The Negotiable Instruments Act, 1881 – CA Inter Law Study Material

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

The Negotiable Instruments Act, 1881 – CA Inter Law Study Material

Meaning of Negotiable Instruments

Question 1.
What are the essential characteristics of Negotiable Instruments. (Write any five) [MTP-March 22]
Answer:
Essential characteristics of Negotiable Instruments:

1. It is necessarily in writing.
2. It should be signed.
3. It is free transferable from one person to another.
4. Holders title is free from defects.
5. It can be transferred any number of times till its satisfaction.
6. Every negotiable instrument must contain an unconditional promise or order to pay money. The promise or order to pay must consist of money only.
7. The sum payable, the time of payment, the payee, must be certain.
8. The instrument should be delivered. Mere drawing of instrument does not create liability.

Promissory Note

Question 2.
Rama executes a promissory note in the following form, ’I promise to pay a sum of ^ 10,000 after three months’. Decide whether the promissory note is a valid promissory note.
Answer:
Promissory Note:

• Promissory note is an unconditional promise in writing.
• In the given situation, the amount is certain but the date and name of payee is missing, thus making it a bearer instrument.
• As per RBI Act, a promissory note cannot be made payable to bearer – whether on demand or after certain days.

Conclusion: Instrument is not valid as per RBI Act, 1934 and cannot be legally enforced.

Question 3.
(i) Are the following instruments signed by Mr. Honest is valid promissory Notes? Give the reasons.
(a) I promise to pay D’s son ₹ 10000 for value received (D has two sons)
(b) I promise to pay ₹ 5000 on demand at my convenience.
(ii) Who is the competent authority to issue a promissory note ‘payable to bearer’?
Your answers shall be in accordance with the provisions of the Negotiable Instruments Act, 1881. [Nov. 20 (3 Marks)]
Answer:
Promissory Note:
(i) As per Sec. 4 of the Negotiable Instruments Act, 1881, a promissory note is an instrument in writing (not being a bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to or to the order of a certain person, or to the bearer of the instruments. Based on the provisions of Sec. 4, following conclusions may be drawn:

(a) Instrument signed by Mr. Honest is not a valid promissory note as D has two sons and it is not specified in the promissory note that which son of D is the payee.
(b) Instrument signed by Mr. Honest is not a valid promissory note as details of the payee are not mentioned in it and it is not an unconditional undertaking.

(ii) As per Sec. 31 of Reserve Bank of India Act, 1934, a promissory note cannot be made payable to the bearer. Only the Reserve Bank or the Central Government can make or issue a promissory note ’payable to bearer’.

Crossing of Cheques (Secs. 123 to 131)

Question 4.
Mr. Muralidharan drew a cheque payable to Mr. Vyas or order. Mr. Vyas lost the cheque and was not aware of the loss of the cheque. The person who found the cheque forged the signature of Mr. Vyas and indorsed it to Mr. Parshwanath as thoe consideration for goods bought by him from Mr. Parshwanato. Mr. Parshwanato encashed the cheque, on the very same day from thoe drawee bank. Mr. Vyas intimated the drawee bank about thoe theft of the cheque after three days. Examine the liability of the drawee bank. [Nov. 18 (4 Marks), RTP-Nov. 19]
Answer:
Protection of Liability of the Paying Banker:
Sec. 85 of the Negotiable Instruments Act, 1881 provides the following:
(1) Where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by payment in due course.

(2) Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any indorsement whether in full or in blank appearing thereon, and notwithstanding that any such indorsement purports to restrict or exclude further negotiation.

In the given situation, cheque is drawn payable to “Mr. Vyas or order”. It was lost and Mr. Vyas was not aware of the same. The person found the cheque and forged and indorsed it to Mr. Parshwanath, who encashed the cheque from the drawee bank. After few days, Mr. Vyas intimated about the theft of the cheque, to the drawee bank, by which time, the drawee bank had already made the payment.

Conclusion: Based on the provisions of Sec. 85 as stated above, the drawee banker is discharged when it has made a payment against the cheque payable to order when it is purported to be indorsed by or on behalf of the payee. Even though the signature of Mr. Vyas is forged, the banker is protected and is discharged. The true owner, Mr. Vyas, cannot recover the money from the drawee bank in this situation.

Question 5.
What is the meaning of Not negotiable crossing as per the Negotiable Instruments Act, 1881? [MTP-March 21]
Answer:
Not negotiable Crossing:
Not negotiable crossing requires writing of words “not negotiable” in addition to the two parallel lines. These words may be written inside or outside these lines.

As per Sec. 130 of the Negotiable Instruments Act, 1881, a person taking a cheque crossed generally or specially, bearing in either case the word “not negotiable” shall not have, and shall not be capable of giving a better title to the cheque than that which the person from whom he took it.

A cheque with such crossing is not negotiable, but continues to be transferable as before. Ordinarily, in a negotiable instrument, if the title of the transferor is defective, the transferee, if he is a holder in due course, will have a good title. When the words “not negotiable” are written, even a holder in due course will get the same title as that of transferor. Thus, if the title of the transferor is defective, the title of transferee will also be so.

Hence, the addition of the words not negotiable does not restrict the further transferability of the cheque, but it entirely takes away the main feature of negotiability, which is that a holder with a defective title can give a good title to the subsequent holder in due course.

Question 6.
As per the Negotiable Instruments Act, 1881, what are the parties who may cross a cheque? [MTP-April 21]
Answer:
Parties who may cross a cheque:
A cheque may be crossed by the following parties:

1. By Drawer: A drawer may cross it generally or specially.
2. By Holder: A holder may cross an uncrossed cheque generally or specially. If the cheque is crossed generally, the holder may cross specially. If cheque crossed generally or specially, he may add words “not negotiable”.
3. By Banker: A banker may cross an uncrossed cheque, or if a cheque is crossed generally he may cross it specially to himself. Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker, his agent, for collection.

