Negotiable instrument CA_IPCC students

© 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal
The Negotiable Instruments
Act 1881
Presented By-:
CA. Mayank Mittal
ACA, PGDBA, B.com
1

Learning Objectives
1
2
3
4
5
6
7
8
9 • Discharge of Parties
• Negotiation & Assignment
• Accommodation Bills
• Liabilities of Parties
• Types of Instruments
• Cheques
• Bills of Exchange
• Promissory Note
• What is a Negotiable Instrument?
© 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 2

According to Section 13(i) “ a negotiable instrument means a promissory note, bill
of exchange or cheque
payable either on order or to bearer”.
DEFINATION
It is an instrument- which is transferable (Indefinite times) by delivery, like cash, and
is also capable of being sued upon by the person holding for the time being.
Characteristics
 It is freely transferable
 Better title (even though title of Transferor is defective)
 Right to sue
 A negotiable instrument can be transferred any number of times till its maturity
 Written & Signed
 NI can be made in favour of one payee or more than one either singly or jointly.
3

Presumptions
1. Consideration : Every negotiable instrument is deemed to have been drawn and
accepted , endorsed, negotiated, or transferred for consideration
2. Date : Every negotiable instrument must bear the date on which it is made or
drawn
3. Acceptance : Every Bill of exchange was accepted within a reasonable time after
the date mentioned therein and before the date of its maturity
4. Transfer : Every transfer should be made before the expiry.
5. A Lost NI is assumed to be dully signed and stamped.
6. Sequence/order of endorsements should be noted.
4

In nutshell
either by delivery or by an endorsement & delivery.
which is transferable from one person to another
specified in it -and-
entitling a person to a sum of money
a written & signed document
A Negotiable Instrument is

Definition- “ A promissory note is an instrument in writing (not being a bank note or
currency note) containing an unconditional undertaking signed by the maker, to pay a
certain sum of money only to , or to order of a certain person, or to the bearer
of the instrument.” -------Sec. 4
The person who makes the promise to pay is called the Maker. He is the debtor and must sign
the instrument. The person who will get the money (the creditor) is called Payee.
Promissory Note
Essentials Promissory Note
1 • It must be in writing
2 • Promise to pay
3 • Unconditional Promise
4
5
6 • Payee must be certain.
• Certainty about maker & amount
• It must be signed & Stamped
7 • The payment must be in legal money 6

Specimens of Promissory Notes
 “ One year after date I promise to pay B or order Rs.
500.” ---- Sd/X.Y.
Date…………
 “ On demand I promise to pay A.B of No.37, College
Street or order Rs1000(Rupees one thousand only) with
interest at 8 percent per annum, for value received in
cash.” Sd/X.Y
Date…………………
Address……………….
 “ I acknowledge myself to be indebted to B in Rs. 1000 to
be paid on demand, for value received.”
Sd/X.Y

Bill of Exchange
“ A Bill of Exchange is an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of a certain person or to the bearer of the
instrument.” ----Sec. 5
Parties to bill of exchange :
Drawer – The person who makes/orders to pay bill of exchange.
Drawee – The person who is directed to pay on bill. On acceptance he
becomes acceptor.
Payee – The person to whom the payment is to be made.
Drawer & Payee can be the same person.
X sells goods worth Rs. 2000 to Y & allow him 3 months time to pay the price. X then
draws a bill on Y “ Three months after date, pay to my order the sum of Rs. 2000 for
value received”. X is drawer . Y is Drawee.
8

Essentials of a Bill of Exchange
Certainty regarding amount
Certainty regarding parties
Duly signed and Stamped
Unconditional
Order to pay
In writing
Money Only
It should be noted
that neither a PN
nor a BE can be
made payable to
Bearer on
demand
9

Cheque
Section 6, defines it as “ A cheque is a bill of exchange drawn on a specified
banker & not expressed to be payable otherwise than on demand”.
It is always drawn on a bank
It is payable to bearer on demand
Parties To Cheque:
1. Drawer – who makes the cheque
2. Payee – to whom payment is to be made
3. Drawee – Bank .
Essentials
 Writing
 Express Order To Pay
 Definite & Unconditional
 Signed
 Sum must be Certain
 Parties must be Certain,
 Always drawn on bank
 Payable on Demand
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Basis Bill Of Exchange Cheque
Validity Period NoValidity Period 3 Months
Stamping Must be Stamped Need not to be Stamped
Drawee Any person including Bank Only bank
Acceptance Required Not Required
Crossing No Crossing Can be crossed
Payable on Demand Can’t be payable to bearer on
Demand
Always payable on Demand
Liability of Drawer My be Primary or secondary Always Primary
Days of Grace Allowed Not allowed
Notice of dishonour: A notice of dishonour is
required
Notice of dishonour is not
necessary.
Criminal Liability Doesn’t Arise Arise
11

