Negotiablie instrument part-1

Practical Questions In Negotiable Instruments Act

Pr.1. State whether the following statements are promissory notes or not?

1. "I promise to pay B or order Rs. 500".
2. "I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on demand, for value received".
3. "Mr. B, I.O.U. Rs. 500".
4. “I am liable to B, in a sum of Rs.500 to be paid by instalments.
5. “I am bound to pay the sum of Rs.500 which I received from you.”
6. "I promise to pay B Rs. 500 and all other sums which shall be due to him".
7. "I promise to pay B Rs. 1,000 and the fine according to the rules".
8. "I promise to pay B Rs. 500, first deducting there out any money which he may owe me".
9. "I promise to pay B Rs. 500 by instalments with a provision that no payment shall be made after my death". knowledge of yours.
10. "I promise to pay B Rs. 500 first deducting there out any money which he may owe me".
11. "I promise to pay B a sum of Rs.500 when convenient or able".
12. "I promise to pay B Rs. 500 when he delivers the goods".
13. "I promise to pay B Rs. 500 seven days after my marriage with C".
14. "I promise to pay B Rs. 500 on D's death, provided D leaves me enough to pay that sum".
15. "I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next"
16. "I promise to pay B Rs. 200 and deliver one quintal of paddy".
17. "I promise to pay B in 20 shares and 10 bonds of XY Ltd".
18. "I promise to deliver to B 100 bags of wheat".

Sol.:

1. Yes – since it is an absolute promise to pay a specific sum of money to a specific person or his order.
2. Yes – The maker is acknowledging his debt and also promises to pay for the value received.
3. No - It is a mere acknowledgement of debt and there is not specific promise to pay the sum.
4. No - It is a mere acknowledgement of debt and there is not specific promise to pay the sum.
5. No – In this case drawer is agreeing that he is bound to pay. But he is promising to pay the sum.
6. No –The amount is uncertain. (In commercial transactions the amount should be certain.)
7. No – same as above.
8. No – same as above.
9. No – In this case death is a certain event and a negotiable can be drawn on the basis of such certain event. Butthis instrument is uncertain as to the amount. In commercial transactions certainty is very important.
10. No – Since the amount is uncertain. (”)
11. No – A negotiable instrument can’t be drawn on the basis of future uncertain event. In this case it is uncertain asto date of payment.
12. No – A negotiable instrument can’t be drawn on the basis of future uncertain event. In this case it is uncertain asto the date of payment. The other party may never deliver the goods.
13. No – Negotiable instruments can be drawn to be payable on the basis of some future certain event. But marriagewith C is an uncertain event. Maker may never marry C.
14. No – Negotiable instruments can be drawn to be payable on the basis of some future certain event. In this case D’s  death is a certain event. But D may not leave enough sum. This is an uncertain event. knowledge of yours.
15. No – A negotiable instrument must be drawn for money and money only. In this case it is written for partly cashand partly kind.
16. No – same as above.
17. No – same as above.
18. No – Same as above.

Pr.2. "I of my own free will and accord approached B and borrowed from him the sum of Rs.100 bearing interest at the rate of 2 per cent per mensem. I have, therefore, executed these few presents by way of a promissory note so that it may serve as evidence and be of use when needed” signed by A.

Sol.: In this case the drawer is acknowledging the receipt of money. But there is no specific promise to pay a specific sum of money. [Bal Mukand Vs. Munna Lal Ramji Lal]

Pr.4. "Mr. Little, Please let the bearer have $7 and oblige." Signed by A. is this a bill of exchange?

Sol.: This is not a bill of exchange as it contains a request and not an order [Little Vs. Slackford)

Pr.5 'I promise to pay B Rs.550 and all other sums which shall be due to him'. Is it a promissory note? State reasons.

Sol: It is not a promissory note since the amount payable is not a certain sum. The expression' all other sums which shall be due to him' makes the amount indefinite or incapable of being made definite. Section 4 of the Negotiable Instruments Act which defines Promissory Note reads:

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 the order of, a certain person, or to the bearer of the instrument. knowledge of yours.

Thus, to constitute a valid promissory note, the amount payable must be a certain sum or capable of being made certain.

Pr.6. Mr. X 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.

