The Negotiable Instruments Act, 1881 – CA Inter Law Notes

The Negotiable Instruments Act, 1881 – CA Inter Law Notes is designed strictly as per the latest syllabus and exam pattern.

The Negotiable Instruments Act, 1881 – CA Inter Law Notes

Negotiable Instrument:

Meaning & Features:
A negotiable instrument means promissory note, bill of exchange and cheque.

It includes other instrument apart from above mentioned instruments, if such instrument has following features:

It should be freely transferable either:
- By delivery; or
- By endorsement
It must be payable either to order or to bearer.
It can be transferred any number of times till its payment
Transferee who takes the instrument bona fide and for valuable consideration obtains a good title despite any defects in the title of the transferor
It is subject to certain presumptions

Presumptions as to Negotiable Instruments – Section 118:
The presumptions as to negotiable instrument shall prevail. Negotiable instrument is subject to following presumptions:

Consideration:

Every instrument was made, accepted and endorsed for consideration.
Consideration is not required to be mentioned on instrument.

Date:
It was drawn on the date shown on face of it.

Time of acceptance:
It was accepted within a reasonable time after its date and before maturity.

Time of transfer:
It was transferred before its maturity.

Duly stamped:
A lost promissory note or bill was duly stamped and signed.

Holder in due course:
The holder of a negotiable instrument is a Holder in due course.

Order of instrument:
Endorsement appearing upon negotiable instrument were made in the order in which they appear thereon.

Promissory Note – Section 4

Definition:
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

a certain person; or
the order of a certain person

Parties:

The person who makes the promissory note is called as maker. His liability is primary and unconditional.
The person to whom money is to be paid is called as payee.

Essential Elements:

Following are the elements of promissory note:

In writing:

It should be in writing (handwritten or printing).
An oral promise to pay is not sufficient.

Express promise to pay:

It must contain express promise to pay.
Mere acknowledgement of indebtedness is not sufficient.

Example:
‘Mr. B I.O.U. ₹ 10,000.’ There is no promise to pay and therefore this is not a valid promissory note.

Definite & unconditional promise:

If a promise to pay is dependent upon an event which is certain to happen, although the unconditional time of its happening is uncertain, the promise to pay is unconditional.

Example:
‘I promise to pay Bina ₹ 5,00,000 on D’s death.’ The promise is not conditional, but definite since death of D is certain. Therefore, the promissory note is valid.

Signed by maker:

A promissory note must be signed by the maker.
The signatures may be made on any part of the instrument.

Promise to pay a certain sum:
It should contain promise to pay certain sum of money. It should contain promise to pay money only and nothing else.

Example:
‘I promise to pay Balwant ₹ 2,500 and all other sums which shall be due to him.’ Since the amount payable is not certain, it is not a valid promissory note.

Example:
‘I promise to pay Balwant ₹ 1200 and to deliver to him my rabbit on 1 st March 2011.’ It is not a valid promissory note since the promisor is required to deliver rabbit, which is not ‘money’.

Payee must be certain: The name of payee must be specified in the promissory note, otherwise it will be invalid.

Stamped:

A promissory note must be stamped.
Stamp duty is paid as per Stamp Act.

Bills of Exchange – Section 5

Definition:
A ‘bill of exchange’ is 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 :

a certain person; or
the order of a certain person; or
the bearer of the instrument

Example :
‘A’ wrote and signed an instrument ordering ‘B’ to pay ₹ 500 to ‘C’ This is a Bill of Exchange.

Example :
On demand, pay to ‘A’ or order the sum of rupees five hundred for value received.’

Parties:

The person who draws or makes the bill is known as drawer. His liability is secondary and conditional.
The person on whom the bill is drawn is called as drawee.
On acceptance of the bill drawee is called as acceptor. He becomes liable for the payment of the bill and his liability
is primary and unconditional.
The person to whom money is to be paid is known as payee.

Elements:
Characteristics of bill of exchange are almost similar to promissory note. Following are essentials characteristics of a bill of exchange:

It must be in writing.
It must contain an express order to pay.
The order to pay must be definite and unconditional.
It must be signed by the drawer.
The sum contained in the order must be certain.
The order must be to pay money only.
Drawer, drawee and payee must be certain. Drawer and payee may be same person.
It must be stamped.

Cheque – Section 7

Definition:
A cheque is a bill of exchange drawn on a specified banker and it includes ‘the electronic image of truncated cheque’ and ‘a cheque in electronic form’.

Truncated cheque:
A truncated cheque means a cheque which is truncated during the course of a clearing cycle either by the clearing house or bank whether paying or receiving payment immediately on generation of an electronic image for transmission, substituting the further physical movement of cheque in writing.

Cheque in electronic form:
A cheque in 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 signature (with or without biometric signature) and asymmetric crypto system.

Parties:
The person who draws or makes the cheque is called as drawer. His liability is primary and conditional.
The bank on whom the cheque is drawn is called as drawee. Bank makes the payment of the cheque.
The person to whom money is to be paid is called as payee. The payee may be the drawer himself or a third party.

Elements:
A cheque must contain all the characteristics of a bill of exchange.

Essentials characteristics of a cheque can be summarized as under:

It must be in writing.
It must contain an express order to pay.
The order to pay must be definite and unconditional.
It must be signed by the drawer.
The sum contained in the order must be certain.
The order must be to pay money only.
Drawer, drawee and payee must be certain.
It is always drawn upon a specified banker.
It is always payable on demand.

Important Mote:
A cheque does not require stamping or acceptance.

Distinguish Between Bills Of Exchange And ProMissory Note

Matter	Bill of Exchange	Promissory Note
Meaning	Bill of exchange is an instrument in writing showing the indebtedness of a buyer towards the seller of goods.	A promissory note is a written promise made by the debtor to pay a certain sum of money to the creditor at a future specified date.
Defined in Section	Section 5 of Negotiable Instrument Act, 1881.	Section 4 of Negotiable Instrument Act, 1881.
Parties	Three parties, i.e. drawer, drawee and payee.	Two parties, ie. drawer and payee.
Liability of Maker	Secondary and conditional	Primary and absolute
Can maker and payee be the same person?	Yes	No
Copies	Bill can be drawn in copies.	Promissory note cannot be drawn in copies.
Dishonour	Notice is necessary to be given to all the parties involved	Notice is not necessary to be given to the maker.

Distinguish Between Bills of exchange and cheque

Matter	Bill of Exchange	Cheque
Drawn on	Bill of exchange can be drawn on any person.	Cheque is always drawn on bank.
Payable on Demand?	Bill of exchange need not always be payable on demand.	It is always payable on demand.
Payable to Bearer?	It cannot be payable to bearer on demand.	It can be drawn payable on bearer on demand.
Acceptance	It require an acceptance of drawee.	It does not require an acceptance.
Stamp	It requires stamp as per Stamp Act.	It does not require stamp.
Crossing	It cannot be crossed.	It can be crossed.
Notice of Dishonour	Notice of dishonour is usually required.	Notice of dishonour is not required.
Noting & Protesting	To establish dishonour, noting and protesting are required.	Noting and protesting are not required for a cheque.

Capacity of Parties

Minor:

Minor is incompetent to enter into contract. Therefore, he cannot bind himself by becoming party to negotiable instrument.
However, minor may draw, endorse, deliver and negotiate a negotiable instrument so as to bind all other parties except himself.

Insolvent:

An insolvent is not competent to enter into valid contract.
He cannot draw, make, accept or indorse a negotiable instrument.
If he endorses an instrument, of which he is payee, to a holder in due course, then holder in due course can recover the amount from all prior parties except insolvent.

Agent:

The negotiable instrument can be drawn or accepted by duly authorised agent on behalf of his principal.
Authority of an agent to draw, accept or endorse negotiable instrument must be expressed in clear terms.

Partner:

In a trading firm, each partner has implied authority to bind the firm and his co-partners by drawing, signing, making, accepting or endorsing negotiable instrument in the name of firm.
But the partner of non-trading firm can bind if he is expressly authorised for same.