Types of Negotiable Instrument
Time Instruments
An instrument payable after a fixed time or on specified date is termed as time
instrument. An instrument payable after happening of a certain event is also called
as time instrument. E.g payable on 10th Dec’14 or 9 months from now
Demand (at sight) Instruments
When no time of payment specified, it is payable on demand. When it is expressed to
be payable on demand or at a sight or presentation. For e.g Cheque is always payable
on demand
Order Instrument
When it is expressed to payable to a particular person or on his order to a particular
person or payable to particular person on his order.
12

Bearer Instruments
An NI is said to be a bearer instrument if it is expressed to be so payable; or
When the only or last endorsement is in blank.
A minor can be a party to a Negotiable Instrument but his Liability will be NILL
Whiile determining the maturity date for BOE, add 3 days as Grace period. If afterr
adding 3 days the day falls on public day then ek kadam peeche le (preceeding day) and
if falls on day which achank se holiday hoo jaye toh ek kadam aage le le (Succeding
day) . For eg if it falls on Gandhi jayanti then consider maturity date as 1-oct and if it falls
on 10th jan and us din danga ho jata hai taab maturity date will be 1 day succedding that
is 11th Jan.
Inland Instrument- Instrument which is drawn in India and is payable to a citizen in
India. Other than this Instrument every Instrument is Foreign Instrument.
Least but thing to remember
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NI made , transferred without Consideration
Ram ko paise ki jarorat thi usne shyam ko bola, shyam ne apna dimag lagaya aur ek
Promissory note Ram ko free fund mai de diya. Ram ne phr who promissionary note
lakshman ko free mai diya….laxman ne bhart ko free mai diya…aur bharat ne ravan ko
apna karz chukane ke liye de diya….Abhi tak tak free mai game chal raha tha lkn bharat
bha sahab ne sab gud gobad kar diya…. Abhi tak kisi ki koi liability nhi thi…lkn bharat ke
karnaaome ki wajah se sab ki liabilty arise ho gayi….Let see how-
If NI is drawn, accepted, transferred or endorsed without any consideration it creates
no lliability between the parties
BUT
If any party in the chain passes on NI for a consideration then such holder and every
holder thereon may recover the amount due on instrument from the Transferor or
Prior Parties to Transaction.
Mr. A draws a bill (payable to himself) on Mr. B, Mr. B, accepts the bill without
consideration just to accommodate Mr. A to enable X to raise money from market by
negotiating the bill in the market. This is accommodation bill.
Though Mr. B accepts the bill, Mr. A is primary liable to the bill. He can not demand
amount from Mr.B
However If Mr. A transfer the bill, after maturity to Z for good consideration, and Z
becomes the holder in good faith- Z is entitle to recover the amount
14

45
All benefits of holder in due course
Liability for subsequent holder for value
No obligation for payment
No creditor-debtor relation
No consideration
In Nutshell

Partial Absence Failure of Money Consideration
If NI is made or transferred for a money which is initially not mentioned on it or it has
failed in part subsequently then the party standing in immediate relation with such signer
is entitled to receive from a sum which is proportionately reduced.
Shyam ne aapko bola ki aapke mere upar 500/- udhar hai pichle ek saal se …apko yaad
nhi tha aapne kaha ha hoga…sur usse blank cheque de diya…lkn baad mai aapko yaad
aaya ki aap usse 300/- rupay ek baar de chuke ho…apne cheque dishonour kara diya…
Shyam ne aapko Sue kiya…but u proved that actual amount due was Rs. 200/- only
then Mr. Shyam will be liable for remaining Rs. 200/- only.
Inchoate Instrument
It is an instrument that is signed and duly stamped but otherwise wholly or
partially blank.
The person signing such Document delivers it to another person.
Impact of this Instrument- Only Holder in Due Course can recover anything in excess
that intended to be nt exceeding the amount covered by Stamp.
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Example of Inchoate Stamped Instrument
Here Z is entiled to
recover full
amount of the
instrument
because he is
HDC. But Y, being
a holder, can not
recover the
amount because
he filled in the
amount in excess
of his authority
Mr. X signs his
name on a blank
and stamped
instrument and
gives to Y with an
authority to fill up
as a note for a sum
of Rs 2000 only.
But Y fills it for Rs
20000 and then
transfers it to Z for
a consideration of
Rs 20000 who
takes
it in good faith.
30© 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 17