Sol: The promissory note is unconditional promise in writing. Amount is certain. It is not dated, but dating is not a mandatory requirement. Filling of date later will not be 'material alteration' as long as date put is not before the date of actual execution. Thus, the instrument fulfils all requirements of promissory note as per Negotiable Instruments Act.

However, name of payee is not mentioned and hence it is a bearer instrument. As per RBI Act, a promissory note cannot be made payable to bearer - whether on demand or after certain days. Hence, the instrument is illegal as per RBI Act and cannot be legally enforced.

Pr.7. Mr. X promises by way of a promissory note to pay Mr.Y his partner a sum of Rs.10,000 in the event of later's retirement from partnership firm. Decide giving reasons for your answer whether the Promissory Note is a valid promissory note.

Sol: The promise is conditional on an event which is not certain. Hence, it is not a promissory note.

Pr.8. Examine the validity of the following Promissory Notes: (a) I owe you a sum of Rs.1,000. 'A' tells 'B'. (b) 'X' promises to pay 'Y' a sum of Rs.10,000, six months after 'Y's marriage with 'Z'.

Sol:

1. It is only acknowledgement of debt. It is not a promise to pay. Thus it is not a promissory note
2. Promissory note can be based on future event. The event should be certain, but date on which it will happen need not be certain. In this case, the event of Y's marriage with 'Z' is not certain, as Y may not marry or marry some other person. Hence, this is not a promissory note.

Pr.9. S writes "I promise to pay 'B' a sum of Rs.500, seven days after my marriage with 'C"'. Is this a promissory note?

Sol: Promissory note can be based on future event. The event should be certain, but date on which it will happen need not be certain. In this case, the event of S's marriage with 'C' is not certain, as S may not marry or marry some other person. Hence, this is not a promissory note.

Pr.10. State, giving reasons, whether the following instruments are valid promissory notes - (i) X promises to pay Y, by a promissory note, a sum of Rs.5,000, fifteen days after the death of B. (ii) X promises to pay Y, by a promissory note, Rs.500 and all other sums, which shall be due.

Sol:

1. The future event i.e. death of B is certain, though date is uncertain. The instrument is valid.
2. the sum payable is not certain. Hence, it is not a negotiable instrument.

Pr.11. A bill is drawn as "Pay to X or order the sum of ten thousand rupees". In the margin the amount stated is Rs 1,000. Discuss the legal position.

Sol: This bill is a valid bill for Rs 10,000 because in case of discrepancy between the amount stated in figure and in words, the amount stated in words shall be the amount of the instrument.

Pr.12. Which of the following is a bill of exchange? Give reasons.

1. “To Anderson, Dear Sir, We hereby authorise you to pay on our account, to the order of Wolf, the sum of six thousand rupees.”
2. “Rs. 500.” “Pay to my order the sum of five hundred rupees, for value received.” It is neither signed by anyperson as drawer nor addressed to any person as drawee. It is accepted by Lam.

Sol: Sec.5 of the Negotiable Instruments Act reads as “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.”

1. In the given case there is no definite order to pay the sum of money. So, it is not a bill of exchange.
2. In the given case, drawee is neither named nor indicated with certainty. So, it is not a bill of exchange.

Q.13. ‘A’ signs, as maker, a blank stamped paper and gives it to ‘B’, and authorises him to fill it as a note for Rs. 500, to secure an advance which ‘C’ is to make to ‘B’. ‘B’ fraudulently fills it up as a note for Rs.2,000, payable to ‘C’, who has in good faith advanced Rs. 2,000. Decide, with reasons, whether ‘C’ is entitled to recover the amount, and if so, up to what extent?

Sol: Section 20 of the Negotiable Instruments Act, 1881 provides that when one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instrument then in force in India and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount covered by the stamps. The person so signing shall be liable upon such instrument, in the capacity in which he signed the same to any holder in due course for such amount. A person other than holder in due course is not authorised to recover anything in excess of the amount intends by him to be paid thereunder.

