Business Law Unit V: Negotiable Instruments Act, 1881 Part A Negotiable Instruments Notes [Gauhati University FYUGP BCom 3rd Sem]

In this post we have provides Gauhati University BCom 3rd Semester Business Law Notes 2025 NEP FYUGP Unit V: Negotiable Instruments Act, 1881 Part A) Negotiable Instruments for All the Major Subjects Finance Major, Marketing Major, Accounting Major and HRM Major as per the Latest BCom FYUGP NEP pattern 2025 and with PYQs Marking Solution. GU Business Law Unit V: Negotiable Instruments Act, 1881 Part A) Negotiable Instruments notes are designed to help students understand key concepts and prepare effectively for their examinations.

Unit V: Negotiable Instruments Act, 1881

A) Negotiable Instruments

2 Marks Questions (Definitions / Direct Answers)

1. Who can cross a cheque? (GU BCom 2019)
Answer: A cheque may be crossed by the drawer, the holder, or the banker acting as an agent of the customer. Crossing of a cheque can be made at the time of drawing the cheque or even after it has been issued.

2. Who are the parties to a cheque? (GU BCom 2020)
Answer: There are three parties to a cheque:
i) The Drawer – the person who draws the cheque.
ii) The Drawee – the bank on which the cheque is drawn.
iii) The Payee – the person to whom the payment is to be made.

3. Define the term ‘Holder in Due Course.’ (GU BCom 2023)
Answer: According to Section 9 of the Negotiable Instruments Act, 1881, a holder in due course means any person who, for consideration, becomes the possessor of a negotiable instrument before its maturity, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived it.

4. Mention the parties to a bill of exchange. (GU BCom 2024)
Answer:
There are three parties to a bill of exchange:
i) The Drawer – the person who draws the bill.
ii) The Drawee – the person on whom the bill is drawn.
iii) The Payee – the person to whom the payment is to be made.

5. What is a promissory note?
Answer: A promissory note is a written and unconditional promise made by one person to another, signed by the maker, to pay a certain sum of money to a specific person or to the bearer of the instrument, either on demand or at a fixed future date.

6. What is a cheque?
Answer: A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. It includes the electronic image of a truncated cheque and a cheque in electronic form.

7. What is endorsement?
Answer: Endorsement refers to the act of signing one’s name on the back of a negotiable instrument for the purpose of transferring the rights therein to another person.

8. Define Negotiable Instrument. (GU BCom 2024)
Answer: According to Section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer.

9. What do you mean by ‘crossing of a cheque’?
Answer: Crossing of a cheque means drawing two parallel transverse lines on the face of a cheque with or without additional words like “& Co.” or “A/c Payee”. It signifies that the cheque must be deposited in a bank account and cannot be encashed over the counter.

10. What is a bearer cheque?
Answer: A bearer cheque is one that is payable to the person whose name appears on it or to any bearer who presents it at the bank for payment. It can be transferred by simple delivery without endorsement.

11. State any two privileges of holder in due course. (GU BCom 2020, 2021)
Answer: The two main privileges of a holder in due course are:
i) He gets a better title than the transferor, even if the previous title was defective.
ii) Every prior party to the instrument is liable to him until the instrument is duly satisfied.

12. What is a dishonour of cheque?
Answer: A cheque is said to be dishonoured when the bank refuses to make payment on it. The common reasons include insufficient funds, mismatched signature, or the account being closed.

13. What is a post-dated cheque?
Answer: A post-dated cheque is one that bears a future date on which it is to be payable. The bank will not honour the cheque before the date mentioned on it.

14. What is "Negotiation" under the Act?
Answer: Negotiation means the transfer of a negotiable instrument to another person in such a manner that the transferee becomes the holder thereof. It may be effected by delivery or by endorsement and delivery.

15. Define "Bill of Exchange."
Answer: According to Section 5 of the Negotiable Instruments Act, 1881, 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.