Negotiation Sec- 14
Negotiation is a transfer of an instrument from one person to another in such a manner
as to express title & to represent the transferee the holder thereof. In simple
words Negotiation means transfer of a NI by one person to another in order to make the
transferee the holder of the instrument.
Negotiation by delivery- Transfer of Bearer Negotiable Instrument by delivery which
should be Voluntary.
Negotiation by Endorsement & Delivery- An Order instrument can be negotiated
only by way of Endorsement & Delivery.
After Effect of Endorsement-
1. Property is transferred to the endorsee
2. Endorsee get right to negotiate the instrument, sue on instrument
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When a maker or holder writes the person’s name on the face or back of the
instrument or on the slip of the paper annexed to NI
&
puts his signatures thereto for the purpose of negotiation, it is called ‘endorsement’.
For eg- When an employer signs a check, they are endorsing the transfer of money
from the business accounts to the account of the employee.
Endorsement Sec- 15
Essentials of valid endorsement
1. On the back or face of the instrument. i.e Writing
2. Must be made by maker or holder. i.e Prepared by Holder
3. Must be properly signed by the endorser.i.e Signed
19

Kinds of endorsement
1. Blank and general endorsement – where endorsee simply puts his signature on
the back of the instrument without writing name of the person in whose favor the
instrument is endorsed (Blank) and where it puts the name of person then it is
General Endorsement.
2. Special or full endorsement – An endorsement with the direction to pay amount
mentioned in the instrument to a specified person or his order & the endorser
writes his signature under it.
3. Partial endorsement – When an endorser is willing to transfer to an endorsee only
a part of the amount of the instrument. Such an endorsement does not operate
as a negotiation of the instrument. Not Valid Now
4. Restrictive endorsement – An endorsement is said to be restrictive if it prohibits or
restricts the further negotiability of the instrument. The holder of such an
instrument can only receive the payment but he cannot negotiate it further. An
instrument can be made restrictive only by expressed words.
5. Conditional endorsement – It limit the liability of the endorser. E.G. – “ Pay A or
order on his marrying B”.
20

Negotiation Back- sec 90
If a NI is negotiated by the Holder but the Endorser again becomes the holder of
Such Negotiable Instrument again then it called Negotiation Back. For e.g
A  B B  C C  D D  B
Here B is the person who is the prior party to the Instrument.
The Holder cannot enforce payment against an Intermediary party to whom he was
previously liable thus B can not sue C or D but it can sue A
Assignment of a NI means transfer of ownership of the instrument from one person to
another (assignor to assignee).
Assignment
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Basis Negotiation Assignment
Applicable Act Negotiable Instrument act’1881 Transfer of Property Act
Meaning Negotiation means transfer of a
NI by one person to another in
order to make the transferee the
holder of the instrument.
Assignment of a NI means
transfer of ownership of the
instrument from one person to
another (assignor to assignee).
Scope For Transferring NI only For Transferring Right
Notice No Notice Required Notice must be given by Assignee to
Debtor
Stamp Duty No Stamp Duty Required Stamp Duty Required
Presumption It is Presumed that every
Negotiation is made for some
Consideration.
No such Presumption.
Manner It can be negotiated by way of
delivery or order or both
Valid only if it is made in Writing and
Signed
Burden of Proof The Other Party has to prove that
negotiation was without any
consideration
The Assignee has to prove that there
was some consideration.
22

