3. Notice of transfer is not necessary	Notice of assignment must be given.
4. Negotiation is effected by delivery in case of instruments payable to bearer and by delivery and endorsement in case of instruments payable to order.	Assignment is affected only by writing
5. Transferee can sue the third party In his own name.	Assignee cannot do so.
6. There are a number of presumptions in favor of holder in due courses	There are no such presumptions.

Descriptive Questions

Question 3.
What is ‘Noting’ (Negotiable Instrument Act) (Dec 2012, 4 marks)
Answer:
“Noting’ means recording the fact of dishonor by Notary Public upon the Instrument. “Noting” must contain the following:

• The fact of dishonor.
• Date of dishonor.
• Reasons if any, assigned for dishonor.
• If the Instrument is not expressly dishonored, reasons why the holder thinks so.
• Notary Charges.

Question 4.
What will be the fate of a “Holder” of negotiable instrument if he fails to give notice of dishonour to prior parties? (Dec 2013, 2 marks)
Answer:
If the Holder does not give notice of dishonour of the bill, instrument or cheque (except when the notice of dishonour is excused,) all the parties liable thereon are discharged of their liability.)

Question 5.
State the circumstances under which the drawer of a cheque will be liable for an offence relating to dishonour of the cheque under the Negotiable Instrument Act, 1881. Examine, whether there is an offence under the Negotiable Instrument Act, 1881, if a Drawer of a cheque after having issued the cheque, informs the Drawee not to present the cheque as well as informs the Bank to stop the payment. (Dec 2014, 5 marks)
Answer:
On dishonor of a cheque the drawer is punishable with imprisonment for a term not exceeding two years or with a fine not exceeding twice the amount of a cheque or with both of the following conditions are fulfilled:

• if the cheque is returned by the bank unpaid due to insufficiency of funds in the account of drawer.
• If the cheque was drawn to discharge a legally enforceable debt or other liability in whole or part of it.
• If the cheque has been presented to the bank within a period of three months from the date on which it is drawn on or within the period of its validity, whichever is earlier.
• If the payee or the holder in due course of the cheque has given a written notice demanding payment within 30 days from the drawer on receipt of information of dishonor of cheque from the bank.
• If the drawer has failed to make payment within 15 days of the receipt of the said notice. (Section 135)
• If the payee or a holder in due course has made a complaint within one month of cause of action arising under Section 138 (Section 142)

Case Laws: The Supreme Court held in Modi Cements Ltd. Vs. Kuchil Kumar Nandi held that once a cheque is issued by the drawer, a presumption under Section 139 follows (i.e. the cheque has been issued for the discharge of any debt or other liability) and merely because the drawer issued a notice thereafter to the drawee as to the bank for stoppage of payment, ¡t will not preclude an action under Section 138. Hence, the drawer of the cheque will be liable for the offence under Section 138 for dishonour of cheque.

Question 6.
A Bill of exchange dated 1st February 2014 payable two months after date was presented to the maker for payment 10 days after maturity. What is the date of maturity? Explain with reference to the relevant provisions of the Negotiable Instruments Act, 1881 whether the endorser and the maker will be discharged by reasons of such delay. (Dec 2014, 3 marks)
Answer:
The due date of maturity is 4th April (i.e., 3 day after two months) Promissory flotes, bills of exchange and cheques must be presented for payment at the due date of maturity to the maker, acceptor or drawee there of respectively, by or on behalf of the holder. In default of such presentment, the other parties to the instrument (i.e., parties other than the parties primarily liable) are not liable thereon to such holder.

If authorized by agreement or usage, a presentation through the post office by means of a registered letter is sufficient (Section 64). So, the Endorser is discharged due to delayed presentment for payment, and the primary party (i.e., Maker of the instrument) continues to be liable.

Question 7.
Answer the questions:
(a) (iv) ‘A partial endorsement does not operate as a negotiation of the instrument’. Explain. (June 2015, 3 marks)
(b) (iii) Amrut draws a cheque payable to ‘self or order’. Before he could encash the cheque, one of his creditors, Bihari approached him for payment. Amrut endorses the same cheque in Bihari’s favour. The banker refuses payment to Bihari on account of insufficiency of funds in the account. Can Amrut be made liable to penalties for dishonour of cheques due to insufficiency of funds in the account under Section 138? (June 2015, 3 marks)
Answer:
(a) (iv) Section 56 provides that a negotiable instrument cannot be endorsed for a part of the amount appearing to be due on the instrument.

In other words, a partial endorsement which transfers the right to receive only a part payment of the amount due on the instrument is invalid.

Such an endorsement has been declared invalid because it would subject the prior parties to plurality of actions (one action by holder for part value and another action by endorsee for part value) and will thus cause inconvenience to them.

Moreover, it would also interfere with the free circulation of negotiable instruments. It may be noted that an endorsement which purports to transfer the instrument to Iwo or more endorsees separately and not jointly as also treated as partial endorsement and hence would be invalid.

