The Negotiable Instruments Act, 1881

Question 1

Essential characteristics of Negotiable Instruments

Answer 1

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 it’s 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

Question 2

Special presumptions as to Negotiable Instruments

Answer 2

1. Of consideration- every NI was made or drawn for consideration
2. As to date- every NI bearing a date was made or drawn on such date
3. As to time of acceptance- every accepted bill of exchange was accepted within a reasonable time after its date and before maturity
4. As to time of transfer- every transfer of NI was made before its maturity
5. As to order of indorsements- indorsements appearing upon a NI were made in the order in which they appear thereon
6. As to stamps- lost promissory note, bill of exchange or cheque was duly stamped
7. As to holder- the holder of a NI is a holder in due course

Question 3

Essential elements of a promissory note

Answer 3

1. Must be in writing
2. Promise to pay: the instrument must contain an express promise to pay
3. Definite and unconditional: the promise to pay must be Definite and unconditional. If it is uncertain or conditional, the instrument is invalid
4. Signed by the maker: the instrument must be signed by the maker otherwise it is incomplete and of no effect. Even if it is written by the maker himself and his name appears in the body of the instrument, his signature must be there
5. Certain parties: when the maker and the payee cannot be identified with certainty from the instrument itself, the instrument even if it contains an unconditional promise to pay, is not a promissory note
6. Certain sum of money: the sum payable must be Certain and must not be capable of contingent additions or subtractions
7. Promise to pay money only: the payment must be in the legal tender money of India

Question 4

The parties to a bill of exchange

Answer 4

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 bill. His liability is primary and conditional.
3. Payee: the person named in the instrument, to whom or to whose order the money is, by the instrument, directed to be paid

Question 5

Promissory note

Answer 5

It 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 only to, or to the order of, a certain person, or to the bearer of the instrument

There is a promise to pay money

There are only 2 parties namely the maker and the payee

Doesnot require any acceptance, as it is signed by the person who is liable to pay

Cannot be made payable to bearer

Question 6

Bill of exchange

Answer 6

It 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

There is an order for making payment

There are 3 parties which are as under the drawer, the drawee and the payee

Needs acceptance from the drawee

Can be drawn payable to bearer. However, it cannot be payable to bearer on demand

Question 7

Cheque

Answer 7

A cheque is a bill of exchange drawn on a specific banker and always payable on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form

Question 8

Cheque in electronic form

Answer 8

Means a cheque drawn in electronic formby using any computer resource, and signed in a secure system with a digital signature (with/without biometric signature) and asymmetric crypto system or electronic signature as the case may be

Question 9

Truncated cheque

Answer 9

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

Question 10

Drawee in Case of need

Answer 10

When in the bill or in any indorsement thereon the name of any person is given in addition to the drawee to be restored to in case of need such person is called a drawee in case of need

Question 11

Not negotiable crossing

Answer 11

This requires writing of words ‘not negotiable’ in addition to the two parallel lines. These words may be written inside or outside the lines.

According to section 130, a person bearing 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.

It is a statutory crossing.

A cheque with such crossing is not negotiable, but continues to be transferable as before

Question 12

Not negotiable + account payee crossing

Answer 12

Protects the drawer cheque in 2 ways

(1) The main feature of Negotiablity is lost i.e. the holder in due course cannot get better title than that of the transferor

(2) the collecting banker must take utmost care to inquire into the title of its customer and satisfy itself that there is no defect in the title of the customer presenting such cheque of collection

Question 13

Parties who may cross a cheque

Answer 13

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 14

Acceptance for honor

Answer 14

When a bill of exchange has been dishonored by non acceptance and any person accepts it for honor of the drawer or of any indorsers, such person is called an acceptor for honor. The payment which he makes is known as “payment of honor “

In other words, it is an undertaking by the third party to accept and pay a bill of exchange that was dishonored either by non- acceptance or by non-payment by the party on whom it was drawn. It is also called acceptance supra protest.

Question 15

How acceptance on honor must be made

Answer 15

A person desiring to accept for honor must, declare that he accepts under protest the protested bill for the honor of the drawer or of a particular indorser whom he names or generally for honor

Question 16

Essentials of valid acceptance for honor

Answer 16

1. the owner must consent to acceptance for honor. The holder cannot be compelled to assent to acceptance for honor
2. the bill must have been noted or protested for the non acceptance or for better security
3. acceptance for honor can be made by a person who is not already liable on the bill. Drawee of the bill when he refuses to accept the bill becomes a stranger. He may therefore accept the bill for honor of any person thereto
4. It must be made by writing on the bill
5. It must be for the whole amount due on the bill
6. Acceptance must be for the honor of any party already liable on the bill
7. Acceptance for honor must be made before to bill is overdue
8. Stranger paying for honor must, before payment, declare before a notary public the party for whose honor he pays and the notary public must have recorded such declaration