Holder-sec 8
The holder of a N.I. means any person entitle to the possession of the instrument
in his own name and to receive the amount thereon from the parties liable
thereto.
Basically we can say that
1- He must be entitled to Possession of Negotiable Instrument in his own name
2- He must be entitled to Receive or recover the amount due on such instrument.
A Holder in Due Course means a holder- who takes the instrument bona fide- for
value -before it is overdue, and without any notice of defects in the title of
the person, who transferred it to him.
Holder in Due Course-sec 9
Basis Holder Holder in Due Course
Consideration Not Necessary Only if he obtains NI for
Consideration
Maturity Before or After Maturity Only before Maturity
Right to Sue Cannot sue all prior parties Can Sue all the prior Parties
Privileges Less Privileges' than HDC More Privileges than Holder
Good Faith Holder even if he obtains NI other
than in Good Faith
HDC only if he obtains NI in good
Faith
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Privileges of a Holder in Due Course**IMPT
 A Holder who derives title from HDC has the same right as that of HDC. (Sec 53)
Every prior party to NI is liable to a HDC. (Sec 36)
HDC can claim full amount of the NI (Not exceeding amount covered by Stamp) even
though such amount is in excess of the amount authorised by the person delivering an
Inchoate NI (Sec 20)
 No Prior party can allege that NI was delivered conditionally or for a special purpose
only. (Sec 46)
 No prior party can set up a defence that the NI was drawn, made or endorsed by him
without any Consideration. (Sec 43)
 The Person liable in NI cannot set up against the HDC the defences that the
instrument had been lost or obtained from the former by means of an offence or fraud or
unlawful consideration. (Sec 58)
24

Crossing of a cheque is a unique feature associated with a cheque affecting to a certain
level the responsibility of the paying Banker and also its negotiable Character.
Crossing of a Cheque is a direction to a particular Banker by the Drawer that
Payment should not be made across the Counter. The payment on the crossed
Cheque can be collected only through a Banker.
Crossing of the Cheque is affected by drawing two parallel Transverse lines .
The Cheque that is not crossed is an open Cheque.
Crossing of Cheque
Types of Crossing
1. General Crossing:- which bears across its face the words “ & co.” or the words
“not negotiable”. For general crossing two transverse lines on the face of cheque
are essential. The paying banker shall pay only to a banker. There are two sloping
parallel lines, marked across its face
25

Special or Restrictive Crossing :- When a particular bank's name is written in
between the two parallel lines the cheque is said to be specially crossed. Where a
cheque bears across its face an addition the name of banker either with or without the
words “ not negotiable”. It contains:
The name of the banker across the face of cheque.
With the words “ not negotiable”
In addition to the word bank, the words "A/c. Payee Only", "Not Negotiable" may also be
written. The payment of such cheque is not made unless the bank named in
crossing is presenting the cheque. The effect of special crossing is that the bank
makes payment only to the banker whose name is written in the crossing. Specially
crossed cheques are more safe than a generally crossed cheques.
26

Why Crossing of Cheque is being used
 The important usefulness of a crossing cheque is that it cannot be covered at the
counter but can be collected only by a bank from the drawee bank.
 Crossing provides a protection and safeguard to the owner of the cheque as by
securing payment through a banker it can be easily detected to whose use the
money is received. Where the cheque is crossed the paying banker shall not pay it
except to a banker.
 In case of not negotiable crossing the person holding such a cheque gets no better
title than that of his transfer and cannot suggest a better title to his own transferee. In
case of 'account payee' only crossing, a direction is given to the collecting banker to
collect cheque and to place the amount to the credit of the payee only.
 A special crossing makes the cheque more safe than a general crossing because the
payee or holder cannot receive payment except through the banker named on the
cheque.
27