The principle contained in section 20 is that a person who gives another possession of his signature on blank stamped paper prima facie authorises the latter as his agent to fill it up and give to the world the instrument as accepted by him. The principle is one of estoppel. In the given problem ‘A’ is estopped from setting up B’s fraud, and ‘C’ is entitled to recover Rs. 2,000/- from ‘A’ because ‘C’ has obtained it as a holder in due course. This liability does not stand of a person other than the holder in due course. ‘C’ as a holder in due course is entitled to enforce payment of the full amount even though the authority has been exceeded but it is necessary that the sum ought not to exceed the amount covered by the stamp. [Lloyds Bank vs. Cooke (1907) KB 794]

P.14. A signs, as the maker, a blank stamped paper and gives it to B and authorises him to fill it as a note for Rs. 2,000, it being the amount of advances made by B to A. B fraudulently fills it up as a note for Rs. 3,000 and then, for consideration, endorses it to C. Can C enforce the instrument?

OR

'A' signs, as maker, a blank stamped paper and gives it to 'B', and authorises him to fill it as a note for Rs. 500, to secure an advance which 'c' is to make to. 'B'. 'B' fraudulently fills it up as a note for Rs. 2,000, payable to 'C', who has in good faith advanced Rs. 2,000. Decide, with reasons, whether 'c' is entitled to recover the amount, and if so, upto what extent? knowledge of yours.

Sol: A duly signed blank stamped instrument is called an inchoate instrument. According to Section 20 of the Negotiable Instruments Act an Inchoate instrument is an incomplete Instrument in some respect. When a person signs and delivers blank or incomplete stamped paper to another, such other is authorised to complete it for any amount not exceeding the amount covered by the stamp. The person so signing is liable upon such instrument, to any holder in due course for any amount. But any other person can’t claim more than the amount intended by the drawer of the instrument.

Thus, for C's claim to be valid and enforceable, two things are important:

1. That C is a holder in due course, i.e., there should be valid consideration and he would have obtained it in goodfaith and before maturity.
2. The amount filled in i.e. Rs. 3,000 is covered by stamp amount.

In Negotiable Instruments act every holder is deemed to be a holder in due course. Thus the other party has to establish that C is not a holder in due course.

P.15. State with reasons whether each of the following instruments is bearer or order:

1. A bill is drawn payable to X or bearer.
2. A bill is drawn payable to X who endorses it in blank in favour of Y.
3. A bill is drawn payable to X.
4. A bill is drawn payable to X or order.
5. A bill is drawn payable to X only.

Sol: First state the rules related bearer instrument and order instrument.

Case	Decision	Reason
(a) (b) (c) (d) (e)	Bearer instrument [Explanation II to Sec.13 (1)] Bearer instrument [Explanation II to Sec.13(1)] Order instrument [Explanation I to Sec.13 (1)] Order instrument [Explanation I to Sec.13(1)] Not a negotiable instrument at all[Explanation I to Sec. 13(1)]	It is expressed to be so payable. The last endorsement is an endorsement in blank. It is expressed to be payable to a particular person and does not contain any words which prohibit transfer or indicate any intention that it shall not be transferred. It is expressed to be so payable. The use of word ‘only’ prohibits or indicates an intention that bill shall not be transferred.

P.16. State with reasons whether each of the following instruments is an Inland Instrument or a Foreign Instrument:

1. A bill drawn in Delhi upon a merchant in Agra and accepted payable in London.
2. A bill drawn in Delhi upon a merchant in London and accepted payable in Agra.
3. A bill drawn in Delhi upon a merchant in London and accepted payable in London.
4. A bill drawn in London upon a merchant in Agra and accepted payable in Delhi.
5. A bill drawn in Delhi on a merchant in Agra but endorsed in London.
6. A bill drawn in London on a merchant in Agra and endorsed in Delhi.

Sol: First state the provisions related to Inland instrument and Foreign instrument.

Case	Decision	Reason
(a) (b) (c) (d) (e) (f)	Inland instrument [Section 11 ] Inland instrument [Section 11] Foreign Instrument [Section 12] Foreign instrument[Section 12] Inland instrument [Section 11] Foreign instrument [Section 12]	It is drawn in India and the drawee is resident in India. It is drawn in India and is payable in India. It is not accepted payable in India and at the same time its drawee is not a resident of India. It is drawn in India. It is drawn in India and drawee is resident in India. It is not drawn in India.