Holder and Holder in Due Course

Holder – Section 8:
Holder of negotiable instrument means any person:

Who is entitled to the possession of it in his name; and
Who is entitled to receive the amount due thereon from party who has transferred it
The party transferring the negotiable instrument should be legally capable.

Example:
Finder of the lost instrument payable to bearer is not holder.

Holder in Due course – Section 9:
Every holder of negotiable instrument will be treated as ‘holder in due course’, if he has obtained instrument:

For consideration before maturity; and
In good faith (Le., without sufficient cause to believe that any defect existed in the title of the person from whom he derived his title).

Distinguish between Holder & Holder in Due Course (HDC):

Matter	Holder	Holder in Due Course (HDC)
Meaning	A holder is a person who legally obtains the negotiable instrument, with his name entitled on it, to receive the payment from the parties liable.	A holder in due course (HDC) is a person who acquires the negotiable instrument bona- fide for some consideration, whose payment is still due.
Consideration	Not necessary	Necessary
Right to Sue	A holder cannot sue all prior parties.	A holder in due course can sue all prior parties.
Good Faith .	Instrument may or may not be obtained in good faith.	Instrument must be obtained in good faith.
Privileges	Comparatively less	More
Maturity	A person can become holder, before or after maturity of the negotiable instrument.	A person can become holder in due course, only before the maturity of negotiable instrument.

Privileges of holder in due course:
Protection in Case of Incomplete Instrument- Section 20:
A person signing and delivering to another a stamped but otherwise incomplete cannot assert that the instrument has not been filled in accordance with the authority given by him, provided the amount filled in it is covered by the amount of the stamps.

Liability of Prior Parties – Section 36:
Every prior party to instrument (maker, drawer, acceptor and endorser) is liable thereon to holder in due course until the instrument is duly satisfied.

Protection in Case of Fictitious Bill – Section 42:

Where bill is drawn by a fictitious person and is payable to his order, the acceptor cannot be relieved from his liability to the holder in due course.
Holder in due course has to prove that instrument was endorsed by the same hand as drawer’s signature.

Protection in Case of Instruments Without Consideration – Section 43:
A negotiable instrument made, drawn, endorsed without consideration does not give any right to intermediate parties. However, when it comes in hands of holder in due course, he can recover an amount due on such instrument from prior parties.

Protection in Case of Conditional Delivery – Section 46:
When instrument is negotiated to the holder in due course, the other parties to bill or note cannot escape liability on the ground that delivery of the instrument was conditional or for a special purpose only.

Instrument Purged (cleared) of All Defects – Section 53:
When instrument passes through the hands of holder in due course, it is purged (cleaned) of all defects. Any person acquiring it also becomes holder in due course and takes it free of all defects, except the person who was party to fraud.

Instrument Obtained by Unlawful Means etc. – Section 58:
The argument (plea) that the instrument was obtained by unlawful means or for unlawful consideration cannot be set up against a holder in due course.

Validity of Instrument – Section 120:
Maker of promissory note, drawer of bill payable to order and acceptor of bill for honour cannot deny validity of instrument in suit filed by holder in due course.

Capacity of Payee to Endorse – Section 121:
Maker of promissory note and acceptor of bill payable to order cannot deny capacity of payee on date of note or bill to endorse it, in suit hied by holder in due course.

Classification of Instruments

Bearer Instrument – Section 13:
A negotiable instrument:

which is expressed to by payable to bearer; or
on which last endorsement is in blank, is bearer instrument

Order Instrument – Section 13:
A negotiable instrument is order instrument when it is payable to:

A specified person; or
A specified person or his order.

Demand Instrument – Sections 19 & 21:
A negotiable instrument is demand instrument where

time for payment is not fixed; or
it is expressly payable on demand.
Cheque is always payable on demand

Time Instrument:
A negotiable instrument is time instrument in which time for payment is specified.
Time instrument may be payable:

On specific day; or
After specified period; or
Certain period after sight; or
On happening of an event which is certain to happen

Inland Instrument – Section 11:
A negotiable instrument is an inland instrument if:

It is drawn in India on person resident in India, payable anywhere; or
It is drawn in India on person resident outside India, payable in India

Example:
A bill drawn in India, payable in Japan, upon person in India is an inland instrument.

Foreign Instrument – Section 12:

A negotiable instrument which is not inland instrument is called foreign instrument.
Foreign instrument must be drawn outside India and made payable outside or inside India.

Ambiguous Instrument – Section 17:

An instrument which cannot be clearly identified either as a bill or exchange or promissory note is an ambiguous instrument.

Inchoate Instrument – Section 20:
Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in India, and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein; and not exceeding the amount covered by the stamp. Such instrument is called as inchoate instrument.

The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount; provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid there under.

Other Instrument:
Accommodation Bill

Accommodation bill means a bill which is drawn, accepted without consideration.
The person who becomes the holder of such a bill in good faith and for consideration after maturity, may recover the amount from any party.

Fictitious bill:

A fictitious bill is a bill in which the name of the drawer or the payee or both is fictitious.

Distinguish Between Inland Bill And Foreign Bill

Matter	Inland Bill	Foreign Bill
Copy	It is drawn in single copy.	It is drawn in triplicate.
Dishonour	In inland bill, dishonour required noting, protest is optional.	In foreign bill, dishonour requires protesting.

Distinguish Between Ambiguous Instrument and Inchoate Instrument

Matter

Ambiguous Instrument

Inchoate Instrument

Negotiable

Ambiguous instrument can be negotiated.

Inchoate instrument is not a negotiable instrument. It can be negotiated only after amounts are filled in.

Can Holder Sue?

Holder of ambiguous instrument can sue on it after electing to treat it either as promissory note of bills of exchange.

Holder of inchoate instrument can sue only after amounts are filled in.

Maturity of Promissory Note or Bill of Exchange – Sections 22 To 25

Cheques are always payable on demand but other instruments like bills, notes etc., may be made payable on specified date or after specified time.
Maturity of a negotiable instrument means the date on which the negotiable instrument falls due for payment.
A negotiable instrument which is payable otherwise than on demand is entitled to 3 days of grace.

Situation	Date of maturity
Instrument payable on a specified day	Specified day + 3rd day
Instrument payable on a stated number of days after date	Date on which instrument is drawn + stated number of days + 3rd day
Instrument payable on stated number of days after sight	Date on which instrument is presented for sight + stated number of days + 3rd day
Instrument payable on stated number of days after happening of a certain event	Date on which such event happens + stated number of days + 3rd day
Instrument payable on stated number of months after date	Corresponding day of the relevant month¹ (ie., Date on which negotiable instrument is drawn + stated number of months) + 3rd day
Instrument payable in instalment	Each instalment is entitled to 3 days of grace.

Negotiation – Section 14

What is Negotiation?
It means transfer of negotiable instrument to any other person so as to constitute that person as holder of such negotiable instrument.

Methods of Negotiation

A bearer instrument can be negotiated by delivery.
An order instrument can be negotiated by way of endorsement and delivery.
Delivery must be voluntary.

(1) The last day of month is taken if in the relevant month, there is no corresponding day.

Example:
A was holder of cheque payable to bearer. He kept cheque in his table drawer. B, stole cheque from A’s table. There is no negotiation of cheque as it has not been delivered voluntary.

Endorsement – Sections 15-16

What is Endorsement?
Endorsement means signing:

on the face or back of negotiable instrument; or
on a slip of paper annexed to the negotiable instrument, by the holder of negotiable instrument.

Parties to Endorsement:

The endorsement shall be valid only if the negotiable instrument is signed by the holder.
The person to whom the instrument is endorsed is called the endorsee.

Purpose of Endorsement:

Endorsement is made for the purpose of negotiating such negotiable instrument.
It transfers the right, title and interest therein to some other person.

Essentials of Valid Endorsement:

It must be in writing.
It must be signed by holder.

Types of Endorsement:
Blank endorsement or General endorsement

Endorser puts signature without specifying name of endorsee.
General endorsement convert order instrument into bearer instrument.

Example:
Where bill is payable to ‘mohan or order’, and he writes on its back ‘mohan’, it is an endorsement in black by mohan and property in the bill can pass by mere delivery.