5 Marks Questions (Short Notes / Brief Explanations)

1. Distinguish between Cheque and Bill of Exchange. (GU BCom 2019)

A cheque and a bill of exchange are both negotiable instruments, but they differ in several aspects. The following table shows the key distinctions between them:

Basis of Difference	Cheque	Bill of Exchange
i) Definition	A cheque is a bill of exchange drawn on a specified banker and payable on demand.	A bill of exchange is an instrument in writing containing an unconditional order directing a person to pay a certain sum of money to a certain person or to the bearer.
ii) Parties Involved	There are three parties – Drawer, Drawee (Banker), and Payee.	There are also three parties – Drawer, Drawee, and Payee, but the drawee is not necessarily a banker.
iii) Payment on Demand	A cheque is always payable on demand.	A bill of exchange may be payable on demand or after a specified period.
iv) Acceptance	A cheque does not require acceptance by the drawee.	A bill of exchange requires acceptance by the drawee before payment.
v) Stamp	No stamp is required for a cheque.	A bill of exchange must be properly stamped as per the Stamp Act.
vi) Crossing	A cheque can be crossed to ensure safe payment through a bank.	A bill of exchange cannot be crossed.
vii) Dishonour Notice	Notice of dishonour is not compulsory in case of a cheque.	Notice of dishonour is necessary in case of a bill of exchange.

2. Distinguish between Promissory Note and Cheque. (GU BCom 2020)

Basis of Difference	Promissory Note	Cheque
i) Definition	A promissory note is a written promise by one person to pay another a certain sum of money on demand or at a future date.	A cheque is a bill of exchange drawn on a specified banker and payable on demand.
ii) Nature	It contains a promise to pay.	It contains an order to pay.
iii) Parties	There are two parties – Maker and Payee.	There are three parties – Drawer, Drawee (Banker), and Payee.
iv) Drawn on Bank	It is not drawn on a bank; it may be drawn on any person.	It is always drawn on a specified bank.
v) Acceptance	Acceptance is not required as the maker himself promises to pay.	A cheque does not require acceptance by the drawee bank.
vi) Stamp	It must be stamped according to the Stamp Act.	It does not require any stamp.
vii) Payability	It may be payable on demand or after a fixed time.	It is always payable on demand.

3. Distinguish between Bill of Exchange and Promissory Note. (GU BCom 2021, 2024)

Basis of Difference	Bill of Exchange	Promissory Note
i) Definition	A bill of exchange is an instrument containing an order to pay a certain sum of money to a specific person or bearer.	A promissory note is an instrument containing a promise to pay a certain sum of money to a specific person or bearer.
ii) Nature	It contains an order to pay.	It contains a promise to pay.
iii) Parties	It involves three parties – Drawer, Drawee, and Payee.	It involves two parties – Maker and Payee.
iv) Acceptance	It requires acceptance by the drawee to be valid.	It does not require acceptance.
v) Drawn on Bank	It may be drawn on any person, not necessarily a banker.	It is also drawn on any person but signed by the maker himself.
vi) Liability	The drawer’s liability is secondary and arises only if the drawee defaults.	The maker’s liability is primary and absolute.
vii) Stamp	It must be stamped under the Indian Stamp Act.	It must also be stamped under the Indian Stamp Act.

4. State the Privileges of Holder in Due Course. (GU BCom 2020, 2021)

Answer: A Holder in Due Course (HDC) enjoys several special rights and privileges under the Negotiable Instruments Act, 1881. These privileges are as follows:

i) Better Title than Transferor: A holder in due course gets a good title to the instrument even if the title of the previous holder was defective or fraudulent.

ii) Right to Recover from All Prior Parties: Every prior party to the instrument (drawer, drawee, and endorsers) is liable to the holder in due course until the instrument is duly paid.

iii) Protection in Case of Conditional Delivery: If a negotiable instrument is delivered conditionally or for a special purpose, the holder in due course can still claim payment, even if the original conditions are not fulfilled.

iv) Estoppel against Inchoate Instrument: If an instrument was signed and delivered incomplete, the maker cannot later deny the holder in due course’s right to fill it up and claim the amount.

v) No Effect of Fraud or Theft: If a negotiable instrument is obtained by fraud or theft and transferred to a holder in due course, he can still claim payment as he took it in good faith and for consideration.

vi) Right in Case of Forgery: If the acceptance or endorsement is forged, and the holder in due course obtained it in good faith, he is still protected in certain situations against prior parties.

vii) Instrument Purged of All Defects: Once the instrument passes to a holder in due course, it becomes free from all defects of title, and he can recover the amount without being affected by previous irregularities.