Question 17

Holder in due course

Answer 17

In the case of an instrument payable to order, ‘holder in due course’ means any person who become the payee or endorsee of the instrument before the amount mentioned in it became payable

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

Question 18

Holder in due course is required to prove

Answer 18

1. On paying the value of consideration, he became either the possessor of the instrument if payable to order.
2. He had come into the possession of the instrument before the amt due there under became actually payable
3. He had come to possess the instrument without having sufficient cause to believe that any defect existed in the title of the transferors from whom derived his title

Question 19

Distinction between holder and holder in due course

Answer 19

1. A holder may become the possessor or payee of an instrument even without consideration, whereas a holder in due course is one who acquires possession for consideration
2. A Holder in due course as against a holder must become the possessor payee of the instrument before the amount thereon become payable
3. A holder in due course as against a holder must have become the payee of the instrument in good faith I.e., without having sufficient cause to believe that any defect existed in the transferors title

Question 20

Person to be called holder

Answer 20

Sec 8, 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

Question 21

Inchoate instrument

Answer 21

When a person signs and delivers blank or incomplete stamped paper to another, such other is authorized to complete it for any amount not exceeding the amount covered by the stamp. The person signing is liable upon such instrument, in any due course for any amount

Question 22

Fictitious payee

Answer 22

Means a person who is not in existence or being in existence, was never intended by the drawer to have the payment. Where the drawer intends to have the payment, then he is not a fictitious payee and the forgery of his signature will affect the validity of the cheque

Question 23

Bearer instrument

Answer 23

When it is expressed to be so payable to its bearer or when the only or last endorsement on it is an endorsement in blank

Question 24

An instrument is payable to order if

Answer 24

1. When it is payable to the order of a specified person or
2. When it is payable to specified person or his order or
3. When it is payable to a specified person without the addition of the words “or his order” and does not contain words prohibiting transfer or indicating an intention that it should not be transferable
4. When an instrument, either originally or by endorsement, is made payable to the order of specified person and not to him or his order, it is payable to him or his order,at his option. When an instrument is not payable to bearer (I.e., in case of order instrument), the payee must be indicated with reasonable certainty

Question 25

Inland instrument and foreign instrument

Answer 25

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

Question 26

Provision for bills drawn and payable in different countries

Answer 26

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 the indorser by the law of the place where the instrument is made payable.

Question 27

Calculation of maturity of a bill of exchange

Answer 27

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, of presentment.

Question 28

Period of termination of the bill

Answer 28

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

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

Question 29

Calculating the date a bill made payable

Answer 29

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

Question 30

Last day of grace

Answer 30

When the last day of grace falls on a day which is a public holiday, the instrument is due and payable on the next preceeding business day

Question 31

Negotiation by delivery

Answer 31

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 certain event is not negotiable (except in the hands of the holder for value without notice of the condition) unless such event happens

Question 32

Endorsement

Answer 32

The endorsement consists of the dignatof the holder made on back of the Negotiable instrument with the object of transferring the instrument. If there is no space on the instrument the endorsement may be made on a slip of paper attached to it. The attachment is known as “Allonge”

Question 33

Types of indorsements

Answer 33

1. Endorsement in Blank
2. Endorsement in full
3. Restrictive Endorsement
4. Endorsement says recourse
5. Conditional Endorsement
6. Faculties Endorsement
7. Partial Endorsement
8. Sans frais Endorsement

Question 34

Indorsement in blank

Answer 34

Where the indorser just puts his signature without specifying the indorsee, the Indorsement is said to be blank. The effect of such an Indorsement is to render the instrument payable to bearer even though originally payable to order

Question 35

Indorsement in full

Answer 35

Where along with indorser’s signature, the name of the indorsee is specified, the indorsement is called ‘indorsement in full’. Thus, where the instrument states, ‘pay X or order’ and is signed by A, the payee, it constitutes ‘indorsement in full’

Question 36

Bearer instrument-> order instrument

Answer 36

A holder of a negotiable instrument endorsed in blank may, without signing his own name, by writing above the endorsers signature, direct that the payment of the instrument be made to another person. The character of instrument is changed and the instrument cannot be negotiated by mere delivery.

Question 37

Bearer cheque

Answer 37

Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment I due course to the bearer thereof, despite any endorsement whether in blank or full appearing thereon not with standing that any such instrument purported to restrict or exclude further negotiation. In other words, the original character of the cheque is not altered so far as the paying bank is concerned, provided the payment is made in due course.