P.17. State with reasons whether each of the following instrument is an Ambiguous Instrument or Fictitious Instrument:

1. A bill is drawn by A, an agent, acting within the scope of his authority, upon his principle P.
2. X draws a bill on Y who is a fictitious person and negotiates it himself.
3. X draws a bill on Y who is a minor.
4. A bill is drawn by Delhi branch of Dena Bank upon its Bombay branch.
5. A bill is drawn upon Y who is a major person payable to Z who is a fictitious person.
6. A bill is drawn upon Y as payable to Z. The drawer is a fictitious person.

Sol: First state the provisions related to ambiguous instrument and fictitious instrument.

Case	Decision	Reason
(a) (b) (c) (d) (e) (f)	Ambiguous instrument [Sec.17] Ambiguous instrument [Sec.17] Ambiguous instrument [Sec.17] Ambiguous instrument [Sec.17] Fictitious instrument [Sec.42] Fictitious instrument [Sec.42]	The drawer and the drawee are the same person. The drawee is a factious person. The drawee is competent to contract. The drawer and the drawee are the same person. The payee is a fictitious person. The drawer is a fictitious person.

P.18. State with reasons whether each of the following instruments is an Inchoate Instrument or not:

1. X signs and delivers an unstamped and blank promissory note to Y.
2. X delivers a stamped and blank promissory note to Y without his signature.
3. X signs a stamped and blank promissory note and keeps in his safe.
4. X signs and delivers a stamped and blank promissory note to Y.
5. X signs and delivers a stamped and complete promissory note to Y.

Sol: First write the provisions related to Inchoate instrument (Section 20).

Case	Decision	Reason
(a) (b) (c) (d) (e)	No No No Yes No	It is not stamped. It has not been signed by the maker. It has not been delivered. There is a delivery of a signed, stamped & blank instrument. It is not incomplete.

P.19. State with reasons whether each of the following instruments is a Time Instrument or Demand Instrument:

1. I promise to pay B Rs 500.
2. I promise to pay B Rs 500 on Demand.
3. Pay Rs 500 at sight.
4. Pay Rs 500 on presentment.
5. I promise to pay B Rs 500 after 3months.
6. I promise to pay B Rs 500 on 1st Jan. 1997.
7. I promise to pay Rs 500 after sight.
8. I promise to pay B Rs 500 after C’ s Death.
9. Pay B Rs 500 on or before 1st Jan. 1997.

Sol: First state the provisions related to order instruments and time instruments.

Case	Decision	Reason
(a) (b) (c) (d) (e) (f) (g) (h) (i)	Demand instrument [Sec.19 & 21] Demand instrument [Sec.19 & 21] Demand instrument [Sec.19 & 21] Demand instrument [Sec.19 & 21] Time instrument [Sec.21] Time instrument [Sec.21] Time instrument [Sec.21] Time instrument [Sec.21] Not a negotiable instrument at all	No time for payment has been specified. It is expressed to be so payable. The expression ‘at sight’ means ‘on demand’. The expression ‘on presentment’ means ‘on demand’. Fixed period has been specified. A particular day has been specified. After sight means after presentment for sight. It is payable on the happening of an event (i.e. death) which is certain to happen. Time is uncertain.

P.20. X accepts a bill for the accommodation of A (drawer). A transfers it to B, without consideration. B transfers it to Cwithout consideration. C transfers it to D for value. D transfers it to E, without consideration. On the due date, the billdishonored by X. Discusse the rights of A, B, C, D and E.

Sol:

1. E cannot recover from D, C cannot recover from B, B cannot recover from A, and A cannot recover from X because a negotiable instrument without consideration creates no obligation of payment between the parties to the transaction.
2. D and E can recover from X, A, B and C because any holder for consideration (D), and every subsequent holder deriving title from him (E) can recover the amount due from the transferor for consideration or any prior party thereto.
   
   

   P.21. X accepts a bill for the accommodation of A (drawer), A transfers it to B for value. The bill is dishonoured by X onthe due date. B collects the amount from A. Can A sue X for the recovery of the amount?

