Negotiable Instruments Act, 1881 – Economic, Business and Commercial Laws Important Questions

Negotiable Instruments Act, 1881 – Economic, Business and Commercial Laws Important Questions

Question 1.
State the essential characteristics of the negotiable instruments.
Answer:
Negotiable instrument [Section 13]: A negotiable instrument means ) a promissory note, bill of exchange or cheque payable either to order or to bearer.

Important characteristics of negotiable instruments:

  • The holder of the instrument is presumed to be the owner of the property contained in it.
  • They are freely transferable.
  • A holder in due course gets the instrument free from all defects of title of any previous holder.
  • The holder in due course is entitled to sue on the instrument in his own name.
  • The instrument is transferable till maturity and in the case of cheques till it becomes stale (on the expiry of 6 months from the date of issue).
  • Certain equal presumptions are applicable to all negotiable instruments unless the contrary is proved.

Question 2.
Distinguish between: Bill of exchange & promissory note
Answer:
Following are the main points of distinction between bill of exchange | & promissory note:

Points Bill of exchange Promissory note
Meaning A bill of exchange as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument. A promissory note is an instrument in writing (not being a banknote or a currency note) 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.
Liability of the maker The Liability of the maker drawer is secondary & conditional upon non-payment he the drawee. The liability of the maker/ drawer is primary and absolute.
Order/Promise It contains an unconditional order. It contains an unconditional promise.
Who draws It is drawn by the creditor. It is made by the debtor.
Acceptance Acceptance by the drawee is a must. Acceptance is not required.
Payee The drawer of the bill may be the payee The maker of the note cannot be pavee.
Parties There are three parties: drawer, drawee & pavee. There are two parties – maker & pavee.

Question 3.
Distinguish between: Electronic and Truncated Cheque
Answer:
Following are the main points of distinction between electronic and truncated cheque:

Points Electronic Cheque Truncated Cheque
Form The electronic cheque is never in paper form. The truncated cheque is initially a regular cheque on paper. It is submitted to the bank as usual for clearance.
Original writing The original writing itself is in electronic form. The truncated cheque is duly written and signed on paper. It is subsequently converted into electronic form.
Signature The original signature is the digital signature. The original signature is in ink.

Question 4.
Explain the meaning of ‘holder’ & ‘holder in due course under the Negotiable Instruments Act, 1881.
Answer:
Holder [Section 8]: The holder of the negotiable instrument means any person:

  • entitled in his own name to the possession thereof, and
  • to receive or recover the amount due thereon from the parties thereto.

Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.

If a bill is lost or stolen, the thief or person who found the instrument is not the ‘holder’.

Holder in due course [Section 9]: Holder in due course means any person:

  • who for consideration became the possessor of a negotiable instrument, before the amount mentioned 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, (ie. he obtains instrument in good faith)

Question 5.
Distinguish between: Holder & Holder in due course
Answer:
Following are the main points of distinction between ‘holder’ & ‘holder in due course:

Points Holder Holder in due course
Meaning The holder of a negotiable instrument means any person:

  • entitled in his own name to the possession thereof and
  • to receive or recover the amount due thereon from the parties thereto.
Holder in due course means any person:

  • who for consideration became the possessor of a negotiable instrument, before the amount mentioned 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.
Position A ‘holder’ may or may not be a ‘holder in due course. A ‘holder in due course’ is obviously a holder.
Title Holder (who is not a holder in due course) cannot acquire a good title if the title of the prior party was defective. A holder in due course acquires a good title even if the title of the prior party was defective.
Mode Mere holder need not necessarily be for consideration e.g. heir of deceased holder becoming entitled to the bill is ‘holder’ not ‘holder in due course. Similarly, the assignee of the bill is the holder but not the holder in due course. A person can become a ‘holder in due course’ only after paying or transferring some consideration.

 

Question 6.
State the privileges of a “holder in due course” under the Negotiable Instruments Act, 1881.
Answer:
A holder in due course has the following privileges:

  1. A person who had signed an inchoate instrument is liable to the holder in due course for full value as long as stamp value is sufficient to cover the amount. [Section 20]
  2. Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied. [Section 36]
  3. If the payee or drawer of the instrument is fictitious, the acceptor is liable to the holder in due course, if the signature of the drawer and endorser is appearing on the instrument tallies. (the same person draw and then endorse the instrument) [Section 42]
  4. Parties to the instrument are liable to the holder in due course even if it was an accommodation bill Le. raised without consideration. [Section 43]
  5. If the bill was lost, the possessor is not entitled to get anything on Bill, but the holder in due course is still entitled to get the full amount of the Bill.
  6. The holder in due course gets a better title even if there was a defect in the title of the transferor. The title of a holder in due course is not affected by any offence or fraud (but not forgery) by the previous party as long as he is not a party to offence/fraud. [Section 58]
  7. In a suit by the holder in due course, the maker of the promissory note, drawer of a bill of exchange or cheque cannot deny the validity of the instrument as originally drawn. [Section 120]
  8. In a suit by the holder in due course, the maker of the promissory note, drawer of a bill of exchange or cheque cannot deny the payee’s capacity to endorse the promissory note or Bill. [Section 121]

In brief, all defects in Bill or Promissory note are cleaned when it comes in 1 the hands of ‘holder in due course. He gets good a title even if transferor j or any earlier party had the defective title. He gets a good title even if there is fraud/offence (but not forgery).