Thus, where A holds a bill for ₹ 2,000 and endorses it in favour of B for ₹ 1,000 and in favour of C for the remaining ‘ ₹ 1,000, the endorsement is partial and invalid.

Section 56, however further provides that where an instrument has been paid in part, a note to that effect may be endorsed on the instrument and it may then be negotiated for the balance. Thus, if in the above illustration the acceptor has already paid ₹ 1,000 to A, the holder of the bill, A can then make an endorsement saying “pay B or order ₹ 1,000 being the unpaid residue of the bill”. Such an endorsement would be valid.

(b) (iii) Section 138 of Negotiable Instrument Ad, 1881, creates statutory offence in the matter of dishonour of cheques on the ground of insufficiency of funds in the account maintained by a person with the banker.

Section 138 of the Act can be said to be falling either in the acts which are not criminal offense in real sense, but are acts which in public interest are prohibited under the penalty or those where although the proceeding may be in criminal form, they are really only a summary mode of enforcing a civil right.

Normally in criminal law existence of guilty intent is an essential ingredient of a crime.

However, the Legislature can always create an offence of absolute liability or strict liability where ‘men’s rea’ is not at all necessary.

No, Amrut cannot be made liable to penalties for dishonour of cheque due to insufficiency of funds in the account since the cheque was not originally drawn payable to another person.

A cheque drawn payable to self and later endorsed in favor of another person dies not seem to fall within the purview of the provisions of Section 138 which lay down that the cheque should have been drawn for payment to another person.

Question 8.
Answer the question:
(iv) “A cheque is a specie of a bill of exchange with two additional qualifications.” Explain. (Dcc 2015, 3 marks)
Answer:
According to Sec. 6 of Negotiable Instrument Act, “A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.”
A cheque is a bill of exchange with the following two distinctive features which are additional qualifications viz.:

• A cheque is always on a specified banker.
• A cheque is always payable on demand.
• Thus, a cheque is a bill of exchange drawn on a bank payable on demand.
• All cheques are bills of exchange, but all bills of exchange are not cheques.
• A cheque must have all the essential requisites of a bills of exchange.

Question 9.
Answer the question:
(d) (i) State the circumstances under which a banker is bound to refuse the payment of a cheque. (June 2016, 8 marks)
Answer:
Circumstances when the banker must refuse the payment:
Following are the circumstances ¡n which the banker is bound to refuse the payment of a cheque:
1. When the customer has countermanded payment:
The term ‘countermand’ means the issue of instruction to the banke[ not to pay a particular cheque. Thus, where a customer issues instructions to the banker not to make the payment of a particular cheque, the banker must not make the payment. A cheque, the payment of which is stopped by the customer is known as a ‘stopped cheque’. And a stopped cheque is a piece of waste paper in the hands of payee.

2. When the customer has died
Sometimes, the banker receives notice of customer’s death. In such cases, he must refuse the payment of the cheque presented after the notice of death. However, if the payment is made before the banker receives the notice of death, the payment is valid and banker is justified in making such payment.

3. When the customer has become insolvent
Sometimes, the banker receives; the notice of customer’s insolvency. In such cases also he must refuse the payment of the cheques presented after the notice.

4. When the customer has become a person of unsound mind
Sometimes, the banker receives the notice that his customer has become insane. in such cases also, he must refuse payment of the cheque presented after the notice.

5. When a garnishee order has been received by the banker
The term Garnishee order may be defined as a Court order attaching the balance in customer’s account. When the banker receives such order then he is bound to refuse the payment of the customer’s cheque.

6. When the cheque is lost
Sometimes, the drawer informs the banker that a particular cheque is lost. In such cases, banker must refuse the payment of that cheque.

7. When the account is closed
Sometimes, the customer closes his account and gives notice to the banker. In such cases that banker must not pay any cheque of the customer after the closure of the account.

8. When holder’s title is defective
Sometimes, the banker comes to know of any defect in the title of the person presenting the cheque. In such cases, he must refuse the payment of the cheque.

9. When a customer gives notice of assignment of credit balance
In his account, the banker must refuse the payment of cheque.

Question 10.
Answer the question:
(ii) Which are the essential elements of a valid acceptance of a Bill of Exchange? An acceptor accepts a ‘Bill of Exchange’ but writes on it ‘Accepted but payment will be made when goods delivered to me is sold’. Decide the validity. (Dec 2016, 7 marks)
Answer:
Essentials of a Valid Acceptance of a Bill of Exchange:
The essentials of a valid acceptance are as follows:
1. Acceptance must be written:
The drawee may use any appropriate word to convey his assent. It may be sufficient acceptance even if just signatures are put without additional words. An oral acceptance is not valid in law.

2. Acceptance must be signed
A mere signature would be sufficient for the purpose. Alternatively the words ‘accepted’ may be written across the face of the bill with a signature underneath; if it is not so signed, it would not be an acceptance.