Question 7.
A signs his name on a blank cheque with ‘not negotiable crossing which he gives to B with an authority to fill up a sum of 13,008 only. But B fills it for ₹ 5,000. B then endorsed it to C for a consideration of ₹ 5,000 who takes it in good faith. Examine whether C is entitled to recover the full amount of the instrument from B or A as per the provisions of the Negotiable instruments Act, 1881. [July 21 (3 Marks)]
Answer:
Not negotiable Crossing:
As per Sec. 130 of the Negotiable Instruments Act, 1881, a cheque marked “not negotiable” is a transferable instrument. The inclusion of the words ‘not negotiable’ however makes a significant difference in the transferability of the cheques i.e., they cannot be negotiated. The holder of such a cheque cannot acquire title better than that of the transferor.

In the given situation, A gave to B the blank cheque with ‘not negotiable crossing’. B had an authority to fill only a sum of K 3,000 but he filled it up ₹ 5,000. This makes B’s title defective. B then endorsed it to C for consideration of ₹ 5,000.

Conclusion: Based on the above stated facts and provision, C is not entitled to recover the full amount from A or B as C cannot acquire a title better than that of the transferor (B).

Holder and Holder in due Course

Question 8.
Explain the meaning of ‘Holder’ and ‘Holder in due course’ of a negotiable instrument The drawer, ‘D’ is induced by ‘A’ draws 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 Hie cheque from ‘A’s banker. Decide.
Answer:
Meaning of ‘Holder’ and the ‘Holder in due course’ of a negotiable instrument: ‘Holder’:
As per Sec. 8 of the Negotiable Instruments Act, 1881, the “holder” of a promissory note, bill of exchange or cheque 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.

As per Sec. 9 of the Negotiable Instruments Act, 1881, ‘Holder in due course’ means:

1. In the case of an instrument payable to bearer means any person who, for consideration became its possessor before the amount of an instrument payable.
2. In the case of an instrument payable to order, ‘holder in due course’ means any person who became the payee or indorsee of the instrument before the amount mentioned in it became payable.
3. He had come to possess the instrument without having sufficient cause to believe that any defect existed in the title of transferor from whom he derived his title.

Given situation is based upon the privileges of a ‘holder in due course’. As per Sec. 42 of the Negotiable Instrument Act, 1881, an acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relieved from liability to any holder in due cause claiming under an indorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer.

Conclusion: In the given case, P is not a fictitious payee and D, the drawer can recover the amount of the cheque from A’s bankers.

Question 9.
Discuss with reasons, whether the following persons can be called as a ‘holder’ under the Negotiable Instruments Act, 1881:  [RTP-May 20; MTP-March 22, April 22]

1. X who obtains a cheque drawn by Y by way of gift
2. A, the payee of the cheque, who is prohibited by a court order from receiving the amount of the cheque.
3. M, who finds a cheque payable to bearer, on the road and retains it.
4. B, the agent of C, is entrusted with an instrument without indorsement by C, who is the payee.
5. B, who steals a blank cheque of A and forges A’s signature.

Answer:
Person to be called as a holder:
As per Sec. 8 of the Negotiable Instruments Act, 1881 ‘holder’ of a Negotiable Instrument means any person entitled in his own name to the possession of it and to receive or recover the amount due thereon from the parties thereto.

On applying the above provision in the given situations, following conclusions may be drawn:

1. X can be termed as a holder because he has a right to possession and to receive the amount due in his own name.
2. A is not a ‘holder’ because to be called as a ‘holder’ he must be entitled not only to the possession of the instrument but also to receive the amount mentioned therein.
3. M is not a holder of the Instrument though he is in possession of the cheque, so is not entitled to the possession of it in his own name.
4. B is not a holder. While the agent may receive payment of the amount mentioned in the cheque, yet he cannot be called the holder thereof because he has no right to sue on the instrument in his own name.
5. B is not a holder because he is in wrongful possession of the instrument

Question 10.
Mr. V draws a cheque of Rs. 11,000 and gives to Mr. B by way of gift. State with reason whether:
(i) Mr. B is a holder in due course as per the Negotiable Instrument Act, 1881 ?
(ii) Mr. B is entitled to receive the amount of Rs. 11,000 from the bank? [May 18 (4 Marks), MTP-May 20]
Answer:
Holder in due course:
As per Sec. 9 of the Negotiable Instrument Act, 1881, “Holder in due course” means any person, who for consideration, becomes the possessor of a promissory note, bill of exchange or cheque (if payable to bearer), or the payee or endorsee thereof,(if payable to order), before the amount 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.

In the instant case, Mr. V draws a cheque of K 11,000 and gives to Mr. B by way of gift.

Conclusion:

1. Mr. B is holder but not a holder in due course since he did not get the cheque for value and consideration.
2. Mr. B’s title is good and bona fide. As a holder, he is entitled to receive R 11,000 from the bank on whom the cheque is drawn.

Question 11.
Give-the answer of the following as per the provisions of the Negotiable Instruments Act, 1881: On a Bill of Exchange for ₹ 5 lakh, X’s acceptance to the Bill is forged. ‘A’ takes the Bill from his customer for value and in good faith before the Bill becomes payable. State with reasons whether ’A* can be considered as a ‘Holder in due course’ and whether he (A) can receive the amount of the Bill from ‘X’. [MTP-Oct. 18, Oct. 20]
Answer:
Holder in due course:
As per Sec. 9 of the Negotiable Instruments Act, 1881 ‘holder in due course’ means any person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque if payable to bearer or the payee or endorsee thereof, if payable to order, before the amount in it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

As ‘A’ in this case prima facie became a possessor of the bill for value and in good faith before the bill became payable, he can be considered as a holder in due course.

But where a signature on the negotiable instrument is forged, it becomes a nullity. The holder of a forged instrument cannot enforce payment thereon. In the event of the holder being able to obtain payment in spite of forgery, he cannot retain the money. The true owner may sue on tort the person who had received. This principle is universal in character, by reason where of even a holder in due course is not exempt from it.

A holder in due course is protected when there is defect in the title. But he derives no title when there is entire absence of title as in the case of forgery.

Conclusion: ‘A’ cannot receive the amount on the bill.