Full endorsement or Special endorsement:

Along with signature, endorser write name of endorsee.
A blank endorsement can be turned into special one by addition or an order making the bill payable to the transferee.

Example:
A bill made payable to mohan or order, and endorsed ‘pay to the order of sohan’ would be specially endorsed and sohan endorse it further.

Restrictive endorsement:
It restricts the right of further negotiation.

Examples:
‘Pay A only’.
‘Pay A on account of B’

Partial endorsement:
It is endorsement which transfer part of the amount of the instrument.
Partial endorsement is not valid.

Example:
A holds a bill for ₹ 10,000 and endorses it as “pay B or order ₹ 500”. The endorsement is partial and invalid.

Conditional endorsement or qualified endorsement:

It includes order to pay with condition.
Endorser makes his liability dependent upon happening of some event.

Example:
Holder of bill endorse it: ‘Pay A or order on his marrying B’. In such case, the endorser will not be liable until A marry toB.”

Facultative endorsement:
It is endorsement where endorser waives his right to receive notice of dishonour.

Sans Frais endorsement:
It is endorsement which indicates that no expenses should be incurred on the bill.

Effect of Endorsement – Section 50:
An unconditional endorsement completed by delivery of instrument has following effects:

Ownership of instrument is transferred from endorser to endorsee
Endorsee gets rights of further negotiation
Endorsee gets rights to bring an action for recovery against all parties whose names appear on the instrument.

Negotiation Back – Section 90

Meaning:
Endorser after he has negotiated instrument, again become holder before its maturity, instrument is said to be negotiated back.

Effects:

The holder cannot enforce payment against an intermediate party to whom he was previously liable.
Holder can sue all prior parties, if he had made san recourse endorsement.

Example:
A, holder of bill endorsed it to B. B endorsed it to C. C to D. D endorsed it again to A. In this case, endorsement by D to A is negotiation back. And B, C, D are not liable to A.

Assignment

Meaning:
It means transfer of one’s right to recover the payment of debt.

Provisions:
Promissory note, bills of exchange and cheques represent debts.

They are assignable (transferable) without an endorsement.
Assignment takes place by means of written document signed by the person who transfers his right, under the negotiable instrument, to the other.

Distinguish Between Negotiation and Assignment

Matter	Negotiation	Assignment
Meaning	It means transfer of a negotiable instrument to any other person so as to constitute that person the holder of such negotiable instrument.	It is transfer of a right to receive the payment of a debt by one person (viz., assignor) to another person (viz., assignee) by way of a written document.
Applicability of Act	Negotiable Instrument Act, 1881 applies.	Where any right is transferred by way of assignment, the Transfer of Property Act applies.
For what?	Negotiation can be made for transferring negotiable instruments only.	Assignment can be made of any right.
Method	A bearer instrument can be negotiated merely by delivery, and an order instrument can be negotiated by endorsement and delivery.	Assignment is valid only if it is made in writing and is signed by the assignor.
Notice	Notice of negotiation is not required to be given to any party.	Notice of assignment must be given by the assignee to the debtor.
C6nsideration	Every negotiable instrument is negotiated for consideration.	Assignment can be made without consideration.
Stamp duty	It does not require payment of stamp duty.	It requires payment of stamp duty.

Liability Of Parties

Liability of Maker and Acceptor – Section 32:

The liability of both, the maker of promissory note and the acceptor of bill of exchange is the same.
They are primarily liable to pay amount due on the instrument. It means that they are bound to pay the amount on instrument.

Liability of Drawer – Section 30:
On dishonour of bill of exchange by drawee (for non-acceptance or non-payment) or on dishonour of cheque, the drawer becomes liable to compensate holder.

Liability of Drawee – Section 31:

The drawer of cheque is always a banker.
It is duty of bank to pay the cheque when it has sufficient fund of drawer.
When banker refuses to make payment without any sufficient reason, then it must compensate drawer for any loss occurred. Bank is not liable to holder.

In the following situations, banker is justified to dishonour cheque:

If cheque is undated
If it is stale (Le. presented beyond period of 3 months)
If it is inchoate
If it is post-dated and presented before date
If it is mutilated or torn
If banker has received notice of customer’s death, customer’s insolvency or lunacy
If bank has received garnishee order (ie. order of court to attach property)
If it contains material alteration or irregular signature or irregular endorsement
Balance in account is insufficient

Liability on In-strument Made, Drawn without Consideration – Sections 43-44:

As between immediate parties:
If negotiable instrument is drawn without consideration or consideration fails, it creates no obligation of payment.

As between remote parties:

Sometime, a person receives a negotiable instrument without any consideration but transfers instrument for holder for some consideration.
In such case, holder and every subsequent holder may recover amount due from the transferor for consideration and from any prior party.

Effect of Partial Absence of Failure of Consideration:
Parties standing in immediate relation to each other cannot recover more than actual consideration but this rule is not apply to holder in due course.

Rights and Obligation of Parties to an Instrument Obtained Illegally

Finder of Lost Instrument:

When a negotiable instrument is lost, the finder or endorsee from the finder is not entitled to receive amount of it from maker, acceptor, holder or from any party prior to such holder.
However, if instrument is lost by one and if it passes by delivery, the third party acquiring it bona fide and for valuable consideration and before maturity is entitled both to retain the instrument against real owner and to compel payment from the prior parties thereon.

Instrument Obtained by Unlawful Means or Unlawful Consideration:
If instrument is obtained from maker, acceptor or holder by way of fraud (unlawful means) or for unlawful consideration, possessor is not entitled to receive amount.

Forged Endorsement:
Person claiming amount under forged endorsement cannot acquire rights of holder in due course even if he is purchaser for value and in good faith.

Crossing of Cheque – Sections 123-131A

What is Crossing of cheque?

A cheque is either ‘open’ or ‘crossed’.
An open cheque can be presented to the paying banker and it is paid over the counter.
A crossed cheque cannot be paid across the counter.
Crossing means a direction given by the drawer of the cheque to the drawee bank, not to pay the cheque at the counter of the bank, but to pay it to a person who presents it through a banker.
Crossing makes the cheque safe and protect holder.

General Crossing – Section 123:

The cheque must contain two parallel transverse lines.
The cheque must be paid only to a banker.
In the case of general crossing, holder cannot get payment over the counter of bank.

Example:

Special Crossing Section 124:

The cheque must contain the name of a banker.
Cheque must be paid only to the banker to whom it is crossed.
Special crossing may be made only once.
Special crossing cannot be converted into general crossing.
The paying banker will pay only to the banker whose name appears across the cheque.

Example:

Not Negotiable Crossing – Section 130:

The cheque must contain the words ‘not negotiable’. Example:
The cheque must be crossed generally or specially.
The title of the transferee shall not be better than the title of the transferor.
Not negotiable crossing does not restrict transferability but restrict negotiability only.

Example:

Accounting Payee Crossing:

The cheque must contain the words ‘A/c Payee’ or ‘A/c payee only’.
It is also known as restrictive crossing.
The cheque does not remain negotiable anymore.
The cheque must be crossed generally or specially.
It warns collective banker that the proceeds are to be credited only to the account of the payee.

Example:

Marked Cheque:

Sometime, a cheque is certified or marked by the banker on whom it is drawn as ‘good for payment’.
Such certification or marking is not acceptance but it is similar to it.
Bankers in India do not mark or certify cheque in this manner. It was held in case of Bank of Baroda vs. Punjab National Bank that bankers in India are not liable even if the cheque is marked ‘good for payment’.

Material Alteration Of Cheque – Sections 87-89

What is Material Alteration?
An alteration is called as material alteration if it alters:

the character or operation (ie., the legal effect) of negotiable instrument; or
the rights and liabilities of any of the parties to a negotiable instrument.
- A material alteration renders the instrument void.

Examples of Material Alteration:

Alteration of the date of instrument.
Alteration of the amount payable.
Alteration in the time of payment.
Alteration in the place of payment.
Alteration in rate of interest.
Addition of new party to an instrument.
Conversion of blank endorsement into special endorsement.
Alteration of clause of instrument containing penal action.