   
   

   Sol: In general, accommodating parties are liable on the bill to the same extent as that of an ordinary bill. However, theyare not liable to the accommodated party - the person for whose benefit they signed the instrument. So, A cannot sue Xfor the recovery of the amount in view of the specific provision to that effect provided in Explanation I to section 43.

   
   

   P.22. X accepts a bill for the accommodation of A (drawer). A transfers it to B for value after maturity. B becomes theholder in good faith. Discuss the rights of A and B.

   1. A cannot recover from X because an instrument without consideration cre­ates no obligation between the partiesto the transaction as per the provisions of Section 43.
   2. B can recover from X and A, because a bonafide holder for value can recover from any prior party even though he  acquires the instrument after maturity as per the provisions of Proviso to Sec.59.

   
   

   P.23. A owes money to B. A makes a promissory note for the amount in favour of B. For safety of transmission he cuts the  note in two halves and posts one half to B. He then changes his mind and calls upon B to return the half of the notewhich he had sent. B requires A to send the other half of the promissory note. Decides as to how the rights of the partiesare to be adjusted.

   
   

   Sol: The relevant question in the given situation is whether the making of the promissory note is complete when one half  of the note was delivered to B. Under Section 46 of the Negotiable Instruments Act, 1881, the making of a promissorynote is completed by delivery, actual or constructive. Delivery, of course, refers to the delivery of the whole of theinstrument and not merely a part of it. Delivery of half instrument cannot be treated as constructive delivery of the whole.  Therefore, the claim of B to have the other half of the Promissory note sent to him is not maintainable. Thus A is justified  in demanding the return of the first half sent by him.

   
   

   P.24. X needs Rs.10,000 but cannot raise this amount because his credit is not good enough. Y whose credit is good,accomodates X by giving him a pronote made out in favour of X, though Y owes no money to X. X endorses the pronoteto Z for value received. Z who is a holder in due course, demands payment from Y. Can Y refuse and plead thearrangement between him and X?

   
   

   Sol: According to Section 120 of the Negotiable Instruments Act, in a suit by holder in due course, maker of a promissory  note and no drawer of a bill of exchange or cheque are not permitted to deny the validity of the instrument, as originallymade or drawn. Thus, Z is entitled to receive payment on the instrument.

   
   

   P.25. What is meant by “Payment of Due Course” in respect of a negotiable instrument? A cheque originally expressedpayable to bearer is subsequently made payable to order by endorsement in full. Is it in order for the drawee bank to paythe amount to the bearer of the cheque?

   
   

   Sol: In the cases of an instrument payable to order the drawee of a bill or maker of a note is discharged by payment in due  course if it is indorsed by or on behalf of the payee. But, in the case of a cheque there is an exception. The rule is once abearer instrument is always a bearer instrument. Hence the banker will be discharged by payment in due course to thebearer of a cheque which was originally expressed payable to bearer even though it was subsequently endorsed in full[Section 85(2)].

   
   

   P.26. A cheque originally expressed payable to bearer is subsequently made payable to order by endorsement in full. Is it  an order for drawee bank to pay the amount to bearer of the cheque?

   Or

   Comment on the following statement with reference to provisions of Negotiable Instruments Act – ‘Once a bearer instruments always a bearer instrument’.

   
   

   Sol: A bearer instrument is one, which can change hands by mere delivery of the instrument. The instrument may be apromissory note or a bill of exchange, or a cheque. It should be expressed to be so payable or on which the lastendorsement is in blank. (Explanation 2 to Section 13 of the Negotiable Instrument Act 1881).

   Under Section 46 where an instrument is made payable to bearer, it is transferable merely by delivery, i.e. without any further endorsement thereon. But this character of the instrument can be subsequently altered. Section 49 provides that a holder of negotiable instrument endorsed in blank (i.e. bearer) may, without signing his own name, by writing above the endorser’s signature, direct that the payment of the instrument be made to another person. Thus the character of the instrument is changed and the instrument cannot be negotiated by mere delivery.

   
   

   But in the case of a Cheque, however, the law is a little different from the one stated above. According to the provisions of Section 85 (2) where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, 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. Hence the proposition that once a bearer instrument always a bearer instrument.