Question 12.
Mr. X is tiie payee of an order cheque. Mr. Y steals the cheque and forges Mr. X signature and endorses the cheque in his own favour. Mr. Y then further endorses the cheque to Mr. Z, 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. Z can claim the privileges of holder-in-due course. [Nov. 19 (3 Marks)]
Answer:
Validity of a forged instrument:

• Forgery confers no title and a holder acquires no title to a forged instrument. Thus, where a signature on the negotiable instrument is forged, it becomes a nullity. Therefore, cheque further endorsed to Mr. Z, is not valid.
• Since a forged instrument is a nullity, therefore the property in such instrument remains vested in the person who is the holder at the time when the forged signatures were put on it. Forgery is also not capable of being ratified.
• In the case of forged endorsement, the person claiming under forged endorsement even if he is purchaser for value and in good faith, cannot acquire the rights of a holder in due course.

Conclusion: Mr. Z, acquires no title on the cheque.

Question 13.
Ram draws a cheque of f 1 lakh. It was a bearer cheque. Ram kept the cheque with himself. After some time, Ram gives this cheque to Shyam as a gift on his birthday. Decide whether Shyam is having a valid title over the cheque and whether Shyam is a holder in due course or not in relation to this cheque as per the Sec. 9 of the Negotiable Instruments Act 1881. [Nov. 20 (3 Marks)]
Answer:
Holder in due course:
As per Sec. 9 of the Negotiable Instruments Act, 1881, “Holder in due course” means any person, who for consideration, became the possessor of a promissory note, bill of exchange or cheque (if payable to bearer), or the payee or endorsee thereof, (if payable to order), before the amount 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.

In the instant case. Ram draws a cheque for ₹ 1 lakh and hands it over to Shyam by way of gift.

Conclusion: Shyam’s title is good and bona fide. As a holder he is entitled to receive ₹ 1 lakh from the bank on whom the cheque is drawn. However, Shyam is not a holder in due course as he does not get the cheque for value and consideration.

Question 14.
Give the answer of the following: Amit draws a cheque for f 1000 and hands it over to Beena by way of gift Is Beena a holder in due course? [MTP-April 21]
Answer:
Holder in due course:
As per Sec. 9 of the Negotiable Instruments Act, 1881, the “holder” of a promissory note, bill of exchange or cheque 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.

As per Sec. 9 of the Negotiable Instruments Act, 1881, “Holder in due course” means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque (if payable to bearer), or the payee or indorsee thereof, (if payable to order), 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.

Conclusion: Beena is a holder but not a holder in due course as she does not get the cheque for value and consideration. Her title is good and bona fide. As a holder she is entitled to receive Rs. 1000 from the bank on whom the cheque is drawn.

Question 15.
Referring the previsions of the Negotiable Instruments Act, 1881 give the answer of the following: Ankit draws a cheque for ₹ 32,808 and hands it over to Shreya by way of gift Whether Shreya is a bolder In due course? [Dec. 21 (2 Marks)]
Answer:
Holder in due course:
As per Sec. 9 of the Negotiable Instruments Act, 1881, “Holder in due course” means any person, who for consideration, became the possessor of a promissory note, bill of exchange or cheque (if payable to bearer), or the payee or indorsee thereof, (if payable to order), 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.

In the given case, Ankit draws a cheque for ₹ 32,000 and hands it over to Shreya by way of gift.

Conclusion: Shreya is a holder but not a holder in due course as she does not get the cheque for value and consideration. Her title is good and bona fide. As a holder she is entitled to receive ₹ 32,000 from the bank on whom the cheque is drawn.

Classification of Negotiable Instruments

Question 16.
State with reasons whether each of the following instruments is an Inland Instrument or a Foreign Instrument as per The Negotiable Instruments Act, 1881: [Nov. 20 (4 Marks)]

1. Ram draws a Bill of Exchange in Delhi upon Shyam a resident of Jaipur and accepted to be payable in Thailand after 90 days of acceptance.
2. Ramesh draws a Bill of Exchange in Mumbai upon Suresh a resident of Australia and accepted to be payable in Chennai after 30 days of sight.
3. Ajay draws a Bill of Exchange in California upon Vijay a resident of Jodhpur and accepted to be payable in Kanpur after 6 months of acceptance.
4. Mukesh draws a Bill of Exchange in Lucknow upon Dinesh a resident of China and accepted to be payable in China after 45 days of acceptance.

Answer:
Inland instrument and Foreign instrument:
As per Sec. 11 of the Negotiable Instruments Act, 1881, a promissory note, bill of exchange or cheque drawn or made in India and made payable in, or drawn upon any person resident in India shall be deemed to be ah inland instrument.

As per Sec. 12 of the Negotiable Instruments Act, 1881, any such instrument not so drawn, made or made payable shall be deemed to be foreign instrument.

Conclusion: Based on the provisions of Secs. 11 and 12 as stated above, nature of the Instruments will be as follows:

1. Bill is drawn in Delhi by Ram upon Shyam, a resident of Jaipur (though accepted to be payable in Thailand after 90 days) is an Inland instrument.
2. Ramesh draws a bill in Mumbai on Suresh, a resident of Australia and accepted to be payable in Chennai after 30 days of sight, is an Inland instrument.
3. Ajay draws a bill in California and accepted to be payable in Kanpur, India, drawn upon Vijay, a person resident in India (Jodhpur), therefore the instrument is a Foreign instrument.
4. As the bill is drawn in India by Mukesh upon Dinesh, the person resident outside India (China) and also payable outside India (China) after 45 days of acceptance, therefore the instrument is a foreign instrument.

Question 17.
A bill of exchange is drawn by ‘A’ in Berkley where the rate of interest is 15% and accepted by ‘B’ payable in Washington where the rate of interest is 6%. The bill is indorsed in India and is dishonoured. An action on the bill is brought against ‘B’ in India. Advise as per the provisions of the Negotiable Instruments Act. 1881, what rate of interest ‘B’ is liable to pay? [MTP-March 22]
Answer:
Liability of Drawer of Foreign Bill:
As per Sec. 134 of the Negotiable Instruments Act, 1881, in the absence of a contract to the contrary, the liability of the maker or drawer of a foreign promissory note or bill of exchange or cheque is regulated in all essential matters by the law of the place where he made the instrument, and the respective liabilities of the acceptor and indorser by the law of the place where the instrument is made payable.

In the given case, since action on the bill is brought against B in India, he is liable to pay interest at the rate of 6% only.