Question 7.
Distinguish between: Inland bills & Foreign bills
Answer:
Following are the main points of distinction between bills & foreign bills:

Points Inland Bills Foreign Bills
Meaning Following types of bills arc called inland instrument:

(a) The bills are drawn in India and payable in India.
(b) The bills are drawn in India on the resident person whether payable in India or outside India.
(c) The bills are drawn in India upon a person resident outside India but payable in India.

An instrument that is not an inland instrument is deemed to be a foreign instrument.
Copies Inland bill are drawn in a single copy. Foreign bills are drawn in triplicate.
Noting or protesting In case of dishonour of inland bills noting is required. In case of dishonour of foreign bills protesting is required.

Question 8.
What do you understand by the term ‘ambiguous instruments’?
Answer:
Ambiguous instruments [Section 17]: Where an instrument may be construed either as a promissory note or bill of exchange. This may happen if the wording of the instrument is not clear.

Example: Demand draft issued by one branch on another may either be treated as a promissory note or as Bill of Exchange.

Question 9.
Explain the provisions relating to ‘inchoate instrument’ under the Negotiable Instruments Act, 1881.
Answer:
Inchoate means insufficient or incomplete. If a person signs a blank or incomplete stamp paper and delivers it to another person, he thereby gives authority to the person to whom he delivers the instrument to fill in the blank. Such an instrument is known as an inchoate instrument.

Example: If stamp paper was sufficient to cover the amount of ₹ 10,000 and the amount was left blank while signing, the holder can fill the amount of ₹ 10,000. Such a holder (who filled in the blanks) cannot recover an amount more than what was intended to be paid to him. However, the holder in due course can recover the whole amount from any previous party, including the drawer. Note that the provision is valid only when the instrument is delivered to another person after signature. Thus, if a signed instrument is stolen, there is no ‘delivery’.

Inchoate stamped instruments [Section 20]: Where one person signs and delivers to another a paper stamped in blank or incomplete, he thereby prima facie authorize the holder to complete the negotiable instrument. If no amount is specified, he has the authority to fill an amount not exceeding the amount covered by the stamp. The person so signing shall be liable upon such instrument to any holder in due course for such amount.

However, he is liable to the holder (who is not a holder in due course) only for the amount actually payable to him. A holder who is not a holder in due course is not entitled to recover the full amount as shown in the Bill of Exchange.

Example: Mayank signs his name on a blank but stamped instrument and gives it to Pratik with the authority to fill up as a promissory note for ₹ 3,500. However, Pratik fills the amount as ₹ 15,000. The stamp is sufficient to cover ₹ 5,000. Pratik then hands it over to Sagar for ₹ 5,000 for value. Sagar has no knowledge of the fraud. In such a case, Mayank is liable to Sagar for ₹ 5,000 but to Pratik for ₹ 3,500. [Lloyds Bank v. Cooke]

Question 10.
Distinguish between: Bill of exchange & promissory note [Dec. 2018 (3 Marks)]
Answer:
Following are the main points of distinction between bill of exchange & promissory note:

Points Bill of exchange Promissory note
Meaning A bill of exchange as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument. A promissory note is an instrument in writing (not being a banknote or a currency note) 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.
Liability of the maker The Liability of the maker drawer is secondary & conditional upon non-payment he the drawee. The liability of the maker/ drawer is primary and absolute.
Order/Promise It contains an unconditional order. It contains an unconditional promise.
Who draws It is drawn by the creditor. It is made by the debtor.
Acceptance Acceptance by the drawee is a must. Acceptance is not required.
Payee The drawer of the bill may be the payee The maker of the note cannot be pavee.
Parties There are three parties: drawer, drawee & pavee. There are two parties: maker & pavee.

Question 11.
Distinguish between: Cheque and Bill of Exchange [June 2019 (3 Marks)]
Answer:
Following are the main points of distinction between cheque & bill of exchange:

Points Cheque Bill of Exchange
Meaning A ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. A bill of exchange as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument.
Drawn on It must be drawn on a specified banker. It may or may not be addressed to the banker.
Payable to bearer It can be made payable to the bearer. It cannot be made payable to the bearer on demand.
On-demand It must be made payable on demand. It cannot be made payable ‘on demand’.
Grace days There is no grace period. If it is not payable on demand, at sight or on presentment; a grace period of 3 days is available.
Crossing A cheque can be crossed. It cannot be crossed.
Presentation Presentation for acceptance is never required. Presentation for acceptance is required.
Stamping It is not required to be stamped. It is required to be stamped.
Due date There is no due date for the presentation of the cheque. It is required to be presented for payment on the due date.
Stop payment Bankers have to stop payment of cheque if the drawer is dead or insolvent and Bank has notice of the same There is no provision to stop payment if a party to the instrument is dead or insolvent or becomes insolvent after signature.
Notice of dis-honour Notice of dishonour is not required unless the holder intends to take criminal action u/s 138 Notice of dishonour is usually required.
Noting & pro-testing It cannot be noted and protested. It can be noted and protested.
Criminal liability Criminal liability gets attracted if a cheque is dishonoured. There is no criminal liability for the dishonour of the Bill of Exchange.