Protection to Paying Banker- Sec 85
If Cheque is Crossed (Special or General)- Payment is made in due Course and
payment is made to the Banker.
If Cheque is Payable on Order or to the Bearer- Payment is made on due Course
notwithstanding of the fact that any endorsement subsequent turns out be Forgery.
Protection to Collecting Banker Sec 131 IMPT
A banker who has in good Faith and without Negligence received payment for a
customer of a cheque crossed generally or specially to Himself SHALL NOT be
liable for any Liability towards the True owner of Cheque in case the Cheque Proves
Defective.
It is the duty of the banker to pay
the cheque provided he has
sufficient funds of drawer in his
hands and the funds are
properly
applicable to such payment.
If the banker refuses payment
without any sufficient cause
being shown, he must
compensate the drawer any
loss
caused by such improper refusal
The drawee of
a cheque is
always a
banker.
Liability of Drawee of Cheque Sec 31
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Mandatory Grounds for Bank to Dishonour Cheque
Stop Payment
Death of Customer
Post Dated Cheque
Insolvency of Customer
Defect in Title Of Holder
Undated Cheque
Loss of Cheque
Signature Mismatch
Stale Cheque
Closed Bank Account
Insanity of Customer
Altered Cheque
Defect in Title of Holder
OPTIONAL Grounds for Bank to Dishonour Cheque
 Insufficient Funds
 Presentation at Different Branch
 Presentation after Banking Hours
 Funds Not Applicable.
If the drawer has sufficient fund in his bank Account and issues a cheque in favour of
Creditor and the Creditor fails to present the cheque for payment within reasonable
time and in the meanwhile bank fails (Insolvent) then the Creditor cannot recover the
amount from the Drawer.
For e.g Mr Ram issue cheque of Rs. 1,00,000 to Miss Sita . Mr Ram had Sufficent Fund
in the account with Bank.The Cheque was not presented within reasonable time to the
Bank for paymment and the bank in themean time become insolvent. Thus is yhis case
Miss Sita cannot recover the money from Mr. Ram.
Non Presentation of Cheque within Reasonable Time Sec 84
29

Liability of an Endorser (Sec.35)
Every endorser who
endorsed an instrument
before its maturity is
liable to the parties that
are subsequent to him.
And his liability arises
only if there is a default
by the party who is
primary liable to pay the
instrument on maturity.
30

Liability of Acceptor of a Bill
42)
Drawn
in a Fictitious Name (Sec
Suppose: X uses a fictitious name in drawing a bill upon
Z. Then he endorses the bill in the same fictitious name
to Y, who presents the bill to Z for acceptance.
Now if Z accepts the bill, he will be liable for payment in
spite of fact that the name of drawer is fictitious.
31

Complaint within 1 month to Court
Notice- demanding payment within 15 days;
Cheque must be present within validity period;
Payment should be for discharge of liability;
Dishonour due to Insufficient funds;
Bouncing of Cheque sec 138 to 142
Dishonour of Cheque due to Insufficient Fund is an offence. The Drawer is
Punishable with Maximum Imprisonment of 2 Years or Amount equal to the two
times(Maximum) of Cheque amount or both. However in order to attract following
Condition need to be satisfied-
If Payment is made otherwise than to Discharge Liability then it will not attract liability u/s
138 . For e.g. a person gift a cheque of Rs. 100000 s a gift and later on the Cheque get
bounced. Then it will not attract liability under this section.
32

Material Alteration- sec 87
An alteration (Cherkhani karna) is called as material alteration if it alters-
• The Legal Effect of NI
• The Rights and Liabilities of any of the parties of to a NI.
Alteration can be-
 Crossing of Cheque
 Filling Blanks of Inchoate Instrument
 Conversion of Blank Endorsement into Full.
 Conversion of Bearer Instrument into Order Instrument.
 Conversion of General Crossing into Special Crossing.
Effects-
All parties to the NI not consenting to the material alterations are discharged and jisne
kiya who gaya…
For eg- A bill payable to Mr A was converted to Payable to Mr A & Mr. B
The Holder of Bearer Cheque convert it into A/c Payee Cheque
33

Acceptance- sec 7
When Drawee draws a bill and the Drawee delivers it to the holder of the bill or gives
notice of acceptance to the holder of the bill then it is termed as Acceptance.
It should be
 Written
 Signed
 Delivery or Intimation to the holder that the bill has been accepted.
General
Acceptance:
• When the drawee, while accepting the bill, does not attach
any condition or qualification to it, it is called general
acceptance.
Qualified
Acceptance
:
• The acceptance is qualified when it is given subject to
some conditions or qualifications
The Holder of the bill may object to the Qualified Acceptance resulting in Automatic
Dishonour of Bill due to Non Acceptance.
If he give his consent to Qualified acceptance then all prior parties not giving consent will
be discharged.
34

Dishonour by Non Acceptance- sec 91
Only Bills of Exchange can be dishonoured by Non Acceptance as BOE only
required Acceptance. Dishonour by Non acceptance means a case where Bill is
presented for acceptance but the same is not accepted. The reasons for the same
can be as follows-
Not accepted by drawee within 48 hours of presentation;
If the bill is not accepted by all the drawees .
Drawee is incompetent to contract.
Drawee is Fictitious Person
Drawee cannot be found even after Reasonable Search
Drawee gives QuaIified acceptance but holder does not give.
If any of the above Instances is satisfied then the holder gets an Immediate right to
Sue all the prior parties before maturity of the bill.
35