Not Considered as Material Alteration:
However following are not considered as material alteration as it is authorized under act:

Filling blanks of an inchoate instrument – Section 20
Conversion of a blank endorsement into an endorsement in full – Section 49
Crossing of cheques – Section 125
Conversion of general crossing into special crossing or not negotiable crossing or A/c Payee Crossing (but not vice-versa).
Additional of the words ‘on demand’ to a note in which no time or payment is expressed.
Conversion of a bearer instrument into an order instrument by deleting the word ‘Bearer’.
Correction of mistake in instrument.
An alteration made before the instrument is issued and made with consent of parties.

Effect of Material Alteration – Sections 87-88:

The effect of a material alteration of a negotiable instrument is only to discharge those who become parties thereto prior to the alteration; but if an alteration is made in order to carry out the common intention of the original parties, it does not render the instrument void.
Any material alteration, if made by an indorsee, discharges his indorser from all liability to him in respect of the consideration thereof.
In Hongkong and Shanghai Bank vs. Lee Shi (1928), it has been held that an accidental alteration will not render the instrument void. It is necessary to show that the alteration has been made improperly and intentionally. The effect of making the material alteration without the consent of the party bound is exactly the same as that of cancelling the deed.
In short, we can conclude that all the parties to the negotiable instrument not consenting to the material alteration are discharged.

Presentment Of Instrument – Section 76

Meaning:
Presentment means showing the instrument to the drawee or acceptor to make payment as per condition.

When Presentment?

Presentment is made during business hours.
Fixed period bill or after sight bill is presented on its maturity.

When Presentment is not Necessary?
In the following conditions presentment of instrument is not necessary:

It maker or acceptor intentionally prevents it.
If it is payable at place of business and it is closed during usual business hours.
If it is payable at some other place (other than place of business) and no one attends at such place during usual business hours
If maker or drawer is not found after reasonable search
If he is ready to pay without presentment
On maturity of instrument, without presentment:
- He makes a part payment
- He promises to make payment
- He waives right to take advantage of any default in presentment of instrument
If drawer could not suffer damage as against drawer only
If the drawer and acceptor are same person

Acceptance Of Bill – Sections 7 & 86

Meaning of Acceptance:
The drawee signs the bill and delivers it to the holder of the bill or gives notice of acceptance to the holder of the bill.

Essentials of Valid Acceptance:

It should be in writing and signed by drawee.
Writing may be either on the face or back of the bill.
Writing the word ‘Acceptance’ is not necessary.
After the signature, delivery or intimation to the holder is given that the bill has been accepted.

Effect:
On acceptance of bill drawee becomes the acceptor.

Types of Acceptance:
An acceptance may be either general or qualified.

General Acceptance:

A general acceptance is absolute.
It is an acceptance of bill without any qualification.

Qualified Acceptance:
Qualified acceptance of bill means acceptance of bill subject with some qualification (e.g., accepting the bill subject to the condition that the payment of bill shall be made only on happening of an event specified therein).

Effect of Qualified Acceptance – Section 86:

The holder may object to the qualified acceptance. In such a case, it shall be treated that the bill is dishonoured due to non-acceptance.
He may give his consent to the qualified acceptance. In such a case, all the prior parties, not consenting to it, are discharged.
Example: accepted payable on giving up bill of landing.

Acceptance For Honour – Sections 108-112

Who is Acceptor for Honour?

If bill is dishonoured for non-acceptance, any person can accept for honour.
The person who accepts the bill for the honour of any other person is called as an ‘acceptor for honour’.

Liability of Acceptor for Honour

He is liable to pay the amount of the bill, if the drawee does not pay on maturity.
He is liable only to the parties subsequent to the party for whose honour the bill is accepted.

Rights of Acceptor for Honour:
He is entitled to recover the amount paid by him from the party for whose honour the bill was accepted, and from all the parties prior to such party.

Conditions for Acceptance for Honour:

The bill must have been noted or protested for non-acceptance.
The acceptance is given:
- for the honour of any party already liable under the bill
- by any person who is already not liable under the bill
- with the consent of the holder of the bill
The acceptance must be made in writing on the bill.
The bill must have not been overdue.

Payment Of Honour – Sections 113-114

Who is Payer for Honour?
A person who pays a bill for honour of any other person is called as ‘payer for honour’.

Conditions for Payment for Honour:

The bill must have been noted or protested for non-payment.
Payment for honour is made:
- for the honour of any party already liable under the bill
- by any person (whether or not he is already liable under the bill)
- with the consent of the holder of the bill
The payment must be recorded by Notary Public.

Rights of Payer for Honour:

The payer for honour is entitled to all the rights of a holder.
He can recover all the sums paid by him from the party for whose honour he pays and all the parties prior to such party.

Drawee in Case of Need:

The drawee in case of need accept and pay bill without previous protest.
If drawee in case of need is named in bill or in any endorsement thereon, the bill is not dishonoured until it has been dishonoured by such drawee.
Failure to present bill to drawee in case of need relieve drawer from liability.

Dishonour of Negotiable Instrument

Negotiable instrument may be dishonoured in either of following ways:

Due to non-acceptance
Due to non-payment

Dishonour for non-acceptance of bill – Section 91:
When it Take Place?
A bill is dishonoured by non-acceptance if it is duly presented for acceptance, but the bill is not accepted.

Cases of Dishonour:
Only bills of exchange can be dishonoured due to its non-acceptance.
Bills of exchange is treated as dishonoured due to its non-acceptance in any of following circumstances:

When drawee does not accept bill within 48 hours of presentment or refuse to accept it
In case of more than one drawee, who are not partners, makes default in acceptance
Where drawee is incompetent to contract
Where drawee gives conditional acceptance
Where the drawee cannot be found with reasonable search
Where the drawee is fictitious person
Where the drawee gives a qualified acceptance, and the holder does not give his consent to the qualified acceptance.

Effect:
The holder gets an immediate right to sue all the prior parties, without waiting for the maturity of the bill.

Dishonour for Non-Payment – Section 92:
A negotiable instrument shall be dishonoured by non-payment if default in payment is made by following parties:

Promissory Note:
Maker

Bills of Exchange:
Acceptor
Drawee, where bill does not require acceptance

Cheque:
Drawee

Notice of Dishonour – Sections 93 to 98:

Who may Give Notice:
Holder or any party liable on the negotiable instrument may give notice of dishonour.

Whom Notice is Given?:
It must be given to all the parties to whom the holder seeks to make liable.

Content & Requirements:
Notice must disclose the fact of dishonour of negotiable instrument.

Notice may be given orally or in writing.
It must be given within reasonable time of dishonour.

Effect:
A party (other than the party primarily liable on the negotiable instrument) to whom notice of dishonour is not given is discharged from liability on the negotiable instrument.

When Notice of Dishonour not Required?
In the following situation, notice of dishonour is not necessary:

When notice of dishonour is dispensed with by a party
Where the drawer of the cheque has countermanded payment, notice to drawer is not required to be given
When the party entitled to notice cannot be found even after due search.
Where the party bound to give notice is unable to give notice without any fault of his own
When the party charged could not suffer damage for want to notice
When the omission to give notice is caused by unavoidable circumstances ie. death
Where the acceptor is also drawee e.g. where firm draws on its branch.

Dishonour of Cheque for Insufficient Funds – Section 138

Punishment:
When cheque is dishonoured due to insufficient funds in drawer’s bank account, he is punishable with:

Imprisonment for a term upto 2 years; or
Fine which may extend to twice the amount of cheque; or
Both

Provisions:
Following conditions shall be satisfied to apply section 138:

Cheque is presented to bank with in its validity
Payee or holder in due course had made demand in writing for payment of amount of cheque to drawer within 30 days from receipt of information from bank
Drawer of cheque failed to pay money to payee or holder in due course within 15 days from written demand for
payment
Payee or holder in due course has made complaint in writing within one month of case of action arising under section 138

Modi cements Ltd. vs. Kuchil Kumar Nandi:
In this case the Supreme Court interpreted meaning of word ‘dishonour of cheque’. According to Court, it includes dishonour of cheque due to stop payment instruction given by drawer to bank and also where the drawer asks the holder not to present cheque.