Question 12.
X a major, and M, a minor, executed a promissory note in favour of P. Examine with reference to the provisions of the Negotiable-Instruments Act, the validity of the promissory note and whether it is binding on X and M.
Answer:
As per Section 26 of the Negotiable Instruments Act, 1881, a minor may draw, indorse, deliver and negotiate any negotiable instrument so as ) to bind all parties except himself.

Hence, the instrument is valid. The instrument is binding on X but not on VI.

Question 13.
X draws a cheque in favour of Y, a minor, Y endorses the same in favour of Z. The cheque is dishonoured by the bank on grounds of inadequate funds. What legal remedy is available to Z under the provisions of the Negotiable Instruments Act, 1881 [Dec. 2019(4 marks)]
Answer:
Section 26 of the Negotiable Instruments Act, 1881- Every person capable of contracting according to law to which he is subject, may bind himself and be bound by making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.

Minors, lunatics, idiots, drunken person and persons otherwise disqualified by their personal law, do not incur any liability as parties to negotiable instruments

Incapacity of one or more of the parties to a negotiable instrument in no 4 way, diminishes the liabilities of the competent parties to the said instrument. Therefore, where a minor is the endorser or payee of an instrument that has been endorsed all the parties excepting the minor are liable in the event of its dishonour

Conclusion: Thus, if the cheque is drawn by X in favour of Y, a minor, Y en-dorses it to Z and the cheque is dishonoured then X is liable to Z but not Y.

Question 14.
A draws and B accepts the bill payable to C or order, C endorses the bill to D and D to E, who is a holder-in-due course. From whom E can; recover the amount? Examining the right of E.
Answer:
As per Section 36 of the Negotiable Instruments Act, 1881, every prior party to a negotiable instrument is liable to a holder in due course until the | instrument is duly satisfied.

The holder in due course (E) can hold all the prior parties liable jointly and severally. Prior parties include the maker or drawer, the acceptor and endorsers. Accordingly in the given problem, E, a holder in due course can recover the amount from all the prior parties i.e. D & C (the endorsers), B (an acceptor) and A (the drawer).

Question 15.
‘X’ is the holder of a bill of exchange made payable to the order of ‘B’, which contains the following endorsements in blank
First endorsement, ‘B’
Second endorsement, ‘C’
Third endorsement, ‘D’
Fourth endorsement, ‘E’
‘X’ strikeout, ‘E’ consent, the endorsement by ‘C’ and ‘D’.
Decide with reason, whether ‘X’ is entitled to recover anything from ‘E’.
Answer:
Discharge of endorser’s liability [Section 40]: Every endorser is entitled to recover the amount of Bill from prior endorsers. Hence, if a holder of a negotiable instrument destroys or impairs the endorser’s remedy against a prior party (without consent of the endorser), the endorser is discharged from liability to the holder as if the instrument had been paid at maturity.

Example: X is the holder of a bill of exchange made payable to the order of B, which contains the following endorsements in the blank:
First endorsement, “B”.
Second endorsement, “C”.
Third endorsement, “D”
Fourth endorsement “E”.

This bill X puts in a suit against E and strikes out, without E’s consent, the endorsements by C and D, X is not entitled to recover anything from E.

Question 16.
P, the holder of the bill of exchange, transfers it to Q without consideration. 0 also transfers it to R without consideration. R transfers it to X for consideration. X transfers it to Y without consideration. State giving reason whether Y can recover the amount on such instrument from X or P.
Answer:
As per Section 43 of the Negotiable Instruments Act, 1881, a negotiable instrument made, drawn, accepted, endorsed or transferred without consideration, or where consideration fails, creates no obligation of payment between immediate the parties to the transaction.

However, a holder who has obtained the bill for consideration can recover the consideration paid by him. The section applies to immediate parties to the transaction and not other parties.

Thus, Y cannot recover the amount from X (which is the immediate party) but can recover from P, Q & R.

Question 17.
P draws a bill on 0 for ₹ 10,000. 0 accepts the bill. On maturity the bill was dishonoured by non-payment, P files a suit against Q for payment of ₹ 10,000. 0 proved that the bill was accepted for a value of ₹ 7,000 and I as an accommodation to the plaintiff for the balance amount i.e. ₹ 3,000. Referring to the provisions of the Negotiable Instruments Act, 1881 decide whether P would succeed in recovering the whole amount of the bill?
Answer:
As per Section 44 of the Negotiable Instruments Act, 1881, if a person has signed a promissory note, bill of exchange or cheque consisting of partly for consideration and partly for without consideration, then he is liable to the extent of consideration involved in such instrument to the immediate party. Thus, P would not succeed in recovering the whole amount of the bill. He will be able to recover only ₹ 7,000.

