Negotiable Instrument Act
Q1. 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 '0' and P. Decide, with reasons, whether 'M is entitled to recover anything from0 under the provisions of the Negotiable Instruments Act, 1881. (3 Marks) [Dec 21]
Answer:
According to section 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 question, "M' strikes out, without Q's consent, the endorsements by ‘O' and P'. In the light of the above provision of law and facts of the question, "M' is not entitled to recover anything from ‘Q’.
Q2. A is a payee and holder 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 the bill of exchange, is entitled to recover the payment from A or B or C. (3 Marks) [Dec 21]
Answer:
According to section 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 endorser's signature a direction to pay to any other person as endorsee, convert the indorsement in blank into an indorsement in full; and the holder does not thereby incur the responsibility of an endorser.
According to section 55, if a negotiable instrument, after having been indorsed in blank, is indorsed in full, the amount of it cannot be claimed from the endorser in full, except by the person to whom it has been indorsed in full, or by one who derives title through such person.
As per the facts of the question and above-mentioned provisions of the Negotiable Instruments Act, 1881, D as the bearer of the Bill of Exchange, 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.
Q3. Referring the provisions of the Negotiable Instruments Act, 1881 give the answer or the following.
(i) 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? Nov 19 4 Marks
(ii) Ankit draws a cheque for Rs. 2,000 and hands it over to Shreya by way of gift. Whether Shreya is a holder in due course? (4 Marks) [Dec 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
(a) which alters the business effect of the instrument if used for any business purpose
(b) which causes it to speak a different language in legal effect form that which it originally spoke or which changes the legal identity or character of the instrument.
The following alteration are specifically declared to be material: any alteration of (i) the date, (ii) the sum payable, (iii) the time of payment, (iv) the place of payment, or the addition of a place of payment.
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 above 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.
Person to be called as a holder: As per section 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.
Person holder in due course: 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 there of (if payable to order) before the amount mentioned in it
became payable, and without having sufficient cause to believe that any defect existed in title of the person from whom he derived his title.
In the given case, Ankit draws a cheque for Rs. 2,000 and hands it over to Shreya by way of gift. Hence, Shreya can be termed as a holder because she has a right to possession and to receive the amount due in her own name.
But she cannot be termed as a holder in due course.
Q4. 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 Rs. 3,000 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. (3 Marks) July 21
Answer:
As per section 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 question, A gave to B the blank cheque with 'not negotiable crossing'. B had an authority to fill only a sum of Rs. 3,000 but he filled it up Rs. 5,000. This makes B's title defective. B then endorsed it to C for consideration of 5,000.
In the light of 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).
Q5. Mr. Harsha donated Rs. 50,000 to an NGO 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 "stop payment" 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 file a case against Harsha. Advise Mr. Harsha about the course of action available under the Negotiable Instruments Act, 1881. (3 Marks) July 21
Answer:
In the given instance, Mr. Harsha donated Rs. 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.
Section 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.
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. Therefore, he is not liable for the donated amount which is not honoured by the bank to the NGO.
Q6. Examine the following 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 04-01-2021, if presented on 01-01-2021.
(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. (3 Marks) July 21
Answer:
(i) The bill of exchange is drawn, mentioning expressly as payable on demand'. The bill will be at maturity for payment on 04-1-2021, if presented on 01-01-2021: 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 section 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.
Q7. Referring to the provisions of the Negotiable Instruments Act, 1881, examine the validity
of the following:
A Bill of Exchange originally drawn by R for a sum of Rs.10,000 but accepted by S only for Rs. 7,000. (3 Marks) [Jan 21]
Answer:
As per the provisions of Section 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 the above section states that an acceptance is qualified where it undertakes the payment of part only of the sum ordered to be paid.
In view of the above provisions, the bill, which has been drawn by R for Rs. 10,000/-, has been accepted by S only for 7,000/-. It is a clear case of qualified acceptance, which may either be rejected by R or he may give assent to the acceptance of Rs.7,000/- only
Q8. A promissory note specifies that three months after, A will pay Rs. 10,000 to B or his order for value received. It is to be noted that no rate of interest has been stipulated in the promissory note. The promissory note falls due for payment on 01.09.2019 and paid on 31.10.2019 without any interest. Explaining the relevant provisions under the Negotiable Instruments Act, 1881, state whether B shall be entitled to claim interest on the overdue amount? (3 Marks) [Jan 21]
Answer:
When no rate of interest is specified in the instrument: As per the provisions of Section 80 of the Negotiable Instruments Act, 1881, when no rate of interest is specified in the instrument, interest on the amount due thereon shall, notwithstanding any agreement relating to interest between any parties to the instrument, be calculated at the rate of eighteen per centum per annum, from the date at which the same ought to have been paid by the party charged, until tender or realization of the amount due thereon, or until such date after the institution of a suit to recover such amount as the Court directs.