Noting and Protest- Sections 99 To 104

Noting:

Meaning:

Recording of fact of dishonour of negotiable instrument upon the instrument or on a paper attached to it, is known as noting.
Noting is a minute recorded by notary public on the dishonoured instrument.

Provisions:

It is optional.
Dishonoured instrument is handed over to notary public who will present it again for acceptance or payment.
If drawee or acceptor refuses to accept or pay, notary public records the fact of dishonour.
It must be made within reasonable time after dishonour.
It must specify date of dishonour, reason for dishonour and notary’s charge.

Protest:

On presenting dishonoured instrument to notary public certificate of dishonour is issued. Such certificate is called a protest.
Protest is optional.

Merit:
Noting and protest serve as good evidence in the Court that instrument has been dishonoured.

Important Note:

Noting or protesting is not compulsory in case of inland bills.
Foreign bill must be protested for dishonour, when such protest is required by law of the country where the bill was drawn. – Section 104

Discharge of Negotiable Instrument and Discharge of Parties From Liability

Discharge in relation to negotiable instrument has two meanings:

Discharge of negotiable instrument
Discharge of one or more parties from their liability on negotiable instrument

Discharge of Instrument:

Meaning:
Instrument is said to be discharged when all the rights of persons involved in it are over.

Methods of Dis-charged:
Negotiable instrument may be discharged in any of the following ways:

By payment in due course:
A payment by party who is primarily liable to pay or by any person who has accepted it for accommodated bill.

Primarily liable party becomes holder:
If party primarily liable on instrument become holder (Negotiation back) of it on or before its maturity in his own right, instrument is discharged.

By cancellation:
When holder of instrument intentionally cancel it, instrument is discharged.

By discharge as simple contract:
A negotiable instrument may also be discharged in the same way as simple contract for payment of money (ie., by novation, alteration, cancellation etc.)

Insolvency:
A negotiable instrument is discharged on insolvency of party who is primarily liable on it.

Discharge of Parties to Instrument:

Meaning:

Party to instrument is discharged when his liability on instrument comes to end.
It means, when some parties are discharged, other parties are liable and instrument cannot be said to be discharged.

Cases Where Parties are Discharged:

By cancellation:
When the holder of a negotiable instrument deliberately conceals the name of any of the party liable on the instrument to discharge him from liability the party and all subsequently endorsers are discharged from liability.
A cancellation in order to be operative must be:

Intentional; and
Apparent.

By payment:
When a party liable on the instrument makes the payment in due course at the maturity, all the parties to the instrument stand discharged.

By allowing more time:
If the holder of a bill of exchange allows the drawee more than 48 hours to accept the bill, all prior parties not consenting to such allowance are thereby discharged from liability of such holder.

Qualified acceptance:
If the holder of a bill consents to qualified acceptance, all prior parties who did not consent are discharged.

Material alteration:
Any material alteration to negotiable instrument renders same void against anyone who is party thereto at the time of alteration and who has not consented.

Negotiation back:
Where party already liable on negotiable instrument becomes a holder of it, such party and all intermediates parties to whom such party was previously liable shall be discharged.

By operation of law:
A party is discharged if he is declared to be an insolvent by competent Court.

Be default of holder:
When an instrument is not presented for holder payment by the holder within reasonable time, all other parties are discharged.
Where on presentation, the instrument is discharged and the holder fails to give notice of dishonour to any party to the instrument other than the party primarily liable, then such party shall be discharged from liability as against the holder.

Practice Questions

Question 1.
Distinguish between ‘Electronic Cheque’ and ‘Truncated Cheque’.
Answer:

Electronic Cheque	Truncated Cheque
Paper is not used at any stage in creation of an electronic cheque.	A truncated cheque is nothing, but a paper cheque, which is truncated during the clearing cycle.
Digital signatures must be used to create an electronic image of a cheque. Thus, an electronic cheque contains digital signature.	The paper cheque, which is afterwards truncated, contains no digital signature. The signatures in ink appear on the truncated cheque. The original writing of a truncated cheque is on paper, duly signed in ink.
The electronic cheque is in electronic form.	Truncated cheque is in paper form.

Electronic Cheque Truncated Cheque
Paper is not used at any stage in creation of an electronic cheque. A truncated cheque is nothing, but a paper cheque, which is truncated during the clearing cycle.
Digital signatures must be used to create an electronic image of a cheque. Thus, an electronic cheque contains digital signature. The paper cheque, which is afterwards truncated, contains no digital signature. The signatures in ink appear on the truncated cheque.
The original writing of a truncated cheque is on paper, duly signed in ink.
The electronic cheque is in electronic form. Truncated cheque is in paper form.

Question 2.
State giving reasons whether the following statements are correct or incorrect: A bill of exchange may not be in writing.
Answer:
Statement is incorrect. Bill of exchange should be in writing.

Past Examination Questions

Question 1.
Explain the meaning of Holder and Holder in due course of a negotiable instrument. The drawer ‘D’ is introduced by A to draw a cheque in favour of P who is an existing person. A instead of sending the cheque to P forgoes his name and pays the cheque into his own bank. Whether D can recover the amount of the cheque from A’s banker. Decide. (CA November 2002)
Answer:
cannot recover amount from A’s banker. Collecting banker is not liable for any loss suffered to real owner due to defective title of holder provided it has acted in good faith and without negligence while collecting amount of crossed cheque as an agent. – Section 131

Question 2.
Referring to the provisions of the Negotiable Instruments Act, 1881 examine the validity of the following Promissory Notes:
I. I owe you a sum of ₹ 1000 A tells B.
II. X promises to pay Y a sum of ₹ 10000 six months after Y’s marriage with Z. (CA November 2002)
Or
What is a promissory note and what are its elements? S writes ‘I promise to pay B a sum of ₹ 500 seven days after my marriage with C’. Is this a promissory note? (CA May 2004)
Answer:
I. It is not promissory note. There is no promise to pay.
II. It is not promissory note. Element of certainty is missing. It is not certain that Y will marry Z.

Question 3.
When a bill of exchange may be dishonoured by non-acceptance and non-payment under the provisions of Negotiable Instruments Act, 1881. (CA November 2002)
Answer:

Question 4.
Which are the essential elements of a valid acceptance of a bill of ex-change? 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. (CA May 2003)
Answer:
In the given case, acceptance of bill is qualified. Acceptance must be general acceptance. In case of qualified acceptance, holder has liberty to refuse. If he refuses to take it, bill is dishonoured by non-acceptance. On the other hand, if he accepts qualified acceptance, then it binds only him and acceptor. It does not bind other parties who have not consented.

Question 5.
What do you mean by an acceptance of a negotiable instrument? Examine validity of the following in the light of the provisions of the Negotiable Instruments Act, 1881:
I. An oral acceptance
II. An acceptance by mere signature without writing the word ‘accepted’. (CA May 2003)
Answer:
I. Acceptance must be written on bill and signed by drawee. Oral acceptance is not valid.
II. The mere signature of the drawee without addition of the words ‘acceptance’ is valid acceptance. As per section 7, acceptance must appear on the bill and must be signed by drawee.

Question 6.
A issues a cheque for ₹ 25000 in favour of B. A has sufficient amount in his account with the bank. The cheque was not presented within reasonable time to the bank for the payment and the bank in the meantime became bankrupt. Decide under the provisions of Negotiable Instruments Act, 1881 whether B can recover the money from A. (CA May 2003)
Or
‘A’ draws a cheque for ₹ 50000. 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 a drawer? (CA May 2005)
Answer:
B cannot recover money from A. The drawer is discharged. He has sufficient balance in his account when the cheque ought to be presented for payment. Holder has defaulted in presenting the cheque for payment within reasonable time.