Question 18.
The distinction between: Accommodation Bill & Trade Bill
Answer:
Following are the main points of difference between accommodation bill & trade bill:

Points Accommodation Bill Trade Bill
Meaning A bill that is drawn, for mutual finance, is called an accommodation bill. Bill drawn and accepted for a genuine trade transaction is termed as a trade bill.
Consideration It is drawn without any consideration. It is drawn for consideration.
Evidence This bill is for mutual financial help. This bill is evidence of debt.
Acknowledgement of debts These bills are not an acknowledgement of debts. These bills are an acknowledgement of debts.
Discounting with banks. These bills are always discounted by banks. These bills may or may not be discounted with banks.
Loss by way of discounting The loss by way of discounting the bill has to be shared by drawer and drawee in the ratio in which they share the proceeds. The loss by way of discounting the bill has to be borne by the drawer
Legal action Legal action cannot be taken up by drawer in case of dishonour of bill. Legal action can be taken up by drawer in case of dishonour of bill.

Question 19.
Difference between Order Instrument and bearer Instrument | [Dec. 2019(3 marks)]
Answer:
Bearer Instruments: A promissory note, bill of exchange or cheque is payable to bearer when:

  • It is expressed to be so payable, or
  • The only or last endorsement on the instrument is an endorsement in blank.

A person who is a holder of a bearer instrument can obtain the payment of the instrument.

Order Instruments: A promissory note, bill of exchange or cheque is payable to order:

  • Which is expressed to be so payable, or
  • Which is expressed to be payable to a particular person, and does not contain any words prohibiting transfer or indicating an intention that it shall not be transferable.

Question 20.
Draws and B accept the bill payable to C or order. C endorses the bill to D and D to E, who is ‘holder in due course. Decide from whom E can recover the amount under the Negotiable Instruments Act, 1881? [June 2019 (4 Marks)]
Answer:
As per Section 36 of the Negotiable Instruments Act, 1881, every prior party to a negotiable instrument is liable to a holder in due course until the j instrument is duly satisfied.

The holder in due course (E) can hold all the prior parties liable jointly and severally. Prior parties include the maker or drawer, the acceptor and j endorsers. Accordingly in the given problem, E, a holder in due course can recover the amount from all the prior parties Le. D & C (the endorsers), B 4 (an acceptor) and A (the drawer).

Question 21.
Distinguish between: Negotiation & Assignment
Answer:
Following are the main points of difference between negotiation & assignment:

Points Negotiation Assignment
Meaning Negotiation means the transfer of a negotiable instrument to another person so that such another person is entitled to possession of the instrument and receive the amount of the instrument on the due date. Assignment means the transfer of interest to another.
Title Holder in due course after a negotiation can get a better title than the transferor. The assignee cannot get a title better than the assignor.
Notice of endorsement Notice of endorsement is not necessary for negotiation. Notice of assignment is required to be given to the debtor in case of assignment of debt.
Form Negotiation of bearer instrument can be simply by delivery. The assignment must be in writing as per section 130 of the Transfer of Property Act, 1882.
Consideration Consideration is presumed in negotiation. Consideration is not presumed in the assignment.
Further En-dorsement & negotiation A negotiable instrument can be further endorsed without permission or even without the knowledge of the transferor. An assignee can further assign only if such right is specifically conferred on him by assignment deed.
Stamp duty Once the original instrument is stamped, further negotiation does not require payment of stamp duty. Each assignment will require fresh stamp duty.

Question 22.
Explain the various types of endorsement.
Answer:
Various types of endorsement are as follows:
(a) Blank or General Endorsement [Section 54]: An endorsement is to be blank or general where the endorser merely writes his signature on the back of the instrument, and the instrument so endorsed becomes payable to the bearer, even though originally it was payable to order. Thus, where the bill is payable to “Mohan or order”, and he writes on its back “Mohan”, it is an endorsement in blank by Mohan and the property in the bill can pass by mere delivery, as long as the endorsement continues to be a blank.

But Section 49 provides that a holder of an instrument endorsed in blank may convert the endorsement in blank into an endorsement in full, by writing above the endorser’s signature, a direction to pay the instrument to another person or his order. This is subject to the provision of the crossed cheque.

(b) Special or Full Endorsement [Section 55]: If the endorser signs his name and adds a direction to pay the amount mentioned in the instrument to, or to the order of a specified person, the endorsement is said to be special or in full. A bill made payable to Mohan or Mohan or order, and endorsed “pay to the order of Sohan” would be specially endorsed and Sohan endorses it further. A blank endorsement can be turned into a special one by the addition of an order making the bill payable to the transferee.

(c) Restrictive Endorsement [Section 50]: An endorsement is restrictive which prohibits or restricts the further negotiation of an instrument. Examples of restrictive endorsement: “Pay C only” or “Pay C for my use” or “Pay C on account of B” or “Pay C or order for collection”.

(d) Partial Endorsement [Section 56]: An endorsement partial is one that purports to transfer to the endorsee a part only of the amount payable on the instrument. A partial endorsement does not operate as negotiation of the instrument. A holds a bill for ₹ 1,000 and endorses it as “Pay B or order ₹ 500″. The endorsement is partial and invalid.