5. Explain Various Types of Crossing of a Cheque. (GU BCom 2020, 2021)

Answer: Crossing of a cheque is a method of ensuring the cheque is paid only through a bank account and not directly over the counter. The Negotiable Instruments Act, 1881, recognizes several types of crossings, which are explained below:

i) General Crossing: When a cheque bears two parallel transverse lines on its face, with or without the words “& Co.” or “Not Negotiable,” it is said to be generally crossed. Such a cheque can only be deposited into a bank account and cannot be encashed directly.

ii) Special Crossing: When the name of a specific banker is written between the parallel lines, the cheque is specially crossed. In this case, payment can be made only through the banker named, ensuring greater security.

iii) Account Payee Crossing (A/c Payee): When the words “Account Payee” or “A/c Payee Only” are added within the general or special crossing, the cheque amount can only be credited to the account of the named payee, making it non-transferable.

iv) Not Negotiable Crossing: If the words “Not Negotiable” are written across the cheque, it means that the transferee cannot have a better title than that of the transferor. It limits negotiability but does not prevent transfer.

v) Double Crossing: Double crossing occurs when a cheque already crossed is further crossed by another banker while acting as an agent for collection. It is permitted only when the first banker acts as an agent for collection on behalf of another banker.

6. What is General and Special Endorsement? (GU BCom 2023)
Answer: Endorsement means the act of signing one’s name on the back of a negotiable instrument for the purpose of transferring the rights contained in it to another person. The person who signs the instrument is called the endorser, and the person in whose favour it is endorsed is called the endorsee.

There are two main types of endorsement – General Endorsement and Special Endorsement.

i) General Endorsement: When the endorser merely signs his name on the back of the negotiable instrument without mentioning the name of the endorsee, it is known as a general endorsement or blank endorsement.
Example: If A signs on the back of a cheque payable to A or order, the cheque becomes payable to the bearer and can be further negotiated by mere delivery.

ii) Special Endorsement: When the endorser specifies the name of the person to whom or to whose order the amount of the instrument is to be paid, it is called a special endorsement or full endorsement.
Example: If A endorses a cheque by writing “Pay B or order” and signs it, only B can receive the payment or further endorse it.

7. Mention Five Reasons for Bouncing of a Cheque. (GU BCom 2023)
Answer: When a cheque presented to the bank is not honoured or the payment is refused by the banker, it is called bouncing or dishonour of cheque. There are several reasons why a cheque may bounce. The main reasons are:

i) Insufficient Funds: The most common reason for cheque dishonour is that the drawer’s bank account does not have enough balance to cover the amount written on the cheque.

ii) Signature Mismatch: If the signature on the cheque does not match the specimen signature available with the bank, the cheque will be dishonoured.

iii) Post-Dated or Stale Cheque: If a cheque is presented before its date (post-dated) or after three months from its date (stale), the bank will refuse payment.

iv) Alterations or Overwriting: Any alteration in the amount, date, or name without proper authentication by the drawer can lead to dishonour.

v) Account Closed or Frozen: If the drawer’s account is closed or frozen due to legal or other reasons, the cheque cannot be cleared.

8. Explain the Features of Negotiable Instruments.
Answer: Negotiable instruments such as promissory notes, bills of exchange, and cheques possess certain distinct features which make them valuable instruments for business transactions. The main features are:

i) Freely Transferable: A negotiable instrument can be easily transferred from one person to another by simple delivery or by endorsement and delivery.

ii) Title of Holder in Due Course: A person who acquires the instrument in good faith and for consideration gets a better title, even if the previous holder had a defective title.

iii) Written and Signed: All negotiable instruments must be in writing and signed by the maker, drawer, or drawer to be valid.

iv) Payment of a Certain Sum of Money: The amount payable under the instrument must be certain and not dependent on any condition or contingency.

v) Payable on Demand or at a Future Date: A negotiable instrument may be payable immediately on demand or after a specified time period as mentioned in the document.

vi) Presumption as to Consideration: It is presumed that every negotiable instrument has been made or drawn for valuable consideration unless the contrary is proved.

vii) Legal Protection: Negotiable instruments are governed by the Negotiable Instruments Act, 1881, which provides legal protection to bona fide holders.