3. Acceptance must be on the bill
The acceptance should be on the face of the bill normally but it is not necessary. An acceptance written on the back of a bill has been held to be sufficient in law. What is essential is that must be written on the bill; else it creates no liability as acceptor on the part of the person who signs It.

4. Acceptance must be completed by delivery
Acceptance would not be complete and the drawee would not be bound until the drawee has either actually delivered the accepted bill to the holder or tendered notice of such acceptance to the holder of the bill or some person on his behalf.

5. Where a bill is drawn in sets, the acceptance should be put on one part only
Where the drawee signs his acceptance on two or more parts, he may become liable on each of them separately.

6. Acceptance may be either general or qualified
An acceptance is said to be general when the drawee assents without qualification order of the drawer. The qualification may relate to an event, amount, place, time etc. (Explanation to Section 86 of the Negotiable Instruments Act 1881).

In the above case, the acceptance is a qualified acceptance since a condition has been attached declaring the payment to be dependent on the happening of an event therein stated. As a rule, acceptance must be general acceptance, and therefore, the holder is at liberty to refuse to take a qualified acceptance. Where, he refuse to take it, the bill shall be dishonoured by non-acceptance. But, il he accepts the qualified acceptance, even then it binds only him and the acceptor and not the other parties who do not consent thereto. (Section 86).

Question 11.
Anil draws a bill of exchange payable to himself on Sushil, who accepts the bill without consideration just to accommodate Anil. Anil transfers the bill to A’ay for good consideration. State the rights of Anil and Ajay. Would your answer be different if Anil transferred the bill to Ajay after maturity? (June 2018,7 marks)
Answer:
Section 43 of the Negotiable Instrument Act, 1881 states the following:
(i) Liability of parties if there is no consideration – A negotiable instrument made, drawn, accepted, endorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction.

(ii) Rights of holder for consideration – but if any such party has transferred the instrument to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on suct instrument from the transferor for consideration or any prior party thereto.

(iii) No right of accommodating party to recover from accommodating party No party for whose accommodation a negotiable instrument has been made, drawn, accepted, endorsed can, if he has paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation.

In the given case, Anil is not entitled to sue Sushil, since there is no consideration between Anil and Sushil and hence there is no obligation to pay.

Again Ajay is entitled to sue Anil and Sushil since Ajay is a holder for consideration. Ajay is entitled to sue the transferor for consideration and every other party prior to him.

According to Section 59, in the case of accommodation bills, a defect in the title of the transferor does not affect the title of the holder acquiring after maturity. Hence, even if Ajay has acquired the bill for consideration after maturity, he is entitled to sue.

Question 12.
Rahul draws a cheque payable to ‘sell or order’. Before he could encash the cheque, one of his creditors, Samrat approaches him for payment. Rahul endorses the same cheque in Samrat’s favour. The banker refuses payment to Samrat on account of insufficiency of funds in the account. Can Rahul be made liable to penalties for dishonor of cheque due to insufficiency of funds in the account under section 138 of Negotiable Instruments Act, 1881? (Dec 2018, 7 marks)
Answer:
1. Section 138 of Negotiable Instrument Act, 1881, creates statutory offence in the matter of dishonour of cheques on the ground of insufficiency of funds in the account maintained by a person with the banker.

2. Section 138 of the Act can be said to be falling either in the acts which are not criminal offense in real sense, but are acts which in public interest are prohibited under the penalty or those where although the proceeding may be in criminal form, they are really only a summary mode of enforcing a civil right. Normally in criminal law existence of guilty intent is an essential ingredient of a crime.

3. Although, the Legislature can always create an offence of absolute liability or strict where ‘meshrea’ is not at all necessary.

4. No, Rahul cannot be made liable to penalties for dishonour of cheque due to insufficiency of funds in the account since the cheque was not originally drawn payable to another person.

5. A cheque drawn payable to self and later endorsed in favour of another person does not seem to fall within the purview of the provisions of Section 138 which lay down that the cheque should have been drawn for payment to another person.

Practical Questions

Question 13.
(ii) ‘Anil’ draws a bill on ‘Susheel’ for INR 10,000 payable to his order. ‘Susheel’ accepts the bill but subsequently dishonours it by non-payment. ‘Anil’ sues ‘Susheel’ on the bill. ‘Susheel’ proves that ¡t was accepted for value as of INR 8,000 and as accommodation to ‘Anil’ for INR 2,000. How much can Anil’ recover from ‘Susheel’? Decide in the light of the provisions of the Negotiable Instruments Act, 1881? (Dec 2013, 3 marks)
Answer:
According to the provisions of Section 44 of Negotiable Instruments Act,1881, when there is a partial absence or failure of money consideration for which a person signed a bill of exchange, the same rules applicable for total absence or failure of consideration will apply. Thus, the parties stancing in immediate relation to each other cannot recover more than the actual consideration. Accordingly, Anil can recover only INR 8000.