Maturity of Negotiable Instrument

Question 18.
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, 2021 to Bharat. Bharat made the payments on 4th January, 2021. 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?
Answer:
Claim of Interest:
Sec. 24 of the Negotiable Instruments Act, 1881 states that where a bill or note is payable after date or after sight or after happening of a specified event, the time of payment is determined by excluding the day from which the time begins to run.

In the given case, Bharat will succeed in objecting to Bhushan’s claim. Bharat paid rightly “three days after sight”. Since the bill was presented on 1st January, 2021, Bharat was required to pay only on the 4th January, 2021 and not on 3rd January, 2021 as contended by Bhushan.

Question 19.
Ascertain the date of maturity of a bill payable hundred days after sight and which is presented for sight on 4th May, 2021.
Answer:
Date of maturity of the bill of exchange:
In the given case, the day of presentment for sight is to be excluded i.e. 4th May, 2021. The period of 100 days ends on 12th August, 2021 (May 27 days + June 30 days + July 31 days + August 12 days). Three days of grace are to be added. It falls due on 15th August, 2021 which happens to be a public holiday. As such it will fall due on 14th August, 2021 i.e. the next preceding business day.

Question 20.
State briefly the rules laid down under the Negotiable Instruments Act for determining the date of maturity of a biii of exchange. [May 18 (5 Marks)]
Answer:
Determining the date of maturity of a bill of exchange:
As per Sec. 22 of Negotiable Instruments Act, 1881, the maturity of a bill, not payable on demand, at sight, or on presentment, is at maturity on the third day after the day on which it is expressed to be payable. Three days are allowed as days of grace. No days of grace are allowed in the case of bill payable on demand, at sight, or presentment.

As per Sec. 23 of Negotiable Instruments Act, 1881, when a bill is made payable at stated number of months after date, the period stated terminates on the day of the month which corresponds with the day on which the instrument is dated.

When it is made payable after a stated number of months after sight the period terminates on the day of the month which corresponds with the day on which it is presented for acceptance or sight or noted for non-acceptance or protested for non-acceptance. When it is payable a stated number of months after a certain event, the period terminates on the day of the month which corresponds with the day on which the event happens.

When a bill is made payable a stated number of months after sight and has been accepted for honour, the period terminates with the day of the month which corresponds with the day on which it was so accepted.

If the month in which the period would terminate has no corresponding day, the period terminates on the last day of such month.

As per Sec. 24 of Negotiable Instruments Act, 1881, in calculating the date, a bill made payable a certain number of days after date or after sight or after a certain event is at maturity, the day of the date, or the day of presentment for acceptance or sight or the day of protest for non-accordance, or the day on which the event happens shall be excluded.

As per Sec. 25 of Negotiable Instruments Act, 1881, when the last day of grace falls on a day which is public holiday, the instrument is due and payable on the next preceding business day.

Question 21.
Calculate the date of maturity of bill of exchange drawn on 1.6.2021, payable 120 days after considering the relevant provisions of the Negotiable Instruments Act, 1881. [RTP-May 21]
Answer:
Date of maturity of the bill of exchange:
In this case, the day of presentment for sight is to be excluded i.e. 1st June, 2021. The period of 120 days ends on 29th September, 2021 (June 29 days + July 31 days + August 31 Days + September 29 days = 120 days). Three days of grace are to be added. It falls due on 2nd October, 2021, which happens to be a public holiday. As such it will fall due on 1st October, 2021 i.e., the next preceding Business Day.

Negotiation (Transfer) of Negotiable Instruments

Question 22.
Explain the meaning of’Negotiation by delivery’ with the help of an example. Give your answer as per the provisions of the Negotiable Instruments Act, 1881. [MTP-March 19]
Answer:
Negotiation by delivery:

• As per Sec. 47 of the Negotiable Instruments Act, 1881, subject to the provisions of Sec. 58, a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof.
• Exception: A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in a certain event is not negotiable (except in the hands of a holder for value without notice of the condition) unless such event happens.
• Example: A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep for B. The instrument has been negotiated.

Question 23.
M drew a cheque amounting to ₹ 2 lakh payable to N and subsequently delivered to him. After receipt of cheque N indorsed the same to C but kept it in his safe locker. After sometime, N died, and P found the cheque in N’s safe locker. Does this amount to Indorsement under the Negotiable Instruments Act, 1881?
Answer:
Negotiation by indorsement:

• As per Sec. 47 of the Negotiable Instruments Act, 1881, Subject to the provisions of Sec. 58, a promissory note, bill of exchange or cheque payable to order, is negotiable by the holder by indorsement and delivery thereof.
• In the given case. M drew a cheque amounting to ₹ 2 lakh payable to N and subsequently delivered to him. After receipt of cheque N indorsed the same to C but kept it in his safe locker. After sometime, N died, and P found the cheque in N’s safe locker.

Conclusion: P does not become the holder of the cheque as the negotiation was not completed by delivery of the cheque to him.

Question 24.
Manoj owes money to Umesh. Therefore, he makes a promissory note for the amount in favour of Umesh, for safety of transmission he cuts the note in half and posts one half to Umesh. He then changes his mind and calls upon Umesh to return the half of the note which he had sent Umesh requires Manoj to send the other half of the promissory note. Decide how rights of the parties are to be adjusted in reference to the Negotiable Instruments Act, 1881. [RTP-May 19; MTP- March 19, May 20, March 21]
Answer:
Importance of Delivery in Negotiation:
As per Sec. 46 of the Negotiable Instruments Act, 1881, delivery of an instrument is essential whether the instrument is payable to bearer or order for effecting the negotiation. The delivery must be voluntary and the object of delivery should be to pass the property in the instrument to the person to whom it is delivered.

The delivery can be, actual or constructive. Actual delivery takes place when the instrument changes hand physically. Constructive delivery takes place when the instrument is delivered to the agent, clerk or servant of the indorsee on his behalf or when the indorser, after indorsement, holds the instrument as an agent of the indorsee.

Delivery refers to the whole of the instrument and not merely a part of it. Delivery of half instrument cannot be treated as constructive delivery of the whole.