In the given question, the promissory note falls due for payment on 1.9.2019 and was paid on 31.10.2019. The note does not mention any rate of interest, hence interest will be charged @ 18% p.a.
Thus, B shall be entitled to claim interest on the overdue amount for the period from 01.09.2019 to 31.10.2019, @ 18% p.a.
Q9. Gireesh, a legal successor of Ripun, the deceased person, signs a Bill of Exchange in his own name admitting a liability of Rs. 50,000 i.e. the extent to which he inherits the assets from the deceased payable to Mukund after 3 months from 1st January, 2019. On maturity, when Mukund presents the bill to Gireesh, he (Gireesh) reítuses to pay for the bill on the ground that since the original liability was that of Ripun, the deceased, therefore, he is not liable to pay for the bill.
Referring to the provisions of the Negotiable Instruments Act, 1881 decide whether Mukund can succeed in recovering 50,000 from Gireesh. Would your answer be still the same in case Gireesh specified the limit of his liability in the bill and the value of his inheritance is more than the liability? (4 Marks) [Jan 21]
Answer:
Liability of a legal representative (Section 29 of the Negotiable Instruments Act, 1881): A legal representative of a deceased person, who signs his name on a promissory note, bill of exchange or cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him.
Thus, in the absence of an express contract to the contrary, the liability of a legal representative is unlimited. However, a legal representative may, by an express agreement, limit his liability to the extent of the assets received by him.
In the light of the stated provision, Mukund can succeed in recovering 50,000 from Gireesh as he has admitted liability of 50,000 i.e. to the extent of the assets received by him from the Ripun, the deceased.
Yes, the limit of liability specified in the bill by Gireesh, will remain same even if value of his inheritance is more than the liability, in case he specified the liability by an express agreement.
Q10. State with reasons whether each of the following instruments is an Inland Instrument or a Foreign instrument as per The Negotiable Instruments Act, 1881:
(i) 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.
(ii) 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.
(iii) 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.
(iv) 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. (4 Marks) [Nov 20]
Answer:
"Inland instrument" and "Foreign instrument" [Sections 11 & 12 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 an inland instrument.
Any such instrument not so drawn, made or made payable shall be deemed to be foreign instrument.
Following are the answers as to the nature of the Instruments:
(i)In first case, Bill is drawn in Delhi by Ram on a person (Shyam), a resident of Jaipur (though accepted to be payable in Thailand after 90 days) is an Inland instrument.
(ii) In second case, Ramesh draws a bill in Mumbai on Suresh resident of Australia and accepted to be payable in Chennai after 30 days of sight, is an Inland instrument.
(iii) In third case, Ajay draws a bill in California (which is situated outside India) and accepted to be payable in India (Kanpur), drawn upon Vijay, a person resident in India (Jodhpur), therefore the Instrument is a Foreign instrument.
(iv) In fourth case, the said instrument is a Foreign instrument 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.
Q11. Vikram accepts a Bill of Exchange for 50,000 which is an accommodation bill drawn by A on 1st January 2020 to be payable at Mumbai on 1st July 2020. A transfers the bill to B on 1st February 2020 without any consideration. B further transfers it to C on 1st March 2020 for value. Then C transfers it again to D on 1st April 2020 without consideration. D holds the bill till maturity and on the due date of payment he presented the bill for payment but the bill is dishonoured by Vikram.
Discuss the rights of A, B, C and D to recover the amount of this bill as per the provisions of the Negotiable Instruments Act, 1881. (3 Marks) Nov 20
Answer:
According to section 43 of the Negotiable Instruments Act, 1881, a negotiable instrument made, drawn, accepted, indorsed, or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if any such party has transferred the instrument with or without endorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.
In view of the above provisions, A and B have no right to recover the bill amount. But, C, being a holder for consideration and the subsequent party D have right to recover the amount of the bill.
Q12. Ram draws a cheque of Rs.1 lakh. lt 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 Section 9 of the Negotiable Instruments Act 1881. (3 Marks) Nov 20
Answer:
"Holder in due course" [Section 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. Here, Shyam's title is good and bonafide. 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.
Q13. (i) Are the following instruments signed by Mr. Honest is valid promissory Notes? Give the reasons.