Question 14.
‘A’ issues an open ‘bearer’ cheque for ₹ 10,000 in favour of B’ who strikes out the word ‘bearer’ and puts crossing across the cheque. The cheque is thereafter negotiated to ‘C’ and ‘D’. When it is finally presented by D’s banker, it is returned with remarks ‘payment counter manded’ by drawer. In response to this legal notice from ‘D’,-A pleads that cheque was altered after it had been issued and therefore he is not bound to pay the cheque. Referring to the provisions of the Negotiable
Instruments Act, 1881, discuss whether A’s argument is valid or not. (June 2014, 3 marks)
Answer:

• Effects of striking off the word bearer. It amounts to a material alteration.
• However, such material alteration is authorized by the Act.
• Therefore, the cheque is not discharged; it remains valid.
• Effects of crossing the cheque. It amounts to a material alteration.
• However, such material alteration is authorized by the Act.
• Therefore, the cheque is not discharged; it remains valid. A’s argument is not valid.
• Since the reason for dishonor of cheque is not ‘material alteration ‘but payment countermanded by drawer’.
• Therefore, A is liable for the payment of the cheque and he shall also be liable for dishonor of cheque in accordance with the provisions of Section 138.

Question 15.
On a Bill of Exchange for Rupees one lakh, X’s acceptance to the Bill ¡s forged. ‘A’ takes the Bill from customer for value and in good faith before the bill becomes payable. State with reasons whether ‘A’
can be considered as a “Holder in due course” and whether he can receive the amount of the Bill from ‘X’? (June 2014, 4 marks)
Answer:
According to the Section 9 of the Negotiable Instruments Act, 1881 “holder in due course” means any person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque
if payable to bearer or the payee or endorsee thereof, if payable to order, before the amount in it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

• As ‘A’ in this case prima fade became a possessor of the bill for value and in good faith before the bill became payable, he can be considered as a holder in due course.
• But where a signature on the Negotiable instruments is forged the instrument is not at all an instrument in itself.
• The holder of a forged instrument cannot enforce payment thereon. In the event of the holder being able to obtain payment in spite of forgery, he cannot retain the money.
• The true owner may sue on tort (tort means wrongful act, misdeed, offense)the person who had received.
• The principle is universal in character; by reason where of even a holder in due course is not exempt from it.
• A holder in due course is protected when there is defect in the title.
• But he derives no title when there is entire absence of title as in the case of forgery. Hence, “A” cannot receive the amount on the bill.

Question 16.
Mr. Punit obtained fraudulently from Rohan a crossed cheque “Not Negotiable”. He transfers the cheque to Sunit, who gets the cheque encashed from ABC Bank Limited which is not the drawee bank. Rohan on coming to know about the fraudulent act of Mr. Punit sues ABC Bank for the recovery of the money. Examine with reference to the relevant provisions of the Negotiable Instruments Act, 1881, whether Rohan will succeed in his claim. Would your answer be still the same in case Mr. Punit does not transfer the cheque and gets the cheque encashed from ABC Bank himself? (Dec 2014, 4 marks)
Answer: .
According to Section 130 of the Negotiable Instruments Act 1881, a person taking a cheque crossed generally or especially bearing, in either case, the words, not negotiable shall not have or shall not be able to give a better title to the cheque than the title the person from whom he had.

In consequence, if the title of the transferor is defective, the title of the transferee would be vitiated by the defect.

Thus, based on the above provisions, it can be concluded that it the holder has a good title, he can still transfer it with a good title but if the transferor has a defective title, the transferee is affected by such defects and he cannot claim the right of a holder in due course by proving that he purchased the instrument in good faith and for value.

As Mr. Punit in the given case had obtained the cheque fraudulently, he had no title to it and could not give to the bank any title to the cheque or money and the bank would be liable for the amount of the cheque for encashment. (Great Western Railway Co. Ltd. Vs. L and and County Banking Co.)

The answer in the second case would not change and shall remain the same for the reasons given above. Thus, Rohan in both the cases shall succeed in his claim from ABC Bank.

Question 17.
Answer the question:
Amit signs, as maker, a blank stamped paper and gives it to Sumit and authorizes him to fill ¡t as a note for ₹ 500, to secure an advance which Namit is to make to Sumit. Sumit fraudulently fills it up as a note for ₹ 2,000, payable to Namit who has in good faith advanced ₹ 2,000. Decide, with reasons, whether Namit is entitled to recover the amount, and if so, up to what extent. (June 2015, 4 marks)
Answer:
A duly signed blank-stamped instrument is called an inchoate instrument. According to Section 20 of the Negotiable Instruments Act, an Inchoate instrúment is an incomplete Instrument in some respect.

When a person signs and delivers blank or incomplete stamped paper to another, such other is authorized to complete it for any amount not exceeding the amount covered by the stamp.