Question 38

Sans recourse endorsement

Answer 38

By adding the words ‘Sans Recourse’ after the endorsement the endorser declines to accept any liability on the instrument of any subsequent party. Sometimes, when an endorser who so Excludes his liability as an endorser afterwards becomes the holder of the same instrument. In such a case, all intermediate endorsers are liable to him.

Question 39

Sans Frais endorsement

Answer 39

These words when added at the end of the endorsement, indicate that no expenses should be incurred on account of the bill

Question 40

Difference of sans Recourse and sans frais

Answer 40

Any endorser can exclude personal liability by endorsing ‘sans recourse’ I.e. without recourse. However, ‘sans frais’ endorsement indicate that no expenses should be incurred on account of the bill

Question 41

Restrictive endorsement

Answer 41

Such an endorsement has thre effect of restricting further negotiation and transfer of the instrument

Eg:
a. Pay to A only
b. For the account of A only

Question 42

Conditional or qualified endorsement

Answer 42

Such an endorsement combines an order to pay with condition

a. Pay to A on safe receipt of goods

Question 43

D/B discharge of instrument and discharge of party

Answer 43

An instrument is said to be discharged only when the party who is ultimately liable thereon is discharged from liability. Therefore discharge of a party to an instrument does not discharge the instrument itself.

Consequently, the holder in due course may proceed against the other parties liable for the instrument. On the other hand, when a bill has been discharged by payment, all rights there under are extinguished even a holder in due course cannot claim any amount under the bill

Question 44

Modes of discharge from liability on instruments

Answer 44

Three ways from which parties are discharged

1. Discharge by cancellation
2. Discharge by release
3. Discharge by payment

Question 45

Discharge by cancellation

Answer 45

When the name of the party on the instrument is canceled from the instrument by holder or his agent with an intention to discharge him, such party and all subsequent parties, who have a right of recourse against the party whose name is canceled, are discharged from liability to the holder

Question 46

Discharge by release

Answer 46

Where the holder of a negotiable instrument releases any party to the instrument by any method other than cancelation, the party so released is discharged from liability. The party so released and all parties subsequent to him who have a right of action against the party so released are discharged from liability. Thus, the effect of release is the same as that of canceling party’s name

Question 47

Discharge by payment

Answer 47

When payment on an instrument is made in due course, both the instrument and the parties to it are discharged. The payment with respect to the instrument made by any party to the instrument provided it is made on account of the party liable to pay

Question 48

Other modes of discharge of liability that co-exist

Answer 48

1. By the holder allowing the drawee of a bill more than 48 hours to accept
2. By the holder agreeing to a qualified or limited acceptance of bill of exchange
3. By the drawer not duly presenting a cheque for payment
4. By the bill coming to the acceptor’s hands after maturity
5. Discharge by material alteration

Question 49

Essential elements of a valid acceptance

Answer 49

1. Acceptance must be written
2. Acceptance must be signed
3. Acceptance must be on the bill
4. Acceptance must be completed by delivery
5. Where a bill is drawn in sets, the Acceptance should be put on one part only.
6. Acceptance may be either general or qualified

As a rule, acceptance must be general acceptance and therefore, the holder is at liberty to refuse to take a qualified acceptance. Where, he refuse to take it, the bill shall be dishonored bh non- acceptance. But, if he accepts the qualified acceptance, even then it binds only him and the acceptor and not the other parties who do not consent thereto

Question 50

Oral acceptance

Answer 50

One of the essential elements of a valid acceptance is that the account be written on the back and signed by the drawee.

An oral acceptance is not sufficient in law. Therefore, an oral acceptance of the bill doesnot stand to be a valid acceptance

Question 51

Acceptance by mere signature without the word ‘accepted’

Answer 51

The usual form in which the drawee accepts the instrument is by writing the word ‘accepted’, across the face of the bill and signing his name underneath. The mere signature of the drawee without the addition of the words ‘accepted’ is a valid acceptance.

Question 52

Material alteration

Answer 52

An alteration can be called a material alteration if it alters or attempts to alter the character of the instrument and affects or is like to affect the contract which the instrument contains or is evidence of. Thus it totally alters the business effect of the instrument. It makes the instrument speak a language other than that was intended

Question 53

Material alterations that are authorized by the act

Answer 53

1. Filling blanks of inchoate instruments
2. Conversion of blank endorsement into an endorsement in full
3. Crossing of cheque
4. Apparent alteration

Question 54

Material alteration

Answer 54

1. Alteration of date of instrument
2. Alteration of time of payment
3. Alteration of place of payment
4. Alteration of amount payable
5. Conversion of blank endorsement into special endorsement
6. Addition of a new party to an instrument
7. Alteration of one of the Clauses of the instrument containing a penal action