(a) I promise to pay D's son Rs. 10000 for value received (D has two sons)
(b) I promise to pay Rs. 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. (3 Marks) Nov 20
Answer:
Promissory Note: As per the provisions of Section 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.
(a) This 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) This is not a valid promissory note as details of the payee are not it and it is not an unconditional undertaking.
(ii) A promissory note cannot be made payable to the bearer (Section 31 of Reserve Bank of India Act, 1934). Only the Reserve Bank or the Central Government can make or issue a promissory note payable to bearer.
Q14. ‘A’ draws a bill amounting ` 5,000 of 3 month's maturity period on ‘B’ but signs it in the fictitious name of 'C'. Bill is payable to the order of ‘C’ and it is duly accepted by 'B'. ‘D’ obtains the bill from 'A' and thus becomes its 'Holder-in-Due course. On maturity ‘D’ presents bill to ‘B’ for payment. Is ‘B’ bound to make the payment of the bill? Examine it referring to the provisions of the Negotiable Instruments Act, 1881. (3 Marks) Nov 19
Answer:
Bill drawn in fictitious name: The problem is based on the provision of Section 42 ofthe Negotiable Instruments Act, 1881. In case a bill of exchange is drawn payable to the drawer's order in a fictitious name and is endorsed by the same hand as the drawer's signature, it is not permissible for the acceptor to allege as against the holder in due course that such name is fictitious.
Accordingly, in the instant case, B cannot avoid payment by raising the plea that the drawer, C is fictitious. The only condition is that the signature of C as drawer and as endorser must be in the same handwriting.
Therefore, in the given case, B is bound to make the payment of the bill to D.
Q15. Ram purchases some goods on credit from Singh, payable within 3 months. After 2 months, Ram makes out a blank cheque in favour of Singh, signs and delivers it to Singh with a request to fill up the amount due, as Ram does not know the exact amount payable by him.
Singh fills up fraudulently the amount larger than the amount payable by Ram and endorses the cheque to Chandra in full payment of Singh's own due. Ram's cheque is dishonoured. Referring to the provisions of the Negotiable Instruments Act, 1881, discuss the rights of Singh and Chandra. (3 Marks) May 2019
Answer:
According to section 44 of the Negotiable Instruments Act, 1881, when the consideration for which a person signed a promissory note, bill of exchange or cheque consisted of 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.
Explanation—The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory note, bill of exchange or cheque stands in immediate relation with the payee, and the indorser with his indorsee. Other signers may by agreement stand in immediate relation with a holder.
In the given question, Singh is a party in immediate relation with the drawer (Ram) of the cheque and so he is entitled to recover only the exact amount due from Ram and not the amount entered in the cheque. However, the right of Chandra, who is a holder for value, is not adversely affected and he can claim the full amount of the cheque from Singh.
Q16. Explain the concept of 'Noting', 'Protest' and 'Protest for better security’ as per the Negotiable Instruments Act,1881. (3 Marks) May 2019
Answer:
Noting: When a promissory note or bill of exchange has been dishonoured by non- acceptance or non-payment, the holder may cause such dishonour to be noted by a notary public upon the instrument, or upon a paper attached thereto, or partly upon each.
Such note must be made within a reasonable time after dishonour, and must specify the date of dishonor, the reason if any assigned for such dishonor, or if the instrument has not been expressly dishonoured, the reason why the holder treats it as dishonoured and the notary’s charges.
Protest: When a promissory note or bill of exchange has been dishonoured by non- acceptance or non-payment, the holder may, within a reasonable time, cause such dishonour to be noted and certified by a notary public. Such certificate is called a protest.
Protest for better security: When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached, before the maturity of the bill, the holder may,
within a reasonable time, cause a notary public to demand better security of the acceptor, and on its being refused, may with a reasonable time, cause such facts to be noted and certified as aforesaid. Such certificate is called a protest for better security.
Q17. 'M' draws bill on 'N'. 'N’ accepts the bill without any consideration. The bill is transferred to 'O' without consideration. 'O' transferred it to 'P' for Rs. 10,000. On dishonour of the bill, 'P' sued 'O' for recovery of the value of Rs. 10,000. Examine whether ‘O' has any right to action against M and N? May 2019 (2 Marks)
Answer:
Negotiable instrument made, etc. without consideration: A negotiable instrument—
➢ made, drawn, accepted, endorsed, or transferred without consideration, or ➢ for a consideration which fails,
creates no obligation of payment between the parties to the transaction.