Suppose: X uses a fictitious name in drawing a bill upon Z. Then he endorses the bill in the
same fictitious name to Y, who presents the bill to Z for acceptance. Now if Z accepts the bill,
he will be liable for payment in spite of fact that the name of drawer is fictitious.
Liability in case of Fictitious Name sec 42
An acceptor Of BOE which is drawn in FICTITIOUS NAME and
Payable to the Drawer’s Order IS NOT
Relieved from the Liability to any HDC by reason that such name is Fictitious.
Moti moti baate aisa samajha jaye ki Ram ne shyam ke upar bill draw kiya lkn ram ne
apna naam nhi likh kar Sita ka naam kar diya… yeh Bill Sita ke order pe payable tha…
Shyam ne yeh bill accept kar liya….Ram ne yeh bill Ravan ko Endorse kar diya….
Ab Shyam apni laibility se bhaag nhi sakta is fact pe ki yeh bill sita ke farzi naam pe
bana hai…kyk usne yeh bill accept kiya hai…aur ravan ko usse karz chukana padega
36

Rights & Obligations - Finder of Lost Instrument
Endorsee of HDC can also recover the amount.
Holder in due course can recover the amount;
True owner can recover the amount;
Finder will not get good title;

Rights & Obligations of Person who had
obtained the instrument by Unlawful Means
The possessor will not
get good title
Holder in due course can
get good title
X steels a bill from
acceptor; X does not get
any good title of it. – If X
collected the proceeds of
bill, the acceptor can
recover it from X–
If X endorses the bill to Y
against value and If Y is
HDC, Y can recover the
money from X but no
from other party

that the acceptance is by writing on the bill.
that the acceptance is for the honour of any party already liable on the bill, and
The acceptor for honour is not already liable on the bill,
Acceptance has been made with the consent of holder,
That the bill has been noted or protested for non acceptance or better security,
Acceptance For Honour sec 108
Acceptance for honour means the acceptance given by some stranger when the
original drawee refuses to accept or to give better security when demanded by a
notary. The stranger may accept the bill of the honour of any party already liable
thereto. Such stranger is called an acceptor for honour or acceptor supra protest
Conditions-
The party who accept the bill for honour will be liable to pay the amount if the person on
whose behalf he accepts the bill and he can recover the same form that party.

Just as a bill may be accepted for the honour of a party to bill, it may also be paid
for the honour of a party liable to pay the bill. After payments he can recover from
that person or any party prior to him.
Payment For Honour sec 108
Notice OF Dishonour Sec 93
Notice Of Dishonour need to be given by the holder or any of the parties to the
instrument. Any party receiving notice must also transmit the same to all prior
parties. Otherwise he can not sue any prior party, if notice has not
transmitted.
Dispensed with by an express waiver,
Party charged would not suffer damage
Party not found after due search,
When drawer is accepter,
Accidental omission,
In the case of a PN which is not negotiable,
Party promises to pay unconditionally.
Cases where Notice for
Dishonour is not Required-
40

To all parties (other than the maker of a note, acceptor of a bill, or drawee of a
cheque) to whom the holder seeks to make liable or to their duly authorized agents
Where there are two or more persons jointly liable as drawer or endorsers, notice to
any one of them is sufficient.
In case of death of person, to legal representative and to official assignee in case of
insolvency (Sec 97).
Notice to Be Given to
Noting
Noting is the process of recording the fact and reasons of dishonour of a NI by the
notary public. It should be done within Reasonable time after dishonour of NI. It is not
mandatory.
The Dishonoured Bill is presented to Notary Official who in Turn again represent it for
acceptance/payment. If the party again refuses then Notary Public records the fact of
Dishonour.
Protest is a formal certificate of dishonour issued by the notary public to the holder
of a bill or note on his demand.
Difference between Noting & Protesting is that noting consists of recording the fact
and reasons of dishonor of NI upon the instrument; whereas Protest is the certificate
as to the fact that instrument has been dishonoured.
Protesting