The person so signing is liable upon such Instrument, to any holder in due course for any amount.
But any other person can’t claim more than the amount intended by the drawer of the instrument.

Thus, for Namit’s claim to be valid and enforceable, two things are important:
(a) That Namit is a holder in due course, i.e., there should be valid consideration and he would have obtained it in good faith and before maturity.

(b) The amount filled in i.e., ₹ 2,000 is covered by stamp amount.
In Negotiable Instruments Act every holder is deemed to be a holder in due course. Thus, the other party has to establish that Namit is not a holder in due course.

Question 18.
Parag issues an open ‘bearer’ cheque for ₹ 10,000 in favour of Qadir who strikes out the word ‘bearer and crosses the cheque. The cheque is thereafter negotiated to Raman and Suman. When it is finally presented by Suman’s banker, it is returned with remarks ‘payment counter manded’ by drawer. In response to a legal notice from Suman, Parag peads that the cheque was altered after it had been issued and therefore he is not bound to pay the cheque. Referring to the provisions of the Negotiable Instruments Act, 1881, decide, whether Parag’s argument is valid or not? (Dec 2015, 3 marks)
Answer:
The cheque bears two alterations when ¡t is presented to the paying banker. One, the word ‘bearer’ has been struck off and two, the cheque has been crossed. Although both the alterations amount to material alterations but such alterations are authorized by the Act. So, it can be said that both of these alterations do not amount to material alteration under the provisions of the Act and hence the liability of any including the drawer is not at all affected. Parag is liable to pay the amount of the cheque to the holder.

Question 19.
A cheque is payable to bearer is crossed generally and is marked ‘not negotiable’. The cheque is lost and comes into the possession of Baldev, who takes it in good faith and for value. Baldev deposits the cheque nto his own account and his banker collects the same. Discuss the liability of collecting bankers and paying banker. Can Baldev be compelled to refund the money to the true owner of the cheque? (Dec 2015, 3 marks)
Answer:
Neither the collecting banker nor the paying banker incurs any liability to anyone because of special protection granted to the bankers under the Act. Yes, the true owner can compel Baldev to refund the money because the cheque bears ‘not negotiable’ crossing as a result of which the transferee cannot get a better title than that of the transfer or.

Question 20.
A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C without consideration. C transferred it to D for value, Decide – (i) Whether D can sue the prior parties of the bill, (ii) Whether the prior parties other than D have any right of action intense? Give your answer in reference to the Provisions of Negotiable Instruments Act, 1881. (June 2017, 6 marks)
Answer:
Section 43 of the Negotiable Instrumente Act, 1881 provides that an instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if any such party has transferred the instrument with or without endorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.

(i) In the problem, as asked in the question, A has drawn a bill on B and B accepted the bill without consideration and transferred it to C without consideration. Later on in the next transfer by C to D is for value. According to provisions of the aforesaid Section 43, the bill ultimately has been transferred to D with consideration. Therefore, D can sue any of the parties i.e. A, B or C, as D arrived a good title on it being taken with consideration.

(ii) As regards to the second part of the. problem, the prior parties before D i.e., A, B and C have no right of action inter se because first part of Section 43 has clearly lays down that a negotiable instrument, made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction prior to the parties who receive it on consideration.

Question 21.
X, by inducing Y, obtains a Bill of Exchange from him fraudulently in his (X) favour. Later, he enters into a commercial deal and endorses the bill to Z towards consideration to him (Z) for the deal. Z takes the Bill as a holder in due course. Z subsequently endorses the bill to X for value, as consideration to X for some other deal. On maturity, the bill is dishonoured. X sues Y for recovery of money. With reference to the provisions of Negotiable Instruments Act, decide whether X will succeed in the case. (Dec 2017, 7 marks)
Answer:
Section 58 of Negotiable Instruments Act provides that when an instrument is obtained by fraud, offence or for unlawful consideration, possessor or endorsee cannot receive the amount of the instrument. Hence, normally X would not be entitled to sue Y as X has obtained instrument through fraud.

However, as per section 53, a holder who derives title from holder in due course has all rights of a holder in due course. Since X derives his title from Z (who is a holder in due course), X has all rights of Z.

Second part of section 58 also makes it clear that even if a negotiable instrument is obtained by means of an offence or fraud or for unlawful consideration, the possessor or endorsee is entitled to receive the amount from the maker, if he is a holder in due course or claims through a person who was a holder in due course. Hence, X can sue Y as he is deriving his right from Z, who is holder in due course. Hence, X will succeed.

Question 22.
Aay draws a bill on Anoop. Anoop accepts the bill without any consideration. The bill is transferred to Udit without consideration. Udit transferred it to Vicky for value.
Decide –
(i) Whether Vicky can sue the prior parties of the bill?
(ii) Whether the prior parties other than Vicky have any right of action intense? (June 2019, 8 marks)
Answer:
Section 43 of Negotiable Instrument Act, 1881, Provides that an instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if any such party has transferred the instrument with or without endorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transfer or for consideration or any prior party thereto.