Question 7.
What do you understand by ‘crossing of cheques’? What is the object of crossing? State the implications of the following crossing?
I. Restrictive crossing
II. Not – negotiable crossing (CA November 2003)
Answer:

Question 8.
Refer paragraph no. 20
What are the difference between negotiability and assignability? (CA November 2003, May 2013)
Or
Answer:

Question 9.
Point out the difference between transfer by negotiation and transfer by assignment under the provisions of the Negotiable Instruments Act, 1881. (CA May 2006)
Or
State the cases in which banker is justified or bound to dishonour cheques. (CA May 2005)
Or
State the grounds on the basis of which a cheque may be dishonoured by a banker, in spite of the fact that there is sufficient amount in the account of the drawer. (CA November 2003)
Or
State the cases in which banker is justified or bound to dishonour cheques. (CA May 2005)
Or
PQR Ltd. receive a cheque for ₹ 50000 from its customer Mr. LML. After a week company came to know that the proceeds were not credited to the account of PQR Limited due to some ‘defects’ as informed by the Banker. What according to you are the possible defects? (CA May 2007)
Or
State in brief the grounds on the basis of which a banker can dishonour / a cheque under the provisions of the Negotiable Instruments Act, 1881. (CA November 2011)
Or
State the circumstances on the basis of which a banker can dishonour a cheque under the provisions of Negotiable Instruments Act, 1881. (CA November 2013)
Answer:

Question 10.
Discuss in brief the main amendments incorporated by the Negotiable Instruments (Amendment and miscellaneous) Act, 2002 in sections 138,141 and 142 of the principal act i.e. Negotiable Act, 1881. (CA May 2004)
Or
Define the term cheque as given in the Negotiable Instruments Act, 1881 and amended by the Negotiable Instruments (Amended and Miscellaneous Provisions) Act, 2002. (CA November 2004)
Answer:
Definition of cheque under section 6 was amended. Refer paragraph no. 4 to refer definition of cheque. Other amendments are as follow:

Punishment is increased from one to two years. – Section 138
Period of notice issued by payee to drawee is increased from 15 days to 30 days.- Section 138
Nominee director is exempted from prosecution under section 138. – Section 141
Discretion is granted to court to waive period of one month which has been prescribed for taking cognizance of the case under the Act.- Section 142

Question 11.
Describe the circumstances where under notice of dishonour is excused under Negotiable Instruments Act, 1881. (CA May 2004)
Answer:

Question 12.
A induced B by fraud to draw a cheque payable to C or order. A obtained the cheque forged C’s endorsement and collected proceeds to the cheque through his Bankers. B the drawer wants to recover the amount from C’s Bankers. Decide in the light of the provisions of Negotiable Instrument Act, 1881.
I. Whether B the drawer can recover the amount of the cheque from C’s Bankers?
II. Whether C is the Fictitious Payee?
III. Would your answer be the same in case C is a fictitious person? (CA November 2004)
Answer:
I. B the drawer cannot recover amount of cheque from C’s Banker as it is neither collected not paid cheque.
II. No. He exits.
III. If C was a fictitious payee, the answer would have remained same.

Protection is available to collecting banker. It is not liable for any loss caused to the true owner due to the defective title of holder provided it has acted in good faith and without negligence while collecting the amount of the crossed cheque as an agent. – Section 131

Paying banker is not liable even if it is subsequently found that any endorsement on the cheque has been forged provided it has made payment in due course. – Section 85

Question 13.
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 and
II. Whether the prior parties other than D have any right of action intense?
Give your answer in reference to the provision of Negotiable Instruments Act, 1881. (CA November 2004)
Answer:
I. D being holder for value can recover amount of bill from all prior parties.
II. No party prior to D can recover the amount of bill from prior party as bill creates no obligation of payment between parties. It was drawn, accepted and transferred without consideration.

Question 14.
A cheque payable to bearer is crossed generally and marked ‘not negotiable’. The cheque is lost or stolen and comes into possession of B who takes it in good faith and gives value for it. B deposits the cheque into his own bank and his banker presents it and obtains payment for his customer from the bank upon which it is drawn. The true owner of the cheque claims refund of the amount of the cheque from B. Discuss the liability of the banker collecting the cheque and the banker paying the cheque and B to the true owner of the cheque referring to the provisions of the Negotiable Instruments Act, 1881. (CA May 2005)
Answer:
Liability of collecting banker:
Collecting banker would not be liable in case title is proved to be defective as it had received payment for B (his customer), in good faith and without negligence for its customer. – Section 131

Liability of paying banker:
Paying banker would not be liable to the true owner because it had paid the same in due course. – Section 128

Liability of B:
Cheque was marked ‘not negotiable’ and hence, B did not acquire any title to cheque as against true owner even though he was holder in due course. The addition of the words ‘not negotiable’ entirely takes away the main feature of negotiability, which is, that a holder with a defective title can give a good title to a subsequent holder in due course. Therefore, B is liable to repay the amount of cheque to the true owner. In turn, he can proceed against the person from whom he received the cheque.

Question 15.
In what ways does the Negotiable Instruments Act, 1881 regulate the determination of the Date of Maturity of a bill of exchange. Ascertain the date of maturity of a bill payable 120 days after the date. The bill of exchange was drawn on 1st June 2009. (CA November 2005)
Answer:
to understand maturity of instrument. The day on which bill was drawn is excluded. Period of 120 days ends on 29th September 2009. Three days of grace are added. Bill falls due on 2nd October 2009. 2nd October 2009 is public holiday and hence it fall due on 1st October 2009. (Preceding business day)

Question 16.
Examine when the holder of the negotiable instrument shall be considered as a holder in due course under the provisions of the Negotiable Instruments Act, 1881. (CA November 2005)
Answer:

Question 17.
When is an alteration in a negotiable instrument is deemed to be a ‘material alteration’ under the Negotiable Instruments Act, 1881? What are the consequences of material alteration in a negotiable instrument? (CA May 2006)
Answer:

Question 18.
J a shareholder of a company purchased for his personal use certain goods from a mall on credit. He sent a cheque drawn on the Company’s a/c for the mall towards the full payment of the bills. The cheque was dishonoured by the company’s bank. J the shareholder of the company was neither a director nor a person in charge of the company. Examining the provisions of the Negotiable Instruments Act, 1881 state whether J has committed an offence under section 138 of the act and decide whether he (J can be held liable for the payment. For the goods purchased from the mall.) (CA November 2006)
AnswerTheThe facts in question are similar with facts of case of H.N.D. Mulla Feroze vs. C. Y. Somya Julu. In this case, Court has held that J a shareholder is not drawer of cheque which was dishonoured and cheque was also not drawn from his account. It was drawn from company’s account. Therefore, he cannot be said to have committed offence under section 138. He is not liable for cheque but he is liable to pay for goods.

Question 19.
A owes a certain sum of money to B. A does not know the exact amount and hence he makes out a blank cheque in favour of B, signs and delivers it to B with a request to fill up the amount due payable by him. B fills up fraudulently the amount larger than the amount due, payable by A and endorses the cheque to C in full payment of dues of B. Cheque of A is dishonoured. Referring to the provisions of the Negotiable Instruments Act, 1881, discuss the rights of B and C. (CA May 2007)
Answer:
As per section 44, B who is a party in immediate relation with the drawer of the cheque is entitled to recover from A only the exact amount due from A and not amount mentioned in the cheque. However, right of C, who is holder for value, is not adversely affected and he can claim full amount mentioned in cheque from B.

Question 20.
State the circumstance under which the drawer of a cheque will be liable for an offence relating to dishonor of the cheque under the Negotiable Instruments Act, 1881.
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. (CA May 2007)
Or
X draws a cheque in favour of Y. After having issued the cheque he in-forms Y not to present the cheque for payment. He also informs the bank to stop payment. Decide under provisions of the Negotiable Instruments Act, 1881 whether the said acts of X constitute an offence against him? (CAMay 2008, 2017)
Answer:
In the case of Modi cements Ltd. vs. Kuchil Kumar Nandi, Court interpreted meaning of word ‘dishonour of cheque’. According to Court, it includes dishonour of cheque due to stop payment instruction given by drawer to bank and also where the drawer asks the holder not to present cheque. Applying above judgment, drawer has committed an offence under section 138.