9. Distinguish between Bearer Cheque and Order Cheque.
Answer: A bearer cheque and an order cheque are two common types of cheques differing in the manner of payment and transferability. The differences are shown below:

Basis of Difference	Bearer Cheque	Order Cheque
i) Definition	A bearer cheque is payable to the person whose name appears on it or to the bearer who presents it.	An order cheque is payable to the person whose name is written on it or to any person whom he orders payment.
ii) Transferability	It can be transferred by mere delivery without endorsement.	It requires endorsement and delivery for transfer.
iii) Identification of Payee	The bank need not verify the identity of the bearer.	The bank must verify the identity of the payee or endorsee.
iv) Safety	Less safe, as payment is made to anyone presenting it.	More secure, as payment is made only to the named person or his order.
v) Words Used	Contains the word “Bearer” on its face.	Contains the word “Order” on its face.
vi) Crossing	Usually not crossed, but may be crossed for safety.	Generally crossed to ensure payment through an account.
vii) Risk of Loss	If lost or stolen, payment may still be made to finder.	If lost, payment can be stopped by the drawer before encashment.

10. State the Liabilities of Parties to a Bill of Exchange.
Answer: A bill of exchange involves three main parties – the drawer, drawee (acceptor), and payee. Each of these parties has certain liabilities under the Negotiable Instruments Act, 1881.

i) Liability of the Drawer: The drawer is primarily responsible for the validity of the bill. His liability is secondary, meaning he is liable to pay only if the drawee fails to make payment on maturity. Once the bill is dishonoured, the drawer becomes liable to compensate the holder.

ii) Liability of the Drawee or Acceptor: The drawee becomes the acceptor after signing the bill. He then becomes primarily and absolutely liable to pay the bill amount on the due date. If he fails to pay, he is responsible to the holder for the total amount due.

iii) Liability of the Payee: The payee is the person to whom the payment is to be made. He has the right to receive payment but no liability unless he further endorses the bill.

iv) Liability of the Endorser: Each endorser is liable to all subsequent holders in case of dishonour of the bill, provided due notice of dishonour is given to him.

v) Liability of the Holder: The holder must present the bill for acceptance and payment at the proper time. If he fails to do so, he may lose the right of recourse against the drawer and endorsers.

10 Marks Questions (Long / Essay Type)

1. Under what circumstances can a banker refuse payment of cheque? (GU BCom 2019)

Answer: A banker is under an obligation to honour the cheque of a customer provided sufficient funds are available in his account and all formalities are fulfilled. However, under certain circumstances, the banker may legally refuse to make payment of a cheque. These circumstances can be divided into two categories — when the customer himself is responsible and when the banker is legally bound to refuse.

i) When the Customer is Responsible:

Insufficient Funds: If the amount standing to the credit of the drawer’s account is not sufficient to cover the cheque, the banker must refuse payment.
Signature Mismatch: If the signature on the cheque does not tally with the specimen signature in the bank’s record, the banker must dishonour the cheque.
Post-Dated Cheque Presented Early: A cheque presented before the date mentioned on it cannot be paid, as it is not yet valid.
Stale Cheque: If a cheque is presented after the expiry of three months from its date, it becomes stale, and the banker should refuse payment.
Alteration or Mutilation: If the cheque has been materially altered or shows overwriting without the drawer’s full signature for authentication, the banker can dishonour it.
Amount in Words and Figures Differ: If the amount written in words and figures does not agree, the banker can refuse to honour it to avoid confusion.
Funds Earmarked for Other Purposes: If a customer has given specific instructions to reserve funds for some particular payment, the banker can refuse payment of any other cheque.

ii) When the Banker is Legally Bound to Refuse:

Stop Payment Order: If the drawer issues written instructions to stop payment of a particular cheque before it is presented, the banker must comply and refuse payment.
Notice of Death of Customer: When the banker receives notice of the customer’s death, all cheques issued thereafter must be dishonoured, as the contract between banker and customer ceases.
Notice of Insolvency or Lunacy: If the customer is adjudged insolvent or declared of unsound mind, the banker must stop payment immediately.
Attachment Order by Court or Government: If the banker receives an order from the court or government attaching the funds of the customer, payment must be refused.
Cheque Presented after Account Closure: If the account on which the cheque is drawn has been closed, the banker is bound to return the cheque unpaid.
Irregular or Incomplete Cheque: If a cheque is incomplete or does not bear a valid date, signature, or payee’s name, the banker can refuse payment.