(e) Conditional or Qualified Endorsement [Section 52]: An endorsement is conditional or qualified which limits or negatives the liability of the endorser. An endorser may limit his liability in any of the following ways:
1. Sans recourse endorsement, Le. by making it clear that he does not incur the liability of an endorser to the endorsee or subsequent holders and they should not look to him in case of dishonour of instrument. The endorser excludes his liability by adding the words “sans recourse” or “without recourse”, e.g. “pay A or order sans recourse”.

2. By making his liability depending upon happening of a specified event which may never happen, e.g. the holder of a bill may en-dorse it thus: “Pay A or order on his marrying B”. In such a case, the endorser will not be liable until A marries B.

Question 23.
A bill of exchange is drawn payable to X or order. X endorses it to Y, Y to Z, Z to A, A to B and B to X. State with reasons whether X can recover the amount of the bill from Y, A and B if he has originally indorsed the bill to Y by adding the words ‘Sans Recourses’.
Answer:
The endorser of a negotiable instrument may, by express words in the endorsement, exclude his own liability thereon. If the endorser writes the words ‘sans recourse’ he excludes his liability on the instrument. Where an endorser so excludes his liability and afterwards becomes the holder of the instrument, all intermediate endorsers are liable to him. If the endorser excludes his liability, further negotiation is not prohibited. It only excludes the liability of the endorsee.

In the example given, normally, X cannot hold Y, Z, A and B, as if X holds them responsible, the responsibility will come back to him by the circuitry of action. However, in this case, X had endorsed ‘Sans Recourses’. Hence, Y, Z, A & B cannot hold X liable and hence circle does not get complete. On the other hand, X is holder after Y, Z, A and B and can hold them liable.

Question 24.
B obtains A’s acceptance to a bill of exchange by fraud. B endorses it to C who is a holder in due course. C endorses the bill to D who knows of the fraud. Referring to the provisions of the Negotiable Instruments Act, 1881, decide whether D can recover the money from A in the given case.
Answer:
As per Section 58 of the Negotiable Instruments Act, 1881, if an I instrument is obtained by offence, fraud or unlawful consideration, the possessor or endorsee is not entitled to get any amount thereon. However, if the instrument goes in the hands of ‘holder in due course’, subsequent ( possessor or endorsee is entitled to recover, as he derives title from the I ‘holder in due course. This is because section 53 provides that a holder of a negotiable instrument who derives title from a holder in due course has the rights thereon of that holder in due course.

Thus, D can recover the money from A.

Question 25.
On a bill of exchange for ₹ 10,000, Sumit’s acceptance of the bill is forged. Amit takes the bill from his customer in good faith and for consideration before the bill becomes payable. State with reasons whether Amit can receive the amount of the bill from Sumit.
Answer:
The Negotiable Instruments Act, 1881 makes no specific provision in respect of forgery. Hence, common law provisions apply. As per common law, a forgery is a nullity of law and it passes no title to the holder. It is not a mere defect in the title but a complete absence of a title, which cannot be cured.

Section 58 of the Act does not give protection against forgery, though it gives protection against offence or fraud. Hence, a person does not get a good title even if he obtains Bill bona fide and for value if the signature was forged. Hence, Amit is not a holder in due course, and cannot get the amount from Sumit.

Question 26.
Distinguish between: Negotiability and Assignability [Dec. 2018 (3 Marks)]
Answer:
Bearer Instruments: A promissory note, bill of exchange or cheque is payable to bearer when –

  • It is expressed to be so payable, or
  • The only or last endorsement on the instrument is an endorsement in blank.

A person who is a holder of a bearer instrument can obtain the payment I of the instrument.

Order Instruments: A promissory note, bill of exchange or cheque is payable to order:

  • Which is expressed to be so payable, or
  • Which is expressed to be payable to a particular person, and does not contain any words prohibiting transfer or indicating an intention that it shall not be transferable.

Question 27.
State the requirements of ‘presentment for acceptance’ of the bill of exchange and promissory note under the Negotiable Instruments Act, 1881.
Answer:
Presentment for acceptance [Section 61 ]: If no time or place is specified for presentment, a bill of exchange payable after sight must be presented to the drawee for acceptance.

The requirements are:

  • Presentment should be made by the person entitled to demand acceptance.
  • Presentment should be made within a reasonable time after it is drawn.
  • Presentment should be during business hours on a business day ie. not a public holiday.

Presentment by post: Where authorized by agreement or usage, a presentment through the post office by means of a registered letter is sufficient.

Bill deemed to be dishonoured if drawee cannot be found: If no time or place is specified for presentment and drawee cannot be found after reasonable search, the bill is said to be dishonoured.

Presentment of promissory note for sight [Section 62]: A promissory note, payable at a certain period after sight, must be presented to the maker for sight (if he can after reasonable search be found).

The requirements are:

  • Presentment should be made by the person entitled to demand payment.
  • Presentment should be made within a reasonable time after a promissory note is made.
  • Presentment should be during business hours on a business day ie. not a public holiday.

Drawees time for deliberation [Section 63]: Drawee can take time of 48 hours (exclusive of public holidays) to consider whether he will accept the bill of exchange.