But if any such party has transferred the instrument with or without endorsement to a holder for a consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.
In the light of the above provisions, in the given instance the bill was drawn, accepted and transferred without consideration by ‘M’ to ‘N’, and from ‘N’ to ‘O’ respectively. Therefore, no obligation of payment is created between the parties. So ‘O’ has no right to action against ‘M’ and ‘N’.
Q18. 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 2019 (2 Marks)
Answer:
Payment of instrument on which alteration is not apparent: 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. As per the provision of Section 89 of the Negotiable Instruments Act, 1881 this is not a material alteration since a bill of exchange where no date of payment is specified will be treated as payable on demand. Therefore, adding the words “on demand” does not alter the business effect of the instrument.
Therefore, this cannot be said to have caused material alteration to the instrument.
Q19. 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 endorsed it to Mr. Parshwanath as the consideration for goods bought by him from Mr. Parshwanath. Mr. Parshwanath encashed the cheque, on the very same day from the drawee bank. Mr. Vyas intimated the drawee bank about the theft of the cheque after three days. Examine the liability of the drawee bank. (4 Marks) Nov 18
Answer:
Cheque payable to order [Section 85 of the Negotiable Instruments Act, 1881]
(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) Whereachequeisoriginallyexpressedtobepayabletobearer,thedraweeisdischarged 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.
As per the given facts, 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 endorsed 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.
According to above stated section 85, the drawee banker is discharged when it has
made a payment against the cheque payable to order when it is purported to be endorsed 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.
Q20. Mr. S Venkatesh drew a cheque in favour of M who was sixteen years old. M settled his rental due by endorsing the cheque in favour of Mrs. A the owner of the house in which he stayed. The cheque was dishonoured when Mrs. A presented it for payment on grounds of inadequacy of funds. Advise Mrs. A how she can proceed to collect her dues. (4 Marks) Nov 18
Answer:
Capacity to make, etc., promissory notes, etc. (Section 26 of the Negotiable Instruments Act, 1881): Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.
However, a minor may draw, endorse, deliver and negotiate such instruments so as to bind all parties except himself.
As per the facts given in the question, Mr. S Venkatesh draws a cheque in favour of M, a minor. M endorses the same in favour of Mrs. A to settle his rental dues. The cheque was dishonoured when it was presented by Mrs. A to the bank on the ground of inadequacy of funds. Here in this case, M being a minor may draw, endorse, deliver and negotiate the instrument so as to bind all parties except himself. Therefore, M is not liable. Mrs. A can, thus, proceed against Mr. S Venkatesh to collect her dues.
Q21. What are the circumstances under which a bill of exchange can be dishonoured by non- acceptance? Also, explain the consequences if a cheque gets dishonoured for insufficiency of funds in the account. (5 Marks) Nov 18
Answer:
As per section 91 of the Negotiable Instruments Act, 1881, a bill may be dishonoured either by non-acceptance or by non-payment.
Dishonour by non-acceptance may take place in any one of the following circumstances:
(i) When the drawee either does not accept the bill within forty-eight hours (exclusive of public holidays) of presentment or refuse to accept it;
(ii) Whenoneofseveraldrawees,notbeingpartners,makesdefaultinacceptance;
(iii) When the drawee makes a qualified acceptance;
(iv) When presentment for acceptance is excused and the bill remains unaccepted; and
(v) When the drawee is incompetent to contract.
Dishonour of Cheque for insufficiency, etc. of funds in the account: As per section 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.
Q22.
(1) Mr.B is a holder in due course as per the Negotiable Instrument Act, 1881?
(2) Mr.B is entitled to receive the amount of ` 11,000 from the bank? 4 Marks May 18
Answer:
According to section 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 ` 11,000 and gives to Mr. B by way of gift.
(i) Mr. B is holder but not a holder in due course since he did not get the cheque for value and consideration.
(ii) Mr. B’s title is good and bonafide. As a holder he is entitled to receive ` 11,000 from the bank on whom the cheque is drawn.
whether -
Mr. V draws a cheque of ` 11,000 and gives to Mr. B by way of gift. State with reason
Q23. Bholenath 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? (4 Marks) May 18
Answer:
As per the facts stated in the question, Bholenath (drawer) after having issued the cheque, informs Surender (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 Surender.
Section 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 f or 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 Section 139 of the Negotiable Instruments Act, 1881 follows and merely because the drawer issues a not ice thereafter to the drawee or to the bank for stoppage of payment, it will not preclude an action under Section 138.