Conclusion: Thus, a banker’s duty to honour cheques is subject to several conditions. While he must honour valid cheques, he is equally responsible for refusing cheques under improper or illegal circumstances. Failure to observe these conditions may make the banker liable to the customer for damages or loss of reputation.

2. Explain the Types of Endorsement under the Negotiable Instruments Act.

Answer: The term endorsement refers to the act of signing one’s name on the back of a negotiable instrument for the purpose of transferring ownership to another person. The person signing the instrument is called the endorser, and the person in whose favour it is signed is the endorsee.

Under the Negotiable Instruments Act, 1881, there are several types of endorsements based on the manner and effect of transfer.

i) General or Blank Endorsement: When the endorser signs his name only without specifying the name of the endorsee, it is called a general endorsement. The instrument becomes payable to the bearer and can be transferred by mere delivery.
Example: “(Signed) A Kumar.”

ii) Special or Full Endorsement: When the endorser writes the name of a specific person to whom or to whose order the payment is to be made, it is called a special endorsement. It restricts payment to that particular person.
Example: “Pay to B Kumar or order – (Signed) A Kumar.”

iii) Restrictive Endorsement: This type of endorsement restricts further negotiation of the instrument. It only authorizes the endorsee to receive the payment. Words like “Pay to B only” or “Pay to B for my use” indicate restrictive endorsement.
Example: “Pay to B only – (Signed) A Kumar.”

iv) Conditional or Qualified Endorsement: Here, the endorser imposes a condition that affects his liability or the payment of the instrument. For example, “Pay to B on his marriage” or “Pay to B if he returns from Delhi.”

v) Partial Endorsement: When the endorser transfers only a part of the amount mentioned in the instrument, it is known as partial endorsement. However, such an endorsement is invalid under the Act because a negotiable instrument must be transferred in full.

vi) Sans Recourse Endorsement: In this case, the endorser exempts himself from liability in case of dishonour of the instrument by writing “Without recourse to me” along with his signature.

vii) Facultative Endorsement: In a facultative endorsement, the endorser increases his liability by waiving some rights, such as notice of dishonour. Example: “Notice of dishonour waived – (Signed) A Kumar.”

Conclusion: Endorsement is a vital part of negotiable instruments, as it facilitates easy transfer of ownership and payment. The different types of endorsements serve various business needs, ensuring flexibility and safety in financial dealings.

3. What is Crossing of Cheque? Explain with Examples the Types of Crossing. (GU BCom 2021)

Answer: Meaning: Crossing of a cheque means drawing two parallel transverse lines on the face of a cheque, with or without additional words like “& Co.” or “A/c Payee.” The purpose of crossing is to instruct the banker to pay the cheque only through a bank account and not over the counter, ensuring safety in payment.

The Negotiable Instruments Act, 1881, recognizes several types of cheque crossing as described below:

i) General Crossing: When a cheque bears two parallel transverse lines on its face, with or without the words “& Co.” or “Not Negotiable,” it is called a generally crossed cheque. It means that the cheque can only be paid through a bank.
Example:

Pay: Mr. Ramesh

& Co.

ii) Special Crossing: When the name of a particular banker is written between the two parallel lines, it is known as special crossing. In such a case, payment can only be made through the banker mentioned.
Example: “Pay through State Bank of India only.”

iii) Account Payee Crossing (A/c Payee): If the words “A/c Payee” or “A/c Payee Only” are written within the crossing, the cheque amount can be credited only to the account of the named payee. It becomes non-transferable and ensures maximum security.

iv) Not Negotiable Crossing: When the words “Not Negotiable” are written across a crossed cheque, the transferee cannot obtain a better title than the transferor. Although the cheque remains transferable, it limits negotiability.

v) Double Crossing: If a cheque that is already crossed is further crossed by another banker while acting as an agent for collection, it is called double crossing. It is allowed only when the first banker acts as a collecting agent for another banker.