Question 28.
Promissory note dated 1st February 2019 payable two months after the date was presented to the maker for payment 10 days after maturity. What is the date of maturity? Explain with reference to relevant provisions of the Negotiable Instruments Act, 1881 whether the endorser and the maker will be discharged by reason of such delay?
Answer:
When the period of the bill is stated in months, the calculation will be in months ignoring the days in months. Thus, if a promissory note made on 1 st February 2019 then its maturity date after adding 3 grace days will be 4th April 2019.

As per Section 64 of the Negotiable Instruments Act, 1881, if there is a default in the presentment of the instrument for payment, the other parties are not liable to the holder of the instrument. Hence, if the negotiable instrument is not presented for payment on the due date to the maker, acceptor and drawee then other parties get discharged. Thus, the maker, acceptor and drawee continue to be liable even if an instrument is not presented for payment on the due date.

Thus, in view of the above provisions, the endorser will get discharged but the maker of the promissory note being a primary party is still liable to the holder.

Question 29.
Examining the provisions of the Negotiable Instruments Act, 1881, answer the following:
(i) Whether any interest is payable on dishonour of negotiable instruments? If yes, at what rate?
(ii) At what rate interest is payable if the rate of an instrument is not specified in the instrument?
Answer:
Provisions relating to the payment of interest is on negotiable inst rumens are follows:

Interest rate is specified [Section 79] The interest rate is not specified [Section 80]
When interest at a specified rate is expressly made payable on a promissory note or bill of exchange, interest shall be calculated at the rate specified in the instrument. When no rate of interest is specified in the instrument, interest on the amount due thereon shall be calculated at the rate of 18% p.a., from the date at which the same
Interest is calculated on the principal amount due from the date of the instrument till the date of realization of the amount.
If the interest rate is excessive and unreasonable, the Court may not allow, if:(a) Interest rate is the nature of penalty u/s 74 of the Contract Act, 1872.
(b) Instrument has been obtained by undue influence as defined u/s 16 of the Contract Act, 1872. Thought to have been paid by the party charged till the realization of the amount due thereon.
Such interest at 18% p.a. is still payable even if there is a separate agreement between parties to instrument specifying different rate.

Question 30.
When must the banker refuse payment of a cheque?
Answer:
When bank may refuse to honour the cheque:

  • When the balance in the account of the drawer is insufficient.
  • When a cheque is mutilated i.e. tom
  • When a cheque is materially altered.
  • The cheque is undated.
  • The signature of the drawee does not tally with his specimen signature.
  • Cheque presented after 6 months.
  • Cheques signed by one authorized signatory where two are required.
  • If a cheque is presented at another branch of the bank where the drawer does not have an account.
  • The cheque appears to be doubtful.
  • If the bank has a lien over the funds.

In all aforesaid cases, the banker may honour cheque, but at the bank’s own risk.

When banker must refuse to honour the cheque:

  • If the drawer has become insolvent and the banker has notice of the same.
  • If customers issues ‘stop payment’ instructions.
  • When a cheque is post-dated and presented before the date mentioned on the cheque.
  • Banker receives notice of death or insanity of the drawer.
  • When an order for attachment of account has been issued by Court.
  • If drawer informs loss of cheque to the banker.
  • If the cheque is issued on a closed bank account.
  • When a banker knows that title of the holder is defective.
  • If the customer has assigned his credit balance and notice given to the bank.
  • If such payments will violation of any law e.g. FEMA etc.

Question 31.
Describe the different modes of discharge of liability of parties with regards to a negotiable instrument.
Answer:
Discharge from liability [Section 82]: The maker, acceptor or endorser respectively of a negotiable instrument is discharged from liability thereon:
(a) Discharge by cancellation: If a holder of the instrument cancels such acceptor’s or endorser’s name with the intent to discharge him then all the parties get discharged.
(b) Discharge by release: If a holder discharges maker, acceptor or en-dorser by any mode other than cancellation (e.g. novation or rescission of contract), maker, acceptor or endorser and all parties deriving title under such holder get discharged. Notice to such parties is necessary.
(c) Discharge by payment: If the instrument is payable to the bearer or has been endorsed in blank, payment to the bearer of the instrument discharge maker, acceptor or endorser from all the parties to the instrument.

Discharge by allowing drawee more than 48 hours to accept [Section 83]:
If the holder of a bill of exchange allows the drawee more than 48 hours, exclusive of public holidays, to consider whether he will accept the same, all previous parties get discharged from liability to such holder, unless they consent to give more time.

Discharge by operation of law: Besides the mode of discharge specified above, parties can get discharged by operation of law in the following cases:
(a) By order of Court discharging insolvent.
(b) Suit becomes time-barred under the Limitation Act, 1963.

Question 32.
‘A’ draws a cheque for ₹ 50,000. When the cheque ought to be presented to the drawee bank, the drawer has sufficient funds to make payment of the cheque. The bank fails before the cheque is presented. The payee demands payment from the drawer. What is the liability of the drawer?
Answer:
As per Section 84 of the Negotiable Instruments Act, 1881, the cheque should be presented to the bank within a reasonable time. If a cheque is not presented within a reasonable time and the drawer suffers actual damages, then the drawer gets discharged to the extent of actual damages.