(i) In the given case, as asked in the question, Ajay has drawn a bill on snoop and Anoop accepted the bill without consideration and transferred it to Udit without consideration. Later on in the next transfer by Udit to Vicky is for value. According to provisions of the aforesaid Section 43, the bill ultimately has been transferred to Vicky with consideration.

Hence, Vicky can sue any of the parties i.e. Ajay, Anoop or Udit, as Vicky arrived a good title on ¡t being taken with consideration.

(ii) As regards to the second part of the problem, the prior parties before Vicky i.e. Ajay, Anoop and Udit have no right of action inter se because first part of Section 43 has clearly lays down that a negotiable instrument, made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction prior to the parties who receive it on consideration.

Question 23.
Mr. S. K drew a cheque in favour of Mr. P. K who was seventeen years old. Mr. P. K settled his rental due by endorsing the cheque in favour of Mrs. R. K the owner of the house in which he stayed. The cheque was dishonored when Mrs. R. K presented it for payment on the grounds of in adequacy of funds. Advice to Mrs. R. K. how she can proceed to collect her dues. (Dec 2019, 6 marks)
Answer:
Section 26 of Negotiable Instrument Act 1881, states that every person capable of contracting may bind himself and be bound by the making, drawing, acceptance, indorsement, delivery and negotiation of a promissory note, bill of exchange or cheque. But, A minor may draw, indorse, deliver and negotiate such instrument so as to bind all parties except himself.

As per the facts given in the question, Mr. S.K drew a cheque in favour of Mr P.K a minor. Mr. P. K endorses the same in favour of Mrs. R. K. to settled his rental dues. The cheque was dishonoured when it was presented by Mrs. R. K. to the bank on the grounds of inadequacy of funds. In the above case, Mr. P. K. being a minor may draw, endorse, deliver, and negotiate the instrument so as to bind all parties except himself. Hence, Mr. P. K is not liable. Mrs. R. K can thus, proceed against Mr. S. K to collect her dues.

Question 24.
Mr. P draws a bill of exchange of ₹ 75,000 on Mr. Q, who accepts. the same and returned to former. Later Mr. P endorsed the instrument in favour of Mr. R in settlement of an amount of ₹ 60,000 payable to him after recording the fact on the back of the bill that ₹ 15,000 has been received by Mr. P as a part payment of the bill. On maturity, Mr. R presented the bill for payment but it was dishonored. Discuss whether the endorsement of the bill by Mr. P to Mr. R is valid as per the provision of the Negotiable Instruments Act, 1881. (Dec 2022, 5 marks)

Negotiable Instruments Act, 1881 CMA Inter Law and Ethics Notes

1. Negotiable Instruments :
It is an “instrument which is transferable, by delivery, like cash, and is also capable of being sued upon by the person holding for time being. As per the Section 13(1) of the Act, “A negotiable instrument means a promissory note, bills of exchange, or cheque payable either to order or to bearer.”

2. Conditions of Negotiability

• It should be freely transferable.
• Defective title of transferor does affects the title of person taking It for value and in good faith.
• Transferee can sue upon the instrument in his own name.

3. Negotiability Involves two Elements

• Transferability free from equities.
• Transferability by delivery or endorsement.

4. Effects of Negotiability
General principal of law says:
“Nemo Dat Quad Non-Habet” Le. no one can pass a better title than he himself has. Negotiable instrument is an exception to above rule. Thus, a bonafide transferee of negotiable instrument without notice of any defect of title acquires a better title than that of transferor.

5. Characteristics
Holder is presumed to be the owner of the property contained therein.

• It is a written document.
• It should be signed.
• Payable to bearer or order.
• It is unconditional.
• It may be transferred by endorsement and delivery.
• Transferee obtains a good title.
• These are freely transferable but can be transferred only till maturity and in case of cheque till it becomes stale (i.e. Three months from the date of issue)

6. Classification

• Bearer
• Order
• Inland
• Foreign
• Demand
• Time
• Ambiguous
• Inchoate/Incomplete.

7. Promissory Note

• As per Sec. 40 the Act,
• A promissory note is, “an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument”.

Parties:

1. Maker – person making or executing it.
2. Payee – person to whom note is payable.
3. Holder – person to whom it is endorsed.
4. Endorser.
5. Endorsee.

8. Essentials of Promissory Note

1. It must be in writing.
2. The promise to pay must be unconditional.
3. The amount promised must be certain and a definite sum of money.
4. The instrument must be signed by the maker.
5. The person to whom promise is made must be a definite person.
6. It must contain an express promise or a clear undertaking to pay.
7. Payment must be ¡n the legal money of the country.
8. It must be properly stamped as per the provisions of Indian Stamp Act.
9. Name of place, member and date on which it is made must be contained in it.
10. Should contain the sum payable which is certain and must not be capable of contingent additions or deletions.