Importance of Crossing:

Provides security to the drawer and payee.
Prevents fraudulent encashment.
Ensures payment is made only through a bank account.
Creates a clear record of the transaction.

Conclusion: Crossing of cheques is a safety measure that minimizes risk and ensures payment through banking channels. It promotes reliability and transparency in financial transactions.

4. Discuss the Privileges of Holder in Due Course.

Answer: A Holder in Due Course (HDC) is a person who acquires a negotiable instrument for valuable consideration, in good faith, and before its maturity, without any knowledge of defects in the title of the transferor. Section 9 of the Negotiable Instruments Act, 1881, defines him and grants several privileges to encourage the free circulation of negotiable instruments.

The Privileges of a Holder in Due Course are as follows:

i) Better Title than Transferor: An HDC gets a better title than the person from whom he acquired the instrument. Even if the instrument was previously obtained by fraud, theft, or forgery, the HDC’s title remains valid.

ii) Right to Recover from All Prior Parties: Every prior party to the instrument—drawer, drawee, and endorsers—is liable to the holder in due course until the instrument is duly paid.

iii) Protection in Case of Conditional Delivery: Even if a negotiable instrument was delivered conditionally, the HDC can claim payment irrespective of those conditions, provided he acquired it in good faith.

iv) Estoppel against Inchoate Instrument: If a person signs and delivers a blank or incomplete negotiable instrument, he cannot later deny its validity against a holder in due course.

v) No Effect of Fraud or Theft: The title of an HDC is unaffected by any defect such as fraud or theft in previous transfers, provided he took the instrument honestly and for value.

vi) Right in Case of Forgery or Fraud: An HDC is protected even if one of the prior endorsements was forged, as long as he obtained the instrument in good faith.

vii) Instrument Purged of All Defects: Once a negotiable instrument passes into the hands of a holder in due course, it becomes purified of all defects, and all previous parties remain liable to him.

Conclusion: The privileges of a holder in due course strengthen confidence in negotiable instruments by ensuring that honest and bona fide holders are protected. This encourages the smooth functioning of trade and commerce.

5. Define Negotiable Instrument. Discuss the Characteristics. (GU BCom 2024)

Answer: Definition: According to Section 13 of the Negotiable Instruments Act, 1881, a Negotiable Instrument means a promissory note, bill of exchange, or cheque payable either to order or to bearer. These instruments are used in business as substitutes for money and are freely transferable from one person to another.

Characteristics of Negotiable Instruments:

i) Freely Transferable: A negotiable instrument can be freely transferred by one person to another through delivery or endorsement and delivery. This transfer does not require any formalities.

ii) Title of Holder in Due Course: The transferee of a negotiable instrument, if he is a holder in due course, obtains a better title than the transferor, even if the transferor’s title was defective.

iii) Written and Signed: A negotiable instrument must be in writing and signed by the maker or drawer; oral promises or orders do not constitute negotiable instruments.

iv) Certain Sum of Money: The amount payable under the instrument must be certain and not subject to any condition or contingency.

v) Payable on Demand or at a Future Date: A negotiable instrument may be payable either immediately on demand or after a specific period as mentioned in the document.

vi) Presumption of Consideration: It is presumed under the law that every negotiable instrument has been made or drawn for valuable consideration unless proved otherwise.

vii) Transferability by Delivery or Endorsement: A bearer instrument can be transferred by simple delivery, while an order instrument requires endorsement and delivery.

viii) Legal Protection: Negotiable instruments are governed by the Negotiable Instruments Act, 1881, which provides legal protection to bona fide holders and defines the rights and duties of all parties.

ix) Right to Sue in Own Name: The holder of a negotiable instrument can sue in his own name to recover the amount due, without needing to prove the original contract.

x) No Need for Notice of Transfer: When a negotiable instrument is transferred, the debtor need not be notified of the transfer, unlike other contracts.