Question 21.
Referring to the provisions of the Negotiable Instruments Act, 1881, examine the validity of the following: A cheque marked ‘not negotiable’ not transferable. (CA May 2007)
Or
State whether the following statements are correct or incorrect: A cheque marked ‘Not Negotiable’ is not transferable. (CA May 2011)
Answer:
It is not completely correct statement. As per section 130, cheque with not negotiable crossing is negotiable so long as its title has not become defective.

Question 22.
Referring to the provisions of Negotiable Instruments Act, 1881 examine the validity of a bill of exchange originally drawn by M for a sum of ₹ 10000 but accepted by R only for ? 7000. (CA May 2007)
Answer:
When bill is accepted for part of payment, it is qualified acceptance. A bill with a qualified acceptance does not have any validity.

Question 23.
Explain as to why shall the combination of ‘not negotiable’ with ‘account payee’ crossing be considered as the safest form of crossing a cheque. (CA November 2007)
Answer:

Question 24.
What do you understand by material alteration under the Negotiable Instruments Act 1881? State whether the following alterations are material alterations under the Negotiable Instruments Act, 1881?
a. The holder of the bill inserts the word ‘or order’ in the bill
b. The holder of the bearer cheque converts it into account payee cheque
c. A bill payable to X is converted into a bill payable to X and Y. (CA November 2007)
Or
Define the material alteration under Negotiable Instruments Act, 1881 and give examples. (CA May 2013)
Answer:
a. Inserting word ‘or order’ will not affect negotiable instrument.
Instrument remains as order instrument. It is not material alteration.

b. It is material alteration. It restricts the right of the holder to obtain payment of the cheque in cash and to negotiate it. Such material alteration is authorised by act.

c. It is material alteration. Right to receive payment was altered.

Question 25.
What are the essential elements of a promissory note under the Negotiable Instruments Act, 1881? Whether the following notes may be considered as valid promissory notes:
I. I promise to pay ₹ 5000 or 7000 to Mr. Ram
II. I promise to pay to Mohan ₹ 500, if he secures 60% marks in the examination.
III. I promise to pay ₹ 3000 to Ravi after 15 days of the death of A. (CA November 2007)
Answer:
to understand essential elements of promissory note.
I. It is not valid promissory note. Amount is not certain.
II. It is valid promissory note because it is conditional.
III. It is valid promissory note because death of A is certain even if time of death is not certain.

Question 26.
What is meant by maturity of a bill of exchange or promissory note? Calculate the date of maturity of the following bills of exchange explaining the relevant rules relating to determination of the date of maturity x as provided in the Negotiable Instruments Act, 1881 :
I. A bill of exchange Dated 31st August 2013 is made payable three months after date.
II. A bill of exchange drawn on 15th October 2013, is payable twenty days after sight and the bill is presented for acceptance on 31st October 2013. (CA November 2007)
Answer:
to understand theory on maturity of promissory note and bill of exchange.
I. Bill of exchange will mature on 3rd December 2013
II. Bill of exchange will payable on 23rd November 2013

Question 27.
Bharat executed a promissory note in favour of Bhushan for ₹ 5 crores. The said amount was payable three days after sight. Bhushan on maturity presented the promissory note on 1st January 2008 to Bharat. Bharat made the payment on 4th January 2008. Bhushan wants to recover interest for one day from Bharat. Advise Bharat in the light of provisions of the Negotiable Instruments Act, 1881 whether he is liable to pay the interest for one day? (CA May 2008)
Answer:
Bharat is not liable to pay interest. As per section 24, in calculating date, a bill made payable a certain number of days after sight or after certain event, the maturity is calculated by excluding the day on which instrument is drawn or presented for acceptance or sight or day on which the event happens.

Question 28.
‘A’ draws a bill of exchange payable to himself on X who accepts the bill without consideration. Just to accommodate A. ‘A’ transfers the bill to P for good consideration. State the rights of A and P. Would your answer be different if A transferred the bill to P after maturity? (CA may 2008)
Answer:
A cannot sue X as there is no consideration between A and X. Hence, there is no obligation to pay. P can sue A and X as he is holder for consideration. Holder for consideration can sue the transferor for consideration and ever party prior to him. Even if A had transferred the bill after maturity answer would remain same.

Question 29.
What is meant by ‘Presentment’ of a bill exchange under the Negotiable Instruments Act, 1881? When is such a bill of exchange presented for payment? State when is the presentment not necessary. (CA May 2008)
Answer:

Question 30.
Describe in brief the advantages and protections available to a ‘holder in due course’ under the provisions of the Negotiable Instruments Act, 1881. (CA November 2008)
Answer:

Question 31.
Discuss with reasons whether the following persons can be called as a ‘holder’ under the Negotiable Instruments Act, 1881:
I. X who obtains a cheque drawn by Y by way of gift.
II. A, the payee of the cheque who is prohibited by the court order from receiving the amount of the cheque.
III. M, who finds a cheque payable to bearer on the road and retains it
IV. B the agent of C is entrusted with an instrument without endorsement by C who is the payee.
V. B who steals a blank cheque of A and forges A’s signature (CA November 2008)
Or
Discuss with reasons in the following given conditions whether M can be called as a holder under the Negotiable Instruments Act, 1881:
I. M the payee of the cheque who is prohibited by a court order from receiving the amount of the cheque.
II. M the agent of 0 is entrusted with an instrument without endorsement by 0 who is the payee (CA November 2016)
Answer:
Refer paragraph no. 8 to understand as to who is called ‘holder’.
I. X is holder because he has right to possession and to receive amount due in his own name.
II. A is not holder because holder is entitled to possession of instrument and also entitled to receive amount mentioned therein.
TTT M is not holder as he has possession of instrument but he is not entitled to possession of it in his name.
IV. B is not holder. Agent may receive payment of the amount mentioned in the cheque but he cannot be called holder because he has no right to sue on the instrument on his name.
V. B is not holder. He is having wrongful possession of instrument.

Question 32.
B issued a cheque for ₹ 1,25,000 in favour of S. B had sufficient amount in his account with the bank. The cheque was not presented within reasonable time to the Bank for payment and the Bank in the meantime became insolvent.
Decide under the provisions of the Negotiable Instruments Act, 1881 whether S can recover the money from B. (CA November 2008)
Or
‘A’ issued a cheque for ? 5000 to B. B did not present the cheque for payment within reasonable period. The bank fails. However when the cheque was ought to be presented to the bank, there was sufficient fund to make payment of the cheque. Now B demands payment from A. Decide the liability of A under the Negotiable Instruments Act, 1881. (CA May 2014)
Answer:
The drawer is discharged as he has sufficient balance in his account when the cheque ought to be presented for payment. Holder has made default by not presenting cheque within reasonable time. S cannot recover damage.

Question 33.
X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the order of Z. The bill is duly accepted by Y. M obtains the bill from X thus becoming its holder in due course. Can Y avoid payment of the bill? Decide in the light of the provisions of the Negotiable Instruments Act, 1881. (CA November 2008)
Or
Q draw a bill on S but signs it in the fictitious name of R. The bill is payable to the order of R. The bill is duly accepted by S. P obtains the bill from Q thus becoming its holder in due course. Can S avoid payment of the bill? Decide in the light of the provisions of the Negotiable Instruments Act, 1881. (CA May 2017)
Answer:
Y is liable to M for payment of bill. Where bill is signed by drawer in fictitious name, the acceptor cannot allege against a holder in due course that the drawer is fictitious. It can be easily proved that the signatures of the person signing in the capacity of drawer and that of the person signing in capacity of the endorser are in same handwriting.

Question 34.
Mr. ‘Wise’ obtains fraudulently from ‘R’ a cheque crossed ‘Not Negotiable’. He later transfer the cheque to ‘V’ who gets the cheque encashed from ANS Bank Limited which is not the Drawee bank. R on coming to know about the fraudulent act of Mr. Wise sues ANS Bank for the recovery of money. Examine with reference to the relevant provisions of the Negotiable Instrument Act, 1881, whether R will be successful in his claim. Would your answer be still the same in case Mr. wise does not transfer the cheque and gets the cheque encashed from ANS Bank himself? (CA June 2009)
Answer:
Mr. Wise had obtained cheque fraudulently from R. He had no title of it and could not give it to bank any title to cheque or money. Bank would be liable for the amount of the cheque for encashment. – Held in case of Great Western Railway Co. vs. London and Country Banking Co.
Answer will remain same in the second case. R will be successful in his claim against bank.