Discharge of Negotiable Instrument
When the party makes the payment in due course at or after maturity
(u/s78)
,
When the holder cancels the instrument with intention to release the
party.
If it becomes Time Barred- it is Discharged by operation of Law
In the case of Negotiation Back
When the holder releases or renounces his right against the party primarily
on the NI.
42

Discharge of One Or More Parties
By cancellation
By release
By allowing drawee more than 48 hours to accept (Sec 83)
By taking qualified acceptance (Sec 86)
By not giving notice of dishonour
By not presentment for acceptance of bill (Sec 61)
By delay in presenting cheque (Sec 84)
By negotiating back of a bill
43

Hundi
Miadi hundi or
Muddati hundi
Darshani hundi
Shah Jog hundi
Nam Jog hundi
Jokhmi hundi
Dhani Jog
Hundi
Hundi means a BOE drawn in an Local Language.
Payable at Sight
Payable after Specified period Of Time
Payable at Shah
Payable to a Party named in Hundi or to his order.
Hundi Drawn in respect of goods shipped on the vessel and is payable only
when the goods reach their destination.
Hundi Payable to the Bearer.
44

#1: The undertaking contained in a promissory
note, to pay a certain sum of money is----
(a) Conditional
(b) Unconditional
(c) May be conditional or unconditional depending upon the
circumstances
(d) None of the above.
Answer : (b) Unconditional
© 2013 Gurukul CA/CS 45

# 2: Which of these is not a negotiable
Instrumen
t
Act,1881
as per the Negotiable Instrument
(a) Bill of exchange
(b) Delivery note
(c) Bearer Cheque
(d) Share certificate
Answer: (d) Share Certificate

# 3: Which of the following is not a payment in
due course under NI Act 1881?
a) Payment should be made in accordance with the apparent tenor of the
instrument
b) A payment is made on instrument before the date of maturity
c) Payment is made to the possessor of the instrument
d) Payment made in good faith & without negligence
Answer: b) A payment is made on instrument before the date of maturity

#4 : X drew a bill on Y and sent it to Y
for
acceptance. In which of the following
instances, it is a valid acceptance?
a) Y signs on bill and keeps it with him
b) He writes “accepted” on the back of bill but does not put his signature on bill
c) He puts his signature on face of bill and returns it to X
d) He write ‘accepted on the face of bill but does not put his signature
Answer: c) He puts his signature on face of bill and returns it to X

# 5: In which of the following situations could a
bill of exchange not be negotiated?
Answer: d) All of the above
d) All of the above.
c) The amount to be paid is “the amount owing on account."
b) The promise to pay is conditional.
a) The time to pay is not determinable.

#6: X made a note payable to the order of his son Y as a
birthday gift
payable after one month. Y presented the note after 3 months
and X
refused to pay. Can Y sue for payment?
a) Yes, because a note, unlike a cheque, cannot become stale dated
b) Yes, because the note is a negotiable instrument that is required to pay
c) No, because a note, like a cheque, can become stale dated.
d) No, because the note was gratuitous so it is not binding for a lack of consideration.
Answer: d) No, because the note was gratuitous so it is not binding for a lack of consideration

# 7: Which of the following is NOT a part
of
criteria for a holder in due course?
the
a) The instrument is held by a party immediate to the promisor.
b) The instrument is taken by someone, or through someone,
has given consideration for it.
who
c) The instrument is taken complete and regular on its face.
d) The instrument is taken before it is overdue and without notice of
any dishonour.
Answer: a) The instrument is held by a party immediate to the promisor.

# 8: B issued a cheque for Rs 10,000/ in favour of S. B had
sufficient
funds in his account. The cheque was not presented within
reasonable time. In the meantime, bank became insolvent.
a) S can recover money from B
b) B is discharged from his liability.
c) S can recover from official assignee of the bank
d) S can sue B and Bank jointly
Answer: b) B is discharged from his liability