   
   

   P.27. A of Calcutta drew a bill of exchange on B of Honkong payable sixty days after sight. The holder C kept the billwith him for five months and then presents it for acceptance before B. B in the meanwhile becomes insolvent. C sues Afor payment. Will he succeed?

   
   

   Sol: In the given case, the bill is payable 60 days after sight. First the holder C has to present the instrument forreckoning 60 days within reasonable time. In the given case there is unreasonable delay in presenting the instrument forsight. So, C can’t succeed in receiving the payment.

   
   

   P.28. Ascertain the date of maturity of a bill payable 100 days after sight and which is presented for sight on 4th May,2000.

   
   

   Sol: In case of bill payable after a certain period after sight, the date of maturity is calculated by adding three days ofgrace to the period after which the bill is payable. In case of bills payable after sight, the period is calculated from thedate when the bill is presented for sight. In case the date of maturity happens to be a public holiday including Sunday,the bill falls due for payment on the day preceding the public holiday. In the given case, the bill is made payable 100days after sight and the same was sighted on 4th May, 2000. 100 days from 4th of May, 2000 works out to 12th ofAugust, 2000, adding three days of grace makes the bill due for payment on 15th of August, 2000 which happens to be a  public holiday. Thus, the date of maturity of the bill shall be 14th of August, 2000 unless the same is also a publicholiday (including Sunday).­

   P.29. A promissory note, executed on 31stJuly, 1997, is made payable 'One month after date. When does the notebecome payable?

   
   

   Sol: 3rd September, 1997. It is calculated in the following manner: Date of Execu­tion-31st July, 1997. Date of maturity-31st August + 3 days of grace = 3rd September, 1997.

   
   

   P.30. 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?

   
   

   Sol: The date of maturity is 4th April, 2001 (1-4-2001 plus three days of grace).

   P.31. Find out date of maturity in the following cases:
   A bill dated 1^st January 1993 is made payable four months after date.
   A bill, dated 30^th January 1993, is made payable one month after date.
   A bill, dated 31^st July, 1993, is made payable two months after date.
   A bill dated 1^st January 1993 is payable 60 days after date.
   A bill is payable on 28^th February 1993.
   A bill is payable thirty days after sight is presented for sight on 1st March, 1993.
   A bill, dated 15 January, 1993, is payable three months after date.
   Sol:
   1.It falls due on 4^th May, 1993.
   2.The date of maturity falls on 3^rd March, 1993.3.The bill is at maturity on 3^rd October, 1993.4.It falls due on 5^th March, 1993.
   5.It falls due on 3^rd March, 1993

   6.It falls due on 3rd April, 1993.

   7.It falls due on 18th April, 1993 which happens to be a Sunday. As such it will fall due on 17th April, 1993, i.e., the preceding business day.

   
   

   P.32. What will be the due dates of following instruments:

   1. A Bill of Exchange dated 10th November 1992, payable 4 months after date.
   2. A Promissory Note dated 27th November 1992, payable 60 days after date without grace.
   3. A Bill of Exchange dated 28th August 1992, payable 180 days after date.
   4. A Bill of Exchange dated 1^st February 1992, payable 45 days after sight. The Bill was accepted on 6^th February1992.

   
   

   Sol: (i) March 24, 1993.

   (ii) 25^th January, 1992.

   (iii) 27^th February, 1993

   (iv) 25^th March, 1993.

   
   

   P.33. Promissory note dated 1^st 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 NegotiableInstruments Act, 1881 whether the endorser and the maker will be discharged by reasons of such delay.

   
   

   Sol: If a promissory role is made payable a stated number of months after date, it becomes payable three days after thecorresponding date of months after the stated number of months (Section 23 read with Section 22 Negotiable Instruments  Act, 1881). Therefore, in this case the date of maturity of the promissory note is 4^th April, 2001.

   
   

   In this case the promissory note was presented for payment 10 days after maturity. According to Section 64 of Negotiable Instruments Act read with Section 66, a promissory note must be presented for payment at maturity by on behalf of the holder. In default of such presentment, the other parties the instrument (that is, parties other than the parties primarily liable) are not liable to such holder. The endorser is discharged by the delayed presentment for payment. But the maker being the primary party liable on the instrument continues to be liable.