Applying the above provisions to the given problem, since the payee has not presented the cheque to the drawer’s bank within a reasonable time when the drawer had funds to pay the cheque, and the drawer has suffered actual damage, the drawer is discharged from the liability.

Question 33.
Under the provisions of the Negotiable Instruments Act, 1881 state as to when shall an alteration made in negotiable instrument be called ‘material alteration’. What alterations in such instrument are permitted under the Act? What is the effect of such alteration?
Answer:
An alteration is a material that in any way alters the operation of the instrument and the liabilities of the parties hereto. Material alteration to an instrument makes the instrument void against previous parties.

The alteration is void only if it is material. Following are material alteration:

  • Alteration of date
  • Alteration of amount
  • Alteration of time of payment
  • Alteration of the place of payment
  • Alteration of the name of the parties
  • Alteration of the rate of interest
  • Putting a stamp on an insufficiently stamped instrument [Adapa Baby Sarojini v. Ravulapati Chandrashekhar]

Alterations that are not material alteration:
(a) Putting a date in an undated cheque subsequent to issue, when there is no dispute regarding the signature, amount and name, is not material alteration. [Bhaskaran Chandrashekharan v. Radhakrishanan]
(b) Filling banks of the inchoate instrument up to value covered by stamp paper. [Section 20]
(c) Conversion of the blank instrument into full endorsement. [Section 49]
(d) Acceptor making qualified acceptance if consented by all previous parties. [Section 86]
(e) Alteration made to carry out the common intention of all original parties to the instrument. [Section 87]
(f) Crossing a cheque generally or especially, or crossing a cheque especially which was crossed generally. [Section 125]

Effect of material alteration [Section 87]: Any material alteration of a negotiable instrument renders the same void as against anyone who is a party thereto at the time of making such alteration and does not consent thereto unless it was made in order to carry out the common intention of the original parties.

Question 34.
When a bill of exchange may be dishonoured by ‘non-acceptance and ‘non-payment under the provisions of Negotiable Instruments Act, 1881?
Answer:
If the negotiable instrument is not accepted (in the case of Bill) or not p paid, it is said to be dishonoured.

Dishonour by non-acceptance [Section 91]: A bill of exchange is said to be dishonoured by non-acceptance:
(a) when the drawee, or one of several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or
(b) where presentment is excused and the bill is not accepted.

Presentment is excused if:

  • If the maker or drawee intentionally prevents presentment.
  • Drawee cannot be found after a due search.
  • Drawee is a fictitious person.

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

Dishonour by non-payment [Section 92]: 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 (bank) of the cheque makes default in payment upon being duly required to pay the same.

When presentment is not necessary and the instrument is treated as dishonoured [Section 76(a)]: In following cases, Bill is dishonoured by non-payment even if not presented for payment:

  • Maker, drawee or acceptor intentionally prevented presentation.
  • The place of business is closed.
  • A person not found even after due search.

Question 35.
Examining the provisions of the Negotiable Instruments Act, 1881, state whether notice of dishonour is necessary in the following cases:
(i) X having a balance of ₹ 1,000 with his bankers and having no authority to overdraw, drew a cheque for ₹ 5,000. The cheque was dishonoured when duly presented for repayment.
(ii) X, drawer of a Bill informs Y, the holder of the bill that the bill would be dishonoured on the presentment for payment.
Answer:
When a negotiable instrument is dishonoured, notice is required to be given. However, section 98 of the Negotiable Instruments Act, 1881 enumerate the circumstance when notice of dishonour is not required to be given.

Thus, considering the provisions of section 98, the answer to the given problem is as follows:
1. Since X is aware of the fact that his account in the bank has only a balance of ₹ 1,000, no notice of dishonour of a cheque of ₹ 5,000 is required to be given to him.

2. X, drawer of a Bill informs Y, the holder of the bill that the bill would be dishonoured which shows that X is aware of the fact of dishonour of instrument and hence no notice of dishonour is required to be given to him.

Question 36.
Distinguish between: Noting & Protesting
Answer:
When a negotiable instrument is dishonoured, it is noted and protested. In noting, the notary public simply makes a note of dishonour as per the information given to him by the holder of the instrument.

In case of protest, the notary public is required to certify the dishonour of the instrument. In such a case, he is required to make a demand for payment from the person who is liable to pay on such an instrument.

Noting is optional in the case of an inland instrument. Protest is required in case of dishonour of foreign instrument if it required by the law of other countries.

Question 37.
Distinguish between: Acceptance for honour & Payment for honour
Answer:
Following are the main points of distinction between acceptance for honour and payment for honour:

Points Acceptance for honour Payment for honour
Meaning If a bill is dishonoured by non-acceptance, another person who was not a party to the bill can accept the same for the honour of drawer after the bill is noted or protested which is known as acceptance for the honour. When payment is made by any person for the honour of any party liable to pay is known as payment for the honour.
When Acceptance for honour is given before Bill is due. Payment for honour is only after Bill is due.
Consent of holder Consent of holder of Bill is necessary in case of acceptance for the honour. Consent of holder of Bill is not necessary in case of acceptance for the honour.
Rights Acceptor for honour is entitled to get compensation for all loss and damages sustained by him. The person paying the Bill gets all the rights of the holder of the Bill after payment. He can recover interest and expenses from the party in whose honour he made payment.