53
Q-1 Explain the essential elements of a promissory note. State, giving reasons,
whether the following instruments are valid promissory notes:
(i) X promises to pay Y, by a promissory note, a sum of ` 5,000, fifteen days after the
death of B.
(ii) X promises to pay Y, by a promissory note, ` 5000 and all other sums, which shall be
due.
(iii) X promises to pay Y after Marriage of Y a sum of Rs. 25000/-
(iv) X tells B that he will pay him Rs. 5000/-.
Q2- What are the essential elements of a valid acceptance of a Bill of Exchange? An
acceptor accepts a “Bill of Exchange” but write on it “Accepted but payment will be made
when I received the payment from third party.” Decide the validity and the impact on the
interim party.
Q3- Examining the provisions of the Negotiable Instruments Act, 1881, distinguish
between a 'Bill of Exchange' and a 'Promissory Note'.
Q4- What do you mean by an acceptance of a negotiable instrument? Examine validity
of the following in the light of the provisions of the Negotiable Instruments Act, 1881:
(i) An oral acceptance
(ii) An acceptance by mere signature without writing the word “accepted”.
(iii) A Qualified Acceptance

54
Q5- A draws and B accepts the bill payable to C or order, C endorses the bill to D and D
to E, who is a holder-in-due course. From whom E can recover the amount? Examining
the right of E, state the privileges of the holder-in-due course provided under the
Negotiable Instruments Act, 1881.
Q6- Discuss with reasons, whether the following persons can be called as a ‘holder’
under the Negotiable Instruments Act, 1881:
(i) X who obtains a cheque drawn by Y by way of gift.
(ii) A, the payee of the cheque, who is prohibited by a court order from receiving the
amount of the cheque.
(iii) M, who finds a cheque payable to bearer, on the road and retains it.
(iv) B, the agent of C, is entrusted with an instrument without endorsement by C, who
is the payee.
(v) B, who steals a blank cheque of A and forges A’s signature.
Q7- State briefly the rules laid down under the Negotiable Instruments Act for
determining the date of maturity of a bill of exchange. Ascertain the date of maturity of a
bill payable hundred days after sight and which is presented for sight on 15th July 2013.
Q8- What do you mean by an endorsement. Briefly explain the types of an endorsement.
Q9- Ram, a major, and Laxman a minor, executed a promissory note in favour of Ravan
Examine with reference to the provisions of the Negotiable Instruments Act, the validity
of the promissory note and whether it is binding on Ram and Laxman

55
Q 10- State, in brief, the grounds on the basis of which a banker can dishonor a cheque
under the provisions of the Negotiable Instruments Act, 1881.
Q 11- X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the
order of Z. The bill is duly accepted by Y. M obtains the bill from X thus becoming its
holder in due course. Can Y avoid payment of the bill? Decide in the light of the
provisions of the Negotiable Instruments Act, 1881.
Q12- A a broker draws a cheque in favour of B, a minor. B indorses the cheque in favour
of C, who in turn indorses it in favour of D. Subsequently, the bank dishonoured the
cheque. State the rights of C and D and whether B, can be made liable?
Q13- Mr. Clever obtains fraudulently from J a cheque crossed ‘Not Negotiable’. He later
transfers the cheque to D, who gets the cheque encashed from ABC Bank, which is not
the Drawee Bank. J, comes to know about the fraudulent act of Clever, sues ABC Bank
for the recovery of money. Examine with reference to the relevant provisions of the
Negotiable Instruments Act,
1881, whether J will be successful in his claim. Would your answer be still the same in
case
Clever does not transfer the cheque and gets the cheque encashed from ABC Bank
himself?

56
Q14- What do you understand by "Material alteration” under the Negotiable Instruments
Act, 1881? State whether the following alterations are material alterations under
the Negotiable Instruments Act, 1881?
(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,
(iii) A bill payable to ' is converted into a bill payable to X and Y
Q15- Promissory note dated 1st February, 2001 payable two months after date was
presented to the maker for payment 10 days after maturity. What is the date of
Maturity? Explain with reference to the relevant provisions of the ‘Negotiable
Instruments Act, 1881 whether the endorser and the maker will be discharged by
reasons of such delay.
Q16- ‘A’ draws a cheque for ` 50,000. When the cheque ought to be presented to the
drawee bank, the drawer has sufficient funds to make payment of the cheque. The bank
fails before the cheque is presented. The payee demands payment from the drawer.
What is the liability of the drawer.
Q 17 (a) A draws a cheque in favour of M ,a minor. M endorses the same in favour of
X. The cheque is dishonoured by the bank on grounds of inadequate funds. Discuss the
rights of X.
(b) 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?
(c) A draws a cheque for ` 100 and hands it over to B by way of gift. Is B a holder in
due course? Explain the nature of his title, interest and right to receive the proceeds of
the cheque.

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