Conclusion: Claim of Umesh to have the other half of the promissory note sent to him is not maintainable. Manoj is justified in demanding the return of the first half sent by him. He can change his mind and refuse to send the other half of the promissory note.

Question 25.
‘Anjum’ drew a cheque for ₹ 20,000 payable to ‘Babioo’ and delivered it to him. ‘Babloo’ indorsed the cheque lit favour of‘Rehansh’ but kept it in his table drawer. Subsequently, ‘Babloo’ died, and cheque was found by ‘Rehansh’ in ‘Babloo’s table drawer. ‘Rehansh’ filed die suit for the recovery of cheque. Whether ‘Rehansh’ can recover cheque under the provisions of the Negotiable Instrument Act 1881? [RTP-May 22]
Answer:
Negotiation of Negotiable Instruments:
As per Sec. 48 of the Negotiable Instrument Act 1881, a promissory note, bill of exchange or cheque payable to order, is negotiable by the holder by indorsement and delivery thereof.

The contract on a negotiable instrument until delivery remains incomplete and revocable. The delivery is essential not only at the time of negotiation but also at the time of making or drawing of negotiable instrument. The rights in the instrument are not transferred to the indorsee unless after the indorsement the same has been delivered.

If a person makes the indorsement of instrument but before the same could be delivered to the indorsee the indorser dies, the legal representatives of the deceased person cannot negotiate the same by mere delivery thereof. [Section 57]

Conclusion: In the given case, cheque was indorsed properly but not delivered to indorsee i.e. ‘Rehansh’, Therefore, ‘Rehansh’ is not eligible to claim the payment of cheque.

Indorsement of Instrument (Sec. 15)

Question 26.
‘M’ is the holder of a bill of exchange made payable to the order of ‘F. The bill of exchange contains the following endorsements in blank:
First endorsement ‘N’
Second endorsement ‘O’
Third endorsement ‘P’ and
Fourth endorsement ‘Q’
‘M’ strikes out, without Q’s consent, the endorsements by ‘O’ and ‘P’. Decide, with reasons, whether ‘M’ is entitled to recover anything from ‘Q’ under the provisions of the Negotiable Instruments Act, 1881. [Dec. 21 (3 Marks)]
Answer:
Discharge of indorser’s liability:
As per Sec. 40 of the Negotiable Instruments Act, 1881, where the holder of a negotiable instrument without the consent of the indorser, destroys or impairs the indorser’s remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.

In the given case, ‘M1 is the holder of a bill of exchange made payable to the order of ’F’. The bill of exchange contains the following endorsements in blank:
First endorsement ‘N’
Second endorsement ‘O’
Third endorsement ‘P’ and
Fourth endorsement ‘Q’
‘M’ strikes out, without Q’s consent, the endorsements by ‘O’ and ‘P’.

Conclusion: ‘M’ is not entitled to recover anything from ‘Q’.

Question 27.
A is a payee and bolder of a bill of exchange. He endorses it in blank and delivers it to B. B endorses it in full to C or order. C without endorsement transfers the bill to D, State giving reasons whether D, as bearer of die bill of exchange, is entitled to recover the payment from A or B or C [Dec. 21 (3 Marks)]
Answer:
Conversion of Indorsement in Blank into Indorsement in full:
As per Sec. 49 of the Negotiable Instruments Act, 1881, the holder of a negotiable instrument indorsed in blank may without signing his own name, by writing above the indorser’s signature a direction to pay to any other person as indorsee, convert the indorsement in blank into an indorsement in full; and the holder does not thereby incur the responsibility of an indorser.

As per Sec. 55, if a negotiable instrument, after having been indorsed in bank, is indorsed in full, the amount of it cannot be claimed from the indorser in full, except by the person to whom it has been indorsed in full, or by one who derives title through such person.

Conclusion: D as the bearer is entitled to receive payment or to sue drawer, acceptor, or A who indorsed the bill in blank, but he cannot sue B or C.

Discharge from liability on Notes, Bills and Cheques (Secs. 82 to 90)

Question 28.
C issues a cheque for ₹ 55,00,00 in favour of D. C has sufficient amount in his account with the Bank. The cheque was not presented within reasonable time to die Bank for payment and the Bank, in the meantime, became bankrupt. Decide under the provisions of Negotiable Instruments Act, 1881, whether D can recover the money from C. [RTP-May 21]
Answer:
Discharge by the drawer not duly presenting a cheque for payment:
As per Sec. 84 of the Negotiable Instruments Act, 1881, cheque should be presented to Bank within reasonable time. If cheque is not presented within reasonable time, meanwhile the drawer suffers actual damage, the drawer is discharged to the extent of such actual damage. This would be so if the cheque would have been passed if it was presented within reasonable time.

In determining what is a reasonable time, regard shall be had to (a) the nature of the instrument (b) the usage of trade and of bankers, and (c) facts of the particular case.

The drawer will get discharge, but the holder of the cheque will be treated as creditor of the bank, in place of drawer. He will be entitled to recover the amount from Bank.

Conclusion: In the given case drawer i.e. C has suffered damage as cheque was not presented by D within reasonable time. Hence, C will be discharged but D will be the creditor of bank for the amount of cheque and can recover the amount from the bank.

Question 29.
Explain the modes of discharge from liability on instruments, as per the provisions of the Negotiable Instruments Act, 1881. [MTP-Aug. 18]
Answer:
Modes of discharge from liability on instruments:
As per Sec. 82 of the Negotiable Instruments Act, 1881, the maker, acceptor or endorser respectively of a negotiable instrument is discharged from liability thereon:
(a) By cancellation: to a holder thereof who cancels such acceptor’s or endorser’s name with intent to discharge him, and to all parties claiming under such holder,

(b) By release: to a holder thereof who otherwise discharges such maker, acceptor or endorser, and to all parties deriving title under such holder after notice of such discharge;

(c) By payment: to all parties thereto, if the instrument is payable to bearer, or has been endorsed in blank, and such maker, acceptor or endorser makes payment in due course of the amount due thereon.

Further, as per Sec. 83 of the Negotiable Instruments Act, 1881, 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 not consenting to such allowance are thereby discharged from liability to such holder.