Question 38.
Write a short note on: Drawee in case of need
Answer:
The Bill is drawn as an order to the drawee to pay a certain amount to the payee. If drawee refuses to honour the Bill, another person may be named ) in the Bill in case of need. Such a person is known as ‘drawee in case of need’. If drawee dishonours or does not accept the bill, it should be presented to the drawee in need.

Drawee in case of need [Section 115]: Where a drawee in case of need is named in a bill of exchange, or in any endorsement thereon, the bill is not dishonoured until it has been dishonoured by such drawee.
Acceptance and payment without protest [Section 116]: A drawee in case of need may accept and pay the bill of exchange without previous protest.

Question 39.
What is ‘crossing of a cheque? Explain in brief the various methods of crossing a cheque.
Answer:
The purpose of crossing a cheque is to provide security to the system of cheque payment. Tracing a payee is easy if the amount is deposited in his account as the banker is expected to check the details of the person before opening an account. If cheque payable to bearer goes in the wrong hand, finder can encash it and it will be impossible to find the person and recover the amount.

Cheque crossed generally [Section 123]: Cheque crossed generally means a cheque which bears across its face an addition of the words ‘& Company ’ or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words ‘Not Negotiable’.

Cheque crossed especially [Section 124]: Cheque crossed especially means a cheque which bears across its face an addition of the name of a banker, either with or without the words Not Negotiable

Specimen of a special crossing
Restrictive crossing: A cheque with just two cross lines across its face is a simple crossing. Such cheque is freely negotiable. The only restriction that payment will be through the banker of the payee. Addition of words like, ‘Not negotiable’, ‘Account Payee’, ‘Axis Bank’, restrict its negotiability. Such crossings are ‘restrictive crossings’.

Not-negotiable crossing [Section 130]: If a crossed cheque bears the words Not Negotiable’, a person taking a cheque cannot get a title better than a transferor. Thus, mere writing words, Not Negotiable’ does not means that the cheque is not transferable. It is still transferable, but the effect is that transferee cannot get a title better than what the transferor had. If there is a defect in the title of the transferor, the same defect will apply to the title of the transferee also. If a non-negotiable cheque is presented to the bank, it should credit to the payee’s account only. Otherwise, the bank will be held liable for negligence and will have to pay compensation.

Account Payee Crossing: There is no provision in the Negotiable Instruments Act, 1881 regarding ‘Account Payee Crossing’. This is a commercially followed practice.

If the ‘Account Payee marking appears on the cheque, it doesn’t mean that is not negotiable. Such ‘account payee cheque’ still remains transferable. [National Bank. Silke]

Thus, a cheque marked as ‘Account Payee or ‘Not Negotiable’ can be transferred. Such ‘Account Payee cheque can be credited in some other account, as Act makes no provisions for account payee crossing. However, this is prohibited as per RBI Guideline.

Question 40.
Write a short note on Stale Cheques
Answer:
A cheque is overdue or becomes statute-barred after 3 years from its due date of issue. A holder cannot sue on the cheque after that time. Apart from this provision, the holder of a cheque is required to present it for payment within a reasonable time, as a cheque is not meant for indefinite circulation.

In India, a cheque, which has been in circulation for more than 6 months, is regarded by bankers as stale. If, as a result of any delay in presenting a cheque, the drawer suffers any loss, as, by the failure of the bank, the drawer is discharged from liability to the holder to the extent of the damage.

Question 41.
Dishonour of cheque for want of funds is an offence under the Negotiable Instruments Act, 1881. Do you agree with the statement?
Answer:
Dishonour of cheque [Section 138]: A person deemed to have committed the offence of dishonour of cheque if:

  • The drawer has issued a cheque to another person from his account with the bank.
  • The cheque is issued for the discharge of any debt or other liability.
  • The drawee has presented the cheque to the bank within 6 months from the date on which it is drawn.
  • The cheque is returned by the drawer’s bank as unpaid.
  • The cheque is returned due to insufficient funds in the drawer’s bank account.
  • The payee makes a demand for the payment of money by giving a notice in writing to the drawer of the cheque within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid.
  • The drawer of the cheque fails to make the payment to the payee within 15 days of the receipt of the notice.

Penalty for the dishonour of cheque: The person dishonouring the cheque shall be punished:

  • with imprisonment for a term which may be extended to 2 years or
  • with fine which may extend to twice the amount of the cheque or
  • with both.

Question 42.
Examine, whether there is an offence under the Negotiable Instruments 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.
Answer:
The Supreme Court in Modi Cements Ltd. v. KuchilKumar Nandiheld that once a cheque is issued by the drawer, a presumption that the cheque has been issued for the discharge of any debt or other liability follows and merely because the drawer issued a notice thereafter to the drawee as to the bank for stoppage of payment, it will not preclude an action u/s 138 of the Negotiable Instruments Act, 1881. Hence, the drawer of the cheque will be liable for the offence u/s 138 for the dishonour of the cheque.

Economic, Business and Commercial Laws Questions and Answers

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