Bill of Exchange
As per Sec. 5 of the Act,
Bill of exchange is,
“an instrument in writing containing an unconditional order signed by a maker, directing a certain person to pay a certain sum of money only to or to the order of certain person or to the bearer of an instrument.”

Parties:

1. Drawer: The party who draws a bill.
2. Drawee: The party on whom such bills drawn.
3. Acceptor: The drawee of the bill who has signified his assent to the drawer’s order.
4. Payee: The party to whom or to whose order, the amount of bill is payable.
5. Endorser: The party who endorsers the bill.
6. Endorsee: The party to whom it is endorsed.
7. Holder: Person entitled in his own name to the possession of bill and to receive or recover the amount due thereon from the parties.
8. Drawee in Case of a Need: When in the bill, the person whose name ¡s entered, in addition to the drawee, to be resorted to in case of need.
9. Acceptor for Honour: Person who offers better security for safeguarding the honour of drawer or any endorser, accepts the bill.

10. Essentials of Bill of Exchange

1. It must be in writing.
2. There must be an order to pay.
3. The order must be unconditional.
4. The drawee must sign the instrument.
5. The drawer, drawee and payee must be specified in the instrument.
6. The um must be certain.
7. The medium of payment must be money and money only.

11. Types of Bills

• Inland bills: Bills drawn in India for any person in India.
• Foreign bills: Bills which are not inland bills. Foreign Bill is drawn in sets of three copies.
• Trade bills: Bills issued for trade settlements.
• Accommodation bills: Also known as kite bills, these are used for mutual help. An accommodation bill is a bill which is drawn, accepted or endorsed without any consideration.

12. Cheque
As per Sec. 6 of Act,
“Cheque is a special type of bills of exchange which ¡s always –
(i) Drawn upon a specified bank and
(ii) Payable on demand.
It also includes electronic image of truncated cheque or cheque in an electronic form.”. “A Cheque in the Electronic form” means a cheque which contains the exact mirror image of a paper cheque and is generated, written and signed in a secure system ensuring the minimum safety, standards with the use of digital signatures and asymmetric crypto system.

“A Truncated Cheque” means a cheque which is truncated during the course of clearing cycle, either by clearing house or by bank, preventing the further physical movement of cheque.
“Clearing House” refers to the clearing house managed or recognised by RBI.

It is a kind of bill of exchange, thus must satisfy all requirements of a bill.
Note: No bill of exchange or hunch except cheque can be made payable to bearer on demand.
Parties:
All are same as that of B/E, except drawee who is a banker.

13. Essentials of Cheque

1. It is always paid on demand.
2. It is drawn on a specified banker.
3. It does not requires acceptance.
4. It may be payable to drawer himself or to bearer on demand.
5. It is usually valid for 3 months.
6. It can be drawn n a bank where drawer has an account.
7. No stamp is required.
8. Banker is only liable to drawer. ‘

14. Banker
Person doing the banking work.
As per Sec. 5(b) of the Banking Regulation Act, 1949.

Banking refers to,
“Accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft or otherwise.”

15. Customer
Person who has an account with the bank or who utilizes the bank services.

16. Rights and Obligations of Banker

• Honour customer’s cheques.
• Collect cheques and drafts on customer’s behalf.
• Keep proper record of transactions with customers.
• Not to disclose customer’s account status with anyone, etc.
• Give reasonable notice to the customer before closing his account.
• Right to claim incidental charges as per the rules of bank.

17. LIabilities of Banker

• Liable to the customer to the extent of amount the account opened.
• Liable to honour customer’s cheques to the extent of amount in his account.
• Liable to compensate the drawer for any loss or damage suffered if he fails to honour cheques without justification.
• Liable to maintain proper and accurate accounts of credits and debits.
• Liable to honour choque presented in due course.

18. Cases when Banker must refuse Payment

• Banker receives notice of customer’s insolvency or lunacy.
• When customer countermands payment.
• If legal order from the Court attaching or otherwise dealing with money in banker’s hand is served on banker.
• Banker receives notice of customer’s death.
• Customer gives notice to the banker to close the account.
• Customer gives notice of assignment of his credit balance.

19. Cases when the Banker may refuse Payment Cheque is undated.

• It is stale i.e. not presented for payment within a reasonable period. (3 months)
• It is inchoate or not free from reasonable doubt.
• It is post-dated and presented before its ostensible period.
• If customer’s fund in bankers hand are not properly applicable to the payment of cheque drawn by former.
• Where the cheque is presented at a branch other than the one where the customer has the account.
• It is not duly presented. ‘
• It is mutilated.
• It is irregular or materially altered.
• Customer’s signature does not agree with his specimen signatures.

20. Crossing of Cheque

• Cheque is either open or crossed.
• Open Cheque:
• Can be presented by payee to the paying banker and Is paid over the counter.