   
   

   P.34. A cheque is drawn upon Dena Bank. It is stolen by X who hands it over to Y who takes in good faith for valuableconsideration. Y deposits the cheque into his own account in Canara Bank who presents it and obtains payment fromDena Bank. Discuss the legal position of paying banker, collecting banker, Y and true owner in each of the followingalternative cases:

   1. If the cheque is payable to bearer.
   2. If the cheque is payable to bearer and is crossed generally.
   3. If the cheque is payable to bearer and is crossed generally with words 'not negotiable’.
   4. If the cheque is payable to bearer and is crossed specially with words 'Canara Bank'.
   5. If the cheque is payable to bearer and is crossed specially with words 'Allahabad Bank’.
   6. If the cheque is payable to B or order and X forges B's endorsement.
   7. If the drawer's signatures were forged.

   
   

   
   

   Case	Paying banker	Collecting banker	Y	True owner
   (a) (b) (c) (d) (e) (f) (g)	Drawer is discharged  by payment in duecourse(Sec 85(2)] - do - - do - - do - Drawee is liable to true owner [Sec.129] Drawee is discharged  by payment in duecourse [Sec. 85(1)] Drawee is liable to true owner because the payment is not in due course [Section 101]	Collecting banker does not incur any liability to the true owner [Section 131] - do - - do - - do - Collecting banker is liable to true owner [Section 131] Collecting banker does not incur any liability to the true owner [Section 131] Collecting banker is liable to the true owner [Section 131]	He is not liable to true owner. - do - He is liable to true owner because he got a defective title. He is liable to true owner. He is not liable to true owner. He is not liable to from X true only. He is liable to true owner because forgery passes no title at all.	He can recover from X and not from Y. - do - He can recover from Y and X. He can recover from X only. He can recover from X or paying banker or collecting banker. He can recover from X only. He can recover from paying  banker, collecting banker or Y.

   
   

   
   

   P.35. A cheque payable to bearer is crossed generally and is marked "not nego­tiable". The cheque is lost or stolen andcomes into the possession of B who takes it in good faith and gives value for it. B deposits the cheque into his own bank  and his banker presents it and obtains payment for his customer from the bank upon which the cheque is drawn. (a) Canboth the bankers, viz., banker paying the cheque and the banker collecting it plead exoneration from their liability. (b)Can B be compelled to refund the money to the true owner of the cheque.

   
   

   Sol:

   (a) Yes; A person who takes a cheque crossed 'not negotiable' has no better title to keep such a cheque than hisimmediate transferor, and the true owner can always reclaim it or the amount of it. On the other hand both collectingbanker and paying banker will be protected under the act, provided the payment and the collection have been made ingood faith and without negligence [Sec. 128 & 130].

   
   

   (b) Yes. B can be compelled to refund the money as he was not entitled to receive payment upon instrument.

   
   

   P.36. “It would be safer for the drawer to cross a cheque ‘not negotiable’ with the words ‘account payee’ added to it”.Explain, how it is safer for the drawer in such case.

   
   

   Sol: As per the instructions issued by Reserve Bank of India on 9.9.1992, it would be safer for the drawer to cross acheque ‘not negotiable’ with the words ‘account payee’ added to it. The effect of the words ‘not negotiable’ on a crossed  cheque is that the title of the transferee of such a cheque cannot be better than that of its transferor (Section 130 ofNegotiable Instrument Act). The addition of the words ‘not negotiable’ does not restrict the further transferability of thecheque; it only takes away the main feature of negotiability, which is, that a holder with a defective title can give a good  title to subsequent holder, in due course. Any one who takes a cheque marked ‘not negotiable’ takes it at his own risk.The object of crossing a cheque ‘not negotiable’ is to afford protection to the drawee or holder of the cheque againstmiscarriage or dishonesty in the course of transit by making it difficult to get the cheque so crossed cashed, until itreaches its destination.

   The words ‘Account Payee’ on a cheque are a direction to he collecting banker that the amount collected on the cheque is to be credited to the account of the payee. If he credits the proceeds to a different account, he is prima facie guilty of negligence and will be liable to the true owner for the amount of the cheque. But such a crossing does not affect the paying banker who is under no duty to ascertain that the cheque in fact has been collected for the account of the person named as the payee.