Question 35.
A issues an open bearer cheque for ? 10000 in favour of B who strikes out the word bearer and put 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 countermanded” by drawer. In response to the legal notice from D., A pleads that the cheques was altered after it had been issued and therefore he is not bound to pay the cheques. Referring to the provisions of the Negotiable Instruments Act, 1881 decide, whether A’s argument is valid or not? (CA June 2009)
Answer:
Striking off word ‘bearer’ amount as material alteration but it is authorised under Act. Therefore, cheque is not discharged and remain valid. Cheque is dishonoured not for material alternation but for payment countermanded by drawer. In view of the above circumstances, A is liable for payment. He is also liable for dishonour of cheque as per section 138.

Question 36.
‘N’ is the holder of a bill of exchange made payable to the order of ‘P’ the bill of exchange contains the following Endorsements in blank :
First endorsement ‘P’
Second endorsement ‘0’
Third endorsement ‘R’
Fourth endorsement ‘S’
‘N’ strikes out without S’s consent the endorsement by ‘Q’ and ‘R’
Describe with reasons whether ‘N’ is entitled to recover anything from ‘S’ (CA November 2009)
Answer:
N is not entitled to recover anything from S. When holder cancels the name of any party liable on the negotiable instrument, then such party as well as all parties subsequent to him are discharged. – Section 82 When N strikes the name of Q and R, so S will be discharged.

Question 37.
P draws a bill on Q for ₹ 10000. Q accepts the bill. On maturity the bill was dishonoured by non-payment. P files a suit against Q for payment of ₹ 10000. Q proved that the bill was accepted for value of ? 7000 and as an accommodation to the plaintiff for the balance amount i.e. ₹ 3000. Referring to the provisions of the Negotiable Instruments Act, 1881 decide whether P would succeed in recovering the whole amount of the bill? (CA November 2010)
Answer:
As per section 44 of Negotiable Instruments Act, 1881, when consideration for which a person signed negotiable instrument consisted money, and was originally absent in part or has subsequently failed in part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionally reduced.

The drawer of bill of exchange stands in immediate relation with the acceptor. On the basis of above provision, P would succeed to recover ₹ 7000 only from Q and not the entire amount (Le. ₹ 10000) of the bill because it was accepted for value as to ₹ 7000 only and on accommodation to P for ₹ 3000.

Question 38.
Point out the difference between a Cheque and a Bill of exchange under the Negotiable Instruments Act, 1881. (CA May 2011)
Answer:

Question 39.
Examining the provisions of the Negotiable instruments Act, 1881 distinguish between a ‘Bill of exchange’ and a ‘Promissory note’. (CAMay 2012)
Answer:

Question 40.
A draws and B accepts 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 Estate the privileges of the holder in due course provided under the Negotiable Instruments Act, 1881. (CA November 2012)
Answer:
Every prior party to negotiable instrument (re. maker, drawer and all intermediate endorsers) continue to remain liable to the holder in due course until the instrument is duly discharge. – Section 36. Applying pro-visions of section 36, E can recover the amount from D, C, B as well as A.

Question 41.
Ram has ₹ 2000 in his bank account and he has no authority to overdraw. He issued a cheque for ₹ 5000 to Gopal which was dishonoured by the bank. Point out whether Gopal must necessarily give notice of dishonor to Ram under the Negotiable Instruments Act, 1881? (CA May 2014)
Answer:
Notice is not necessary for the reason that party charged could not suffer damage for want of notice.

Question 42.
Explain the terms ‘Acceptance for honour’ and ‘Drawee in case of need’ as used in the Negotiable Instruments Act, 1881. (CA November 2014)
Answer:

Question 43.
S by inducing T obtains a bill of exchange from him fraudulently in his (S) favour. Later he enters into a commercial deal and endorses the bill to U towards consideration to him (U) for the deal. U takes the bill as a holder in due course. U subsequently endorses the bill to S for value as consideration to S for some other deal. On maturity the bill is dishonoured. S sues T for the recovery of the money. With reference to the provisions of the Negotiable Instruments Act, 1881, decide whether X will succeed in the case? (CA November 2014)
Or
F by inducing G obtains a bill of exchange from him fraudulently in his (F) favour. Later he enters in to a commercial deal with H and endorses the bill to him (H) towards consideration for the deal. H takes the bill as holder-in-due course. H subsequently endorses the bill to F for value as consideration to F for some other deal. On maturity the bill is dishonoured. F sues G for the recovery of the money. With reference to the provisions of the Negotiable Instruments Act, 1881 explain whether F will succeed in this case. (CA November 2016)
Answer:
Once a negotiable instrument passes through the hands of holder in due course, if gets cleansed of its defect provided the holder was himself not a party to the fraud or illegality which affected the instrument in some / stage of its journey. Thus, any defect in the title of transferor will not affect the right of holders in due course even if he had knowledge of prior defect provided he is himself not party to fraud. – Section 53

Applying above provision, it can be suggested that S who originally in-duced T in obtaining the bill of exchange fraudulently cannot succeed in the case. S himself was party to the fraud.

Question 44.
A, a major and B a minor executed a Promissory Note in favour of C. Examine with reference to the provision of the Negotiable Instruments Act, 1881, the validity of the promissory note and whether is binding on P and 0- (CA May 2015)
Answer:
Promissory note executed by A and B is valid even though a minor is a party to it. B, being a minor is not liable but A, major joint holder is liable.

Question 45.
What is meant by ‘Sans Recours Endorsement’ of a bill of exchange? How does it differ from ‘Sans Frais Endorsement’? (CA May 2015)
Answer:

Question 46.
Explain the concept and different forms of Restrictive and Qualified endorsement. (CA November 2015)
Answer:

Question 47.
State whether the following statement is correct or incorrect:
I. A Promissory note drawn jointly by X a minor and Y a major is valid but can be enforced only against Y.
II. A promissory note duly executed in favour of a minor is valid. (CA November 2015)
Answer:
Statement (I) & (II) are correct.

Question 48.
Mr. A is the payee of an order cheque. Mr. B steals the cheque and forges Mr. A signatures and endorses the cheque in his own favour. Mr. B then further endorses the cheque to Mr. C who takes the cheque in good faith and for valuable consideration. Examine the validity of the cheque as per the provisions of the Negotiable Instruments Act, 1881 and also state whether Mr. C can claim the privileges of a holder-in-due course. (CA November 2015)
Answer:
Endorsement is not valid due to forgery. Mr. C cannot claim privileges of holder in due course.

Question 49.
State giving reasons whether the following statements are correct or incorrect: In a promissory note the promise to pay must be conditional. (CA May 2016)
Answer:
Statement is incorrect. Refer section 4 from paragraph no. 2, Promissory note should be in writing and contain unconditional undertaking to pay certain sum of money.

Question 50.
Mr. Bean is a promoter who has taken a loan on behalf of company but he is neither a director nor a person-in-charge of the company. He sent a cheque from the company’s account to discharge its legal liability. Subsequently the cheque was dishonored and a complaint was lodged against him. Can he be held liable for an offence under section 138 of the Negotiable Instruments Act, 1881? (CA May 2016)
Answer:
If cheque is dishonoured for insufficient fund by bank, drawer is liable to be punished under section 138 of Negotiable Instruments Act, 1881. Action under section 138 can be invoked against person who has issued cheque (Le. account holder) or against person authorised to issue cheque on behalf of account holder.
In the given case, Mr. Bean cannot be held liable for offence under section 138 for dishonour of cheque. Cheque was not drawn on account maintained by him. Cheque was drawn from account maintained by the company. Mr. Bean is neither director of company nor person in charge of company. He has issued cheque from company’s account.

The Negotiable Instruments Act, 1881 – CA Inter Law Notes

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