Question 30.
Referring to the provisions of the Negotiable Instruments Act, 1881, examine the validity of then following: A Bill of Exchange originally drawn by R for a sum of ₹ 10,000 but accepted by S only for ₹ 7,000. [fan. 21 (3 Marks}]
Answer:
Discharge by qualified or limited acceptance:
As per Sec. 86 of the Negotiable Instruments Act, 1881, if the holder of a bill of exchange acquiesces in a qualified acceptance, or one limited to part of the sum mentioned in the bill, or which substitutes a different place or time for payment, or which, where the drawees are not partners, is not signed by all the drawees, all previous parties whose consent is not obtained to such acceptance are discharged as against the holder and those claiming under him, unless on notice given by the holder they assent to such acceptance.

Explanation to Sec. 86 states that an acceptance is qualified where it undertakes the payment of part only of the sum ordered to be paid.

Conclusion: Based on the above stated provisions, the bill, which has been drawn by R for ₹ 10,000, has been accepted by S only for ₹ 7,000, is a clear case of qualified acceptance, which may either be rejected by R or he may give assent to the acceptance of ₹ 7,000 only.

Question 31.
‘A’ draws a cheque for ₹ 5,000 in favour of’B’. ‘A’ had sufficient funds in his bank account to meet it when the cheque ought to be presented in the bank. The bank fails before the cheque is presented. ‘B‘ wants to claim it from ‘A’. Decide, whether ‘A’ is liable as per the Negotiable Instruments Act, 1881. [May 22 (3 Marks)]
Answer:
Discharge by the drawer not duly presenting a cheque for payment:
As per Sec. 84 of the Negotiable Instruments Act, 1881, cheque should be presented to Bank within reasonable time. If cheque is not presented within reasonable time, meanwhile the drawer suffers actual damage, the drawer is discharged to the extent of such actual damage. This would be so if the cheque would have been passed if it was presented within reasonable time.

In determining what is a reasonable time, regard shall be had to (a) the nature of the instrument (b) the usage of trade and of bankers, and (c) facts of the particular case.

The drawer will get discharge, but the holder of the cheque will be treated as creditor of the bank, in place of drawer. He will be entitled to recover the amount from Bank.

Conclusion: In the given case drawer i.e. A has suffered damage as cheque was not presented by B within reasonable time. Hence, A will be discharged but B will be the creditor of bank for the amount of cheque and can recover the amount from the bank.

Material alteration and its effect

Question 32.
State whether the following alterations are material alterations under the Negotiable Instruments Act, 1881?
(i) The holder of the bill inserts the word “or order” in the bill,
(ii) The holder of the bearer cheque converts it into account payee cheque.
Answer:
Material Alteration:

• An alteration is material which in any way alters the operation of the instrument and affects the liability of parties thereto. Any alteration is material which alters the business effect of the instrument if used for any business purpose.
• The following materials alterations have been authorised by the Act and do not require any authentication:
  (a) Filling blanks of inchoate instruments (Sec. 20)
  (b) Conversion of a blank indorsement into an indorsement in full (Sec. 49).
• Alteration as stated in the question are material in nature and permitted under the provisions of the law.

Question 33.
A Bill of Exchange was made without mentioning any time for payment The holder added the words “on demand ‘ on the face of the instrument Does this amount to any material alteration? Explain. [May 19 (2 Marks)]
Or
State whether the following alteration is material alteration under the provisions of the Negotiable Instruments Act, 1881.
A promissory note was made without mentioning any time for payment The holder added the words “on demand” mi the face of the instrument. [Nov. 19 (4 Marks)]
Or
A promissory note was made without mentioning any time for payment The holder added the words “on demand” on the face of the instrument Does this amount to material alteration? [MTP-April 21]
Answer:
Material Alteration:

• An alteration is material which in any way alters the operation of the instrument and affects the liability of parties thereto. Any alteration is material which alters the business effect of the instrument if used for any business purpose.
• In the given case, a promissory note was made without mentioning any time for payment. The holder added the words “on demand” on the face of the instrument.
• As per the provision of the Negotiable Instruments Act, 1881 this is not a material alteration as a promissory note where no date of payment is specified will be treated as payable on demand. Hence, adding the words “on demand” does not alter the business effect of the instrument.

Question 34.
Referring the provisions of the Negotiable Instruments Act, 1881 give the answer of the following: A promissory note was made without mentioning any time for payment. The holder added the words ‘on demand’ on the face of the instrument Whether this may be treated as material alteration in the instrument? [Dec. 21 (2 Marks)]
Answer:
Material Alteration:
An alteration is material which in any way alters the operation of the instrument and affects the liability of parties thereto. Any alteration is material which alters the business effect of the instrument if used for any business purpose.

In the given case, a promissory note was made without mentioning any time for payment. The holder added the words “on demand” on the face of the instrument.

Conclusion: As per the provision of the Negotiable Instruments Act, 1881 this is not a material alteration as a promissory note where no date of payment is specified will be treated as payable on demand. Hence, adding the words “on demand” does not alter the business effect of the instrument.

Question 35.
Examine the validity of the following statements with reference to the Negotiable Instruments Act, 1881.
(i) When payment on an Instrument is made in due coarse, both the instrument and the parties to it are discharged.
(ii) Alteration of rate of interest specified in the Promissory Note is not a material alteration.
(iii) Conversion of the blank indorsement into an indorsement in full is not a material alteration and it does not require authentication. [May 22 (3 Marks)]
Answer:
Validity of Statements with reference to the Negotiable Instruments Act, 1881:
(i) Statement is valid. As per Sec. 78, when payment on an instrument is made in due course, both the instrument and the parties to it are discharged subject to the provision of Sec. 82(c). The payment on an instrument may be made by any party to the instrument. It may even be made by a stranger provided it is made on account of the party liable to pay.

(ii) Statement is not valid. Alteration of rate of interest specified in the Promissory Note is considered as a material alteration.

(iii) Statement is partially valid. Conversion of the blank indorsement into an indorsement in full is a material alteration, but it is authorised by the Act and does not require authentication.