Crossed Cheque:

• It is not paid over the counter but has to be collected through a banker.
• When two parallel lines are drawn on the upper left corner of cheque, it is known as crossing of cheque.
• It is a direction to the paying banker that the cheque should be paid only to a banker or a specified banker.
• It is done as a measure of safety.

21. Modes of Crossing
(i) General Crossing:

• When two parallel lines are drawn and nothing is specified in between them.
• Amount will be directly credited to account of payee.
• Payee cannot get money over the counter.
• It prevents the money from going in wrong hands & Co.

(ii) Restrictive Crossing:

• When the words ‘A/c Payee’ are specified within the crossing.
• Cheque cannot be further negotiated.
• Collecting banker will be guilty of negligence if he credits the proceeds to accoúnt other that of A/c payee.
• It does not affects the paying banker.

(iii) Special Crossing:

• When the name of a particular bank is specified between the crossed lines.
• Amount can be collected only by the bank whose name is specified.
• (iv) Not – Negotiable Crossing:
• When the words ‘not – negotiable’ is specified between the crossed lines.
• It enhances the safety as it ensures protection from any misappropriation.
• As per Sec. 130,
• “A person taking a cheque crossed generally or specially bearing in either case, with the words ‘not – negotiable’ shall not have and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had.”
• It does not mean non – transferable.
• It provides protection to the drawer or holder of a cheque who wants to transfer it against dishonesty or actual miscarriage in the course of transmit.

22. Holder (Sec. 8)

• Person must be named in the instrument.
• It implies ‘de jure’ i.e. holder in law and not ‘de facto’ i.e. holder in fact.

23. Holder in Due Course (HDC) (Sec. 9)
It means any person who obtains the instrument

• Before maturity.
• For some consideration.
• In good faith.

24. Privileges of HDC

• An inchoate instrument, if properly stamped, is valid, if it subsequently comes in hands of HDC.
• In case of inchoate instrument, HDC has a right to recover that much amount which is sufficiently covered by stamp.
• The acceptor of a bill of exchange cannot plead against a HDC that the bill is drawn in fictitious name.
• The person liable on an instrument cannot plead against HDC that the instrument has been lost or was obtained by means of fraud or unlawful means.
• No one can deny the original validity of the instrument.
• No one can deny against a HDC, the capacity of the payee to endorse.
• HDC can recover from all prior parties.
• No effect of conditional delivery.

25. Bank Draft
It is an order drawn by an office of a bank upon another office of same bank.
It is different from cheque in following 3 ways:

• It cannot be easily counter-manned.
• It cannot be made payable to bearer.
• It can be drawn only by one branch of bank upon another branch.

26. Material Alteration (Sec. 87)
Any alteration made in the instrument which causes it to speak a different language from what it originally intended or which changes the legal identity of the instrument in its terms or in relation or parties thereto is a material alteration.

• It alters the parties liabilities.
• It renders the instrument void.
• Persons taking the altered instrument after its alteration have no right to complain.
• However, as per Sec. 88, an acceptor or endorser remains bound by his acceptance or endorsement.
  E.g.: Sum payable, interest rate, date of payment etc.

Following cases do not result in material alteration:

• Alteration made with consent of parties before issue.
• Crossing of cheque.
• Adding words ‘on demand.
• Correction of any mistake.
• Carrying out common intention of parties.

27. Liability of Endorser (Sec. 35)

• By accepting and delivering it before maturity, he undertakes the responsibility that on the presentment it shall be accepted and paid.
• If it is dishonour by drawee, acceptor or maker, he will identify the holder or subsequent endorser who is compelled to pay, provided due notice of dishonour is received by him.
• However, he may make his liability conditional.

28. Negotiation (Sec. 14)
When a negotiable instrument is transferred to a person, so as to make the person the holder of the instrument, the instrument is said to be negotiated. It may be by –

• Mere Delivery.
• Endorsement and Delivery.

29. Assignment
It is a mode of transferring the instrument which requires a written document. Under this, the instrument is transferred like goods, by deed that is under a contract.

30. Endorsement (Sec. 15)

• It refers to ‘signing one’s name on the negotiable instrument for the purpose of transferring it to another person.”
• It there is no space on the instrument, it may be made on a slip of paper attached to it known as “Allonge.”
• Endorsee is the person to whom the instrument is endorsed.
• Endorsement therefore means writing something on the back of an instrument for the purpose of transferring the rights, title and interest to some other person.

31. Kinds of Endorsement

• Blank/General
• Special/Full
• Restrictive
• Partial
• Conditional/Qualified.

32. Hundis

• It is an instrument drawn in an oriental language i.e. local language.
• Known as native bill of exchange.
• They were also called ‘Teep

33. Types of Hundis

• Shah Jog Hundi
• Jokhmi Hundi
• Jawabee Hundi
• Nam Jog Hundi
• Darshani Hundi
• Miadi Hundi
• Dhani Jog Hundi
• Firman Jog Hundi