Also, Section 140 of the Negotiable Instruments Act, 1881, specifies absolute liability of the drawer of the cheque for commission of an offence under the section 138 of the Act. Section 140 states that it shall not be a defence in a prosecution for an offence under section 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 section.
Accordingly, the act of Bholenath, i.e., his request of stop payment constitutes an offence under the provisions of the Negotiable Instruments Act, 1881.
Q24. State the rules laid down by the Negotiable Instruments Act, 1881 for ascertaining the date of maturity of a bill of exchange. [5 Marks] May 18
Answer:
Ascertaining the date of maturity of a Bill of Exchange: 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 (Section 22 of Negotiable Instruments Act, 1881). 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.
When a bill is made payable at stated number of months after date, the period stat ed 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 (Section 23).
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 (Section 23).
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 (Section 24).
Three days of grace are allowed to these instruments after the day on which they are expressed to be payable (Section 22).
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 (Section 25).
Q25. Rama executes a promissory note in the following form, 'I promise to pay a sum of RS.10,000 after three months'. Decide whether the promissory note is a valid promissory note. (3 Marks) [MTP OCT 21]
Answer:
The promissory note is an unconditional promise in writing. In the above question the amount is certain but the date and name of payee is missing, thus making it a bearer instrument. As per Reserve Bank of India Act, 1934, a promissory note cannot be made payable to bearer – whether on demand or after certain days. Hence, the instrument is illegal as per Reserve Bank of India Act, 1934 and cannot be legally enforced.
Q26. Mr. Amna draws a cheque of Rs. 11,000 and gives to Mr. Babita by way of gift. State with reason whether
(1) Mr. Babita is a holder in due course as per the Negotiable Instrument Act, 1881?
(2) Mr. Babita is entitled to receive the amount of Rs. 11,000 from the bank? (3 Marks) [MTP NOV 21]
Answer:
According to section 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 (f 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 instant case, Mr. Amna draws a cheque of Rs. 11,000 and gives to Mr. Babita by way of gift.
Hence,
(1) Mr. Babita is holder but not a holder in due course since he did not get the cheque for value and consideration.
(2) Mr. Babita's title is good and bonafide. As a holder he is entitled to receive Rs. 11,000 from the bank on whom the cheque is drawn.
Q27. What are the parties to a bill of exchange? (3 Marks) MTP NOV 21
Answer:
The parties to a bill of exchange are:
1. Drawer: The maker of a bill of exchange.
2. Drawee: The person directed by the drawer to pay is called the 'drawee'. He is the person on whom the bill is drawn. On acceptance of the bill, he is called an acceptor and is liable for the payment of the bll. His liability is primary and unconditional.
3. Payee: The person named in the instrument, to whom or to whose order the money is, by the instrument, directed to be paid.
Q28. Discuss with reasons, whether the following perSons can be called as a 'holder under the Negotiable Instruments Act, 1881:
(1) Megha, who finds a cheque payable to bearer, on the road and retains it.
(2) Bob, who steals a blank cheque of Alpa and orges Alpa's signature. (4 Marks) MTP NOV 21 Answer:
Person to be called as a holder: As per section 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 cases-
(1) No, Megha is not a holder of the Instrument though she is in possession of the cheque, so is not entitled to the possession of it in his own name.
(2) No, Bob is not a holder because he is in wrongful possession of the instrument.
Q29. Mr. X is the 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 InstrumentsAct, 1881 and also state whether Mr. Z can claim the privileges of holder-in-due course. (3 Marks) Nov 19
Answer:
Forgery confers no title and a holder acquires no title to a forged instrument. Thus, wherea 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 the such instrumentremains 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 ifheispurchaserforvalueandingoodfaith,cannotacquiretherightsofaholderinduecourse. Therefore, Mr. Z, acquires no title on the cheque.
Q30. What are the essential characteristics of Negotiable Instruments? (3 Marks) MTP OCT 21
Answer:
Essential Characteristics of Negotiable Instruments
1. It is necessarily in writing.
2. It should be signed.
3. It is freely transferable from one person to another. 4. Holder's 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.
Q31. Discuss with reasons, in the following given conditions, whether 'M can be called as a "holder under the Negotiable Instruments Act, 1881:
(1) M the payee of the cheque, who is prohibited by a court order from receiving the amount of the cheque.
(2) 'M the agent of 'Q' is entrusted with an instrument without endorsement by Q' who is the payee. (4 Marks) MTP OCT 21
Answer:
Person to be called as a holder: As per section 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 cases-
(1) M 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.
(2) No, 'M' 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.