Question 36.
Healthcare Services Limited (the Bidder), bids the tender floated by Super Care Hospital (the Tenderer), attaching a cheque dated 01.04.2022 for ₹ 5,00,000 towards earnest money deposit. Since the tender process was extended, the Tenderer returned the cheque expiring on 30.06.2022 to the Bidder for its resubmission after having revalidated by changing the date of the cheque to 01.07.2022. Accordingly, the revalidated cheque was resubmitted by the Bidder to the Tenderer. The cheque presented by the Tenderer to the banker. It was dishonoured by the bank. Examine, whether, the cheque altered with a new date shall be deemed a valid cheque binding the Bidder for payment as per the Negotiable Instruments Act, 1881? [May 22 (5 Marks)]
Answer:
Validity of a Negotiable instruments in case of material alteration:
As per Sec. 87 of the Negotiable Instruments Act, 1881, any material alteration of negotiable instruments 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.

However, the party who consents to the alteration as well as the party who makes the alteration are disentitled to complain against such alteration e.g. the drawer of the cheque himself altered the date of the cheque for validating or revalidating the same instrument, he cannot take advantage of it by saying that the cheque becomes void as there was a material alteration thereto. It is always open to a drawer to voluntarily re-validate a negotiable instrument including a cheque.

In the given case, Healthcare Services Limited (the Bidder), bids the tender floated by Super Care Hospital (the Tenderer), attaching a cheque dated 01.04.2022 for ₹ 5,00,000/- towards earnest money deposit. Since the tender process was extended, the Tenderer returned the cheque expiring on 30.06.2022 to the Bidder for its resubmission after having revalidated by changing the date of the cheque to 01.07.2022. Accordingly, the revalidated cheque was resubmitted by the Bidder to the Tenderer. The cheque presented by the Tenderer to the banker. It was dishonoured by the bank.

Conclusion: Cheque altered with a new date shall be deemed a valid cheque binding the Bidder for
payment.

Dishonour of Negotiable instruments

Question 37.
Is notice of dishonour necessary in the following cases:
(1) X, drawer of a Bill informs Y, the holder of the bill that the bill would be dishonoured on the presentment for payment.
(2) X, drawer of a Bill informs Y, the holder of the bill that the bill would be dis honoured on the presentment for payment.
Answer:
Dishonour of Negotiable instruments:
As per Sec. 98 of the Negotiable Instruments Act, 1881, notice of dishonour is not necessary in the following cases:
(a) Notice of dishonour is dispensed with by the party entitled thereto; a waiver of notice may be made at the time of drawing or indorsing the instrument, or before or after the time for giving notice has arrived.
(b) In order to charge the drawer, when he has countermanded payment;
(c) When the party charged could not suffer damages for want of notice;
(d) When the party entitled to notice cannot after due search be found; or the party bound to give notice is, for any other reason, unable without any fault of his own to give it;
(e) To charge the drawers, when the acceptor is also a drawer;
(f) In the case of a promissory note which is not negotiable.
(g) When the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the instrument.

Conclusion: Notice of dishonour is not necessary in both the cases.

Question 38.
What are the circumstances under which a bill of exchange can be dishonoured by non-acceptance? Also, explain die consequences if a cheque gels dishonoured for insufficiency of funds In the account. [Nov. 18 (5 Marks), MTP-May 20]
Or
What are the circumstances under which a bill of exchange can be dishonoured by non-acceptance? Give your answer as per the provisions of the Negotiable Instruments Act, 1881. [MTP-April 19, Oct 19, April 22]
Answer:
Dishonour by Non-acceptance:
As per Sec. 91 of the Negotiable Instruments Act, 1881, a bill of exchange is said to be dishonoured by non-acceptance in any one of the following circumstances:
(a) When a bill is duly presented for acceptance, and the drawee, or one of several drawees not being . partners, refuse acceptance within 48 hours from the time of presentment, the bill is dishonoured.
(b) where presentment is excused and the bill is not accepted.
(c) Where the drawee is incompetent to contract, the bill may be treated as dishonoured.
(d) Where the drawee is a fictitious person.
(e) Where the drawee could not be found even after reasonable search
(f) When a drawee gives a qualified acceptance, the holder may treat the instrument dishonoured.

Dishonour of Cheque for insufficiency, etc. of funds in the account:
As per Sec. 138 of the Negotiable Instruments Act 1881, where any cheque drawn by a person on an account maintained by him with a banker for payment is dishonoured due to insufficiency of funds, he shall be punished with imprisonment for a term which may extend to two years or with fine which may extend to twice the amount of the cheque or with both.

Question 39.
Examine the billowing cases with respect to their validity. State your answer with Reasons.
(i) A bill of exchange is drawn, mentioning expressly as ‘payable on demand’. The bill will be at maturity for payment on 04.01.2022, if presented on 01.01.2022.
(ii) A holder gives notice of dishonour of a bill to all the parties except the acceptor. The drawer claims that he is discharged from his liability as the holder fails to give notice of dishonour of the bill to all the parties thereto. [July 21 (4 Marks)]
Answer:
(i) The bill of exchange is drawn, mentioning expressly as ‘payable on demand’. The bill will be at maturity for payment on 04-1-2022, if presented on 01-01-2022: This statement is not valid as no days of grace are allowed in the case of bill payable on demand.

(ii) A holder gives notice of dishonour of a bill to all the parties except the acceptor. The drawer claims that he is discharged form his liability as the holder fails to give notice of dishonour of the bill to all the parties thereto:
As per sec. 93 of the Negotiable Instruments Act, 1881, notice of dishonour must be given by the holder to all parties other than the maker or the acceptor or the drawee whom the holder seeks to make liable. Accordingly, notice of dishonour to the acceptor of a bill is not necessary. Therefore, claim of drawer that he is discharged from his liability on account of holder’s failure to give notice to all the parties thereto, is invalid.

Dishonour of Cheques for Insufficiency of Funds in die Accounts (Secs. 138 to 142)

Question 40.
A promoter who has borrowed a loan on behalf of company, who is neither a director nor a person- in-charge, sent a cheque from the companies account to discharge its legal liability. Subsequently, the cheque was dishonoured and the complaint was lodged against him is he liable for an offence under
Answer:
Dishonour of Cheques for Insufficiency of Funds in the Accounts:
As per Sec. 138 of the Negotiable Instruments Act, 1881 where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from/out of that account for discharging any debt or liability, and if it is dishonoured by banker on sufficient grounds, such person shall be deemed to have committed an offence and shall be liable.