Question 55

Non material alteration

Answer 55

1. Conversion of instrument payable to bearer
2. Conversion of instrument payable to bearer into order
3. Elimination of the words ‘or order’ from an endorsement
4. Addition of the words ‘on demand’ to a note in which no Time of payment is expressed

Question 56

Circumstances of Dishonor by non acceptance

Answer 56

1. When the drawee either doesnot accept the bill within 48 hrs of presentment or refuse to accept it
2. When one several drawers, not being partners, make default in acceptance
3. When the drawee gives a qualified acceptance
4. When presentment for acceptance is excused and the bill remains unaccepted
5. When the drawee is incompetent to contract

Question 57

Notice of dishonor must be given by

Answer 57

1. The holder
2. A person liable on the instrument

Notice of dishonor given by strangers is of no effect. Even a Notice given by a party to the instrument is not valid, if at the time of giving such notice he is not liable thereon.

Question 58

Notice of dishonor must be given to

Answer 58

All parties other than the maker or the acceptor or the drawee whom the holder seeks to make liable

Notice of dishonor to the acceptor of a bill or to the maker of a note or the drawee of cheque is not necessary as they are the parties primary liable upon the instrument and Notice to them will merely be a Notice of fact already know to them

Question 59

Modes of giving Notice of dishonor

Answer 59

1. To a duly authorized agent of the person to whom it is required to be given or,
2. Where he has died, to his legal representative or,
3. Where he has been declared insolvent, to his assignee
4. May be oral or written; may , if written, be sent by post

and may be in any form; but it must inform the party to whom it is given, either in express term or by reasonable in intended, that the instrument has been dishonored, and in what way and that he will be held liable thereon

5. It must be given within reasonable time after dishonor
6. At the ace of business or at the residence of the party for whom it is intended
7. If the notice is duly directed and sent by post and miscarried, such miscarriage does not render the notice invalid

Question 60

No notice of dishonor is necessary if

Answer 60

1. Waiver: when it 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. A waiver by a party to receive notice ensures for the benefit of all parties coming after him.
2. In order to charge the drawer, when he has countermanded payment
3. No damage: when the party charged could not suffer damages for want of notice
4. 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
5. To charge the drawers, when the acceptor is also a drawer
6. In the case of a promissory note which is not negotiable
7. Promise to pay: when the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the instrument

Question 61

Dishonor of cheque for insufficiency, etc. Of funds in the account

Answer 61

Where any cheque drawn by the person on an account maintains by him with a banker for payment is dishonored due to insufficiency of funds, he shall be punished with imprisonment for a term which may extend to two yrs or with fine which may extend to twice the amount of cheque or with both

Question 62

Noting in section 138 shall apply unless

Answer 62

1. Such cheque should have been presented to the bank within a period of 3 months of the date of drawn or within the period of it’s validity, whichever is earlier
2. The payee or holder in due course of such cheque had made a demand in writing for the payment of the said amount of money from the drawer 30 days of the receipt of information by him from the bank regarding the return of the cheque unpaid and
3. The drawer of the cheque had failed to pay the money to the payee or holder in due course of the cheque within 15 days for the written demand for payment

Question 63

Gift, donation

Answer 63

Sec 138 of NI Act, 1881 deals with dishonor of cheque which is issued for the discharge, in whole or in part, of any debt or other liability. However, any cheque given as a gift or donation or as a security or in discharge of a mere moral obligation, would be considered outside the purview of sec 138

Question 64

Cognizance of offences

Answer 64

a. Cognizance on written complaint
b. Limitation for filing a complaint
c. Jurisdiction of court

Question 65

Trial of offence

Answer 65

Not withstanding anything contained in the code of criminal procedure, 1973, all offences under this chapter shall be tried by judicial magistrate of the first class or be a metropolitan magistrate and the provisions of sections 262 to 265 of the said code shall, as far as may be, apply to such trials:

Summary trial
No summary trial

Question 66

In case of summary trial

Answer 66

It shall be lawful for magistrate to pass a sentence of imprisonment a term not exceeding one yr and an amount of fine exceeding five thousand rupees

Question 67

In case of no summary trial can be made

Answer 67

When at commencement of, or in the course of, a summary trial under this section, it appears to the magistrate that the nature of the case is such that a sentence of imprisonment for a term exceeding more than 1 yr may have to be passed or that it is, for any other reason, undesirable to try the case summarily, the magistrate shall after hearing 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

Question 68

Speedy trial

Answer 68

The trial of a case jnder this section 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

Question 69

Speedy and efficient disposal

Answer 69

Every trial under this section shall be conducted as expeditiously as possible and an endeavor shall be made to conclude the trial within 6 months from the date of filing of the complaint