   
   

   Thus the cheque crossed ‘not negotiable’ with the words ‘account payee’ added to it protects the drawer of the cheque in two ways. (1) The main feature of negotiability is lost i.e. the holder in due course cannot get a 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.

   
   

   P.37. Can an acceptor of a bill avoid his liability against a person who is a holder in due course or who derives his titlefrom a holder in due course, on the following grounds:

   1. That the instrument has not been filled in accordance with the authority given by him.
   2. That the other parties to the bill were fictitious.
   3. That the instrument was drawn without consideration.
   4. That the delivery of the instrument was conditional.
   5. That the instrument had been lost.
   6. That the instrument was obtained from him by means of fraud.
   7. That the instrument was obtained from him for an unlawful consideration.
   8. That his signature was forged.
   9. That payee had no capacity to endorse.

   
   

   Sol: First state the privileges of holder in due course.

   
   

   Ground	Decision	Explanation
   (a) (b) (c) (d) (e) (f) (g) (h) (i)	No No No No No No No Yes No	Privilege given to holder in due course under Section 20 provided the stamp put on the instrument was sufficient to cover the amount. Privilege given to a holder in due course u/s 42 Privilege given to a holder in due course u/s 43 Privilege given to a holder in due course u/s 46 Privilege given to a holder in due course u/s 58 Privilege given to a holder in due course u/s 58 Privilege given to a holder in due course u/s 58 Forgery passes no title to anyone at all. Privilege given to a holder in due course u/s 121

   
   

   
   

   Note: The aforesaid decisions also hold good for a holder who derives title from a holder in due course.

   
   

   P.38. State whether a holder can refuse to take the following acceptance or not:

   1. Accepted payable when in funds.
   2. Accepted payable when a cargo consigned to me is sold.
   3. A bill drawn for Rs 5,000 but accepted for the 4,000 only.
   4. Accepted payable at Delhi when no place of payment is specified in the order.
   5. Accepted payable at Delhi only when no place of payment is specified in the order.
   6. Accepted payable at Delhi when place of payment specified in the order was Bombay.
   7. A bill drawn payable three months after date but accepted payable two months after date.
   8. A bill drawn on X, Y, and Z (who are not partners) but accepted by X only.
   9. A bill drawn on X, Y and Z (who are partners) but accepted by X.

   
   

   
   

   Case	Decision	Reason
   (a) (b) (c) (d) (e) (f) (g) (h) (i)	Can refuse Can refuse Can refuse Can’t refuse Can refuse Can refuse Can refuse Can refuse Can’t refuse	It is a qualified acceptance because it is conditional acceptance. It is a qualified acceptance because it is conditional acceptance. It is a qualified acceptance because it is a partial acceptance for a part only. It is a general acceptance and not a qualified acceptance. It is a qualified acceptance because of the use of the word 'only'. It is a qualified acceptance because it is accepted payable at a place other than specifiedone. It is a qualified acceptance because it is accepted payable at a time other than specified one. It is a qualified acceptance because acceptance has not been made by all drawees. It is a general acceptance because acceptance has been made by a partner.

   
   

   
   

   Note: First state when acceptance is valid.

   
   

   P.39. H is the holder in due course of a bill of which A is the acceptor. D, the drawer of the bill, is fictitious. Can A escape  from his liability to H?

   
   

   Sol: Section 42 of the Negotiable Instruments Act provides that where a bill of exchange is drawn by a fictitious personand is payable to his order, the acceptor cannot be relieved from his liability to the holder in due course. Thus, H beingholder in due course, A cannot escape liability. However, H shall have to establish that the bill was endorsed by the same  hand as drawer's signature.

   
   

   P.40. A draws a cheque for Rs. 100 and hands it over to B by way of gift. Is B a holder in due course? Explain the natureof his title, interest and rights to receive the proceeds of the cheque.

   
   

   Sol: One of the requirements of Section 9 of the Negotiable Instruments Act to constitute a holder, as holder in duecourse is that he must have received the instrument for consideration. There are no exceptions to this condition. Thus Bcan’t be treated as holder in due course. But he is certainly a holder with good title thereto and hence he will have everyright to claim payment upon instrument.