Conclusion: Promoter is neither a director nor a person-in-charge of the company and is not connected with the day-to-day affairs of the company and had neither opened nor is operating the bank account of the company. Further, the cheque, which was dishonoured, was also not drawn on an account maintained by him but was drawn on an account maintained by the company. Therefore, he has not committed an offence under Sec. 138

Question 41.
Explain the power of court for trial of cases summarily, as per the provisions of the Negotiable instruments Act, 1881. [MTP-Oct. 18]
Answer:
Power of Court to try Cases Summarily:
Sec. 143 of the Negotiable Instruments Act, 1881, deals with the provisions relating to power of Court for trial of cases summarily. Main provisions are:
(1) Trial of Offence: Notwithstanding anything contained in the Code of Criminal Procedure, 1973, all offences under this Chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate and the provisions of Secs. 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to such trials:

In case of summary trial: In the case of any conviction in a summary trial under this Sec., it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding ₹ 5,000.

In case where no summary trial can be made: When at the commencement of, or in the course of, a summary trial under this Sec., it appears to the Magistrate that the nature of the case is such that a sentence of imprisonment for a term exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the case summarily, the Magistrate shall after hearing the parties, record an order to that effect and thereafter recall any witness who may have been examined and proceed to hear or rehear the case in the manner provided by the said Code.

(2) Speedy Trial: The trial of a case under this Sec. shall, so far as practicable, consistently with the interests of justice, be continued from day to day until its conclusion, unless the Court finds the adjournment of the trial beyond the following day to be necessary for reasons to be recorded in writing.

(3) Speedy and efficient Disposal: Every trial under this Sec. shall be conducted as expeditiously as possible and an endeavour shall be made to conclude the trial within six months from the date of filing of the complaint.

Question 42.
Bhoienath drew a cheque in favour of Surendar. After having issued the cheque; Bholenath requested Surendar not to present the cheque for payment and gave a stop payment request to the bank in respect of the cheque issued to Surendar.

Decide, under the provisions of the Negotiable Instruments Act 1881 whether the said acts of Bholenath constitute an offence? [RTP-Nov. 20, May 18 (4 Marks)]
Answer:
Stop payment of Cheques:
Sec. 138 of the Negotiable Instruments Act, 1881, is a penal provision in the sense that once a cheque is drawn on an account maintained by the drawer with his banker for payment of any amount of money to another person out of that account for the discharge in whole or in part of any debt or liability, is informed by the bank unpaid either because of insufficiency of funds to honour the cheques or the amount exceeding the arrangement made with the bank, such a person shall be deemed to have committed an offence.

Once a cheque is issued by the drawer, a presumption under Sec. 139 of the Negotiable Instruments Act, 1881 follows and merely because the drawer issues a notice thereafter to the drawee or to the bank for stoppage of payment, it will not preclude an action under Sec. 138.

Also, Sec. 140 of the Negotiable Instruments Act, 1881, specifies absolute liability of the drawer of the cheque for commission of an offence under the Sec. 138 of the Act. Sec. 140 states that it shall not be a defence in a prosecution for an offence under Sec. 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that Sec..

As per the facts stated in the question, Bholenath (drawer) after having issued the cheque, informs Surendar (drawee) not to present the cheque for payment and as well gave a stop payment request to the bank in respect of the cheque issued to Surendar.

Conclusion: Act of Bholenath, i.e., his request of stop payment constitutes an offence under the provisions of the Negotiable Instruments Act, 1881.

Question 43.
Mr. Harsha donated ₹ 50,000 to an N60 by cheque for sponsoring the education of one child for one year. Later on he found that the NGO was a fraud and did not engage in philanthropic activities. He gave a “stoppayment” instruction to his bankers and the cheque was not honoured by the bank as per his instruction. The NGO has sent a demand notice and threatened to tile a case against Harsha. Advise Mr. Harsha about the course of action available under the Negotiable Instruments Act, 1881. [July 21 (3 Marks)]
Answer:
Offence u/s 138 as to dishonour of cheque:
Sec. 138 of the Negotiable Instruments Act, 1881 deals with dishonour of cheque which is issued for the discharge, in whole or in part, of any debt or other liability. However, any cheque given as gift or donation, or as a security or in discharge of a mere moral obligation, would be considered outside the purview of section 138.

In the given situation, Mr. Harsha donated ₹ 50,000 to NGO by cheque for sponsoring child education for 1 year. On founding that NGO was fraud, Mr. Harsha instructed bankers for stop payment. In lieu of that, NGO sent a demand notice and threatened to file a case against him. Here the cheque is given as a donation for the sponsoring child education for 1 year and is not legally enforceable debt or other liability on Mr. Harsha.

Conclusion: Mr. Harsha is not liable for the donated amount which is not honoured by the bank to the NGO.

Question 44.
Mr. Mudlt is the employee in Senior Research Analyst Private Limited. He went to a Super Mall, a departmental store, where he purchased some goods for his personal use on credit Mr. Mudit gave a cheque drawn on the Senior Research Analyst Private Limited’s account to Super Mall towards the full payment of the dues. The cheque was dishonoured by the company’s bank. Mr. Mudit was neither a director nor a person in-charge of die company.

Explain under the provisions of the Negotiable Instruments Act, 1881, whether Mr. Mudit has committed an offence under section 138. [MTP-Aprii 22]
Answer:
Offence u/s 138 as to dishonour of cheque:
As per Sec. 138 of the Negotiable Instruments Act, 1881, where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from/out of that account for discharging any debt or liability, and if it is dishonoured by banker on sufficient grounds, such person shall be deemed to have committed an offence and shall be liable.

As per Sec. 141, if the person committing an offence u/s 138 is a company, every person who, at the time the offence was committed was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

In the given situation, Mudit is neither a director nor a person-in-charge of the company and is not connected with the day-to-day affairs of the company and had neither opened nor is operating the bank account of the company. Further, the cheque, which was dishonoured, was also not drawn on an account maintained by him but was drawn on an account maintained by the company.

Conclusion: Mudit has not committed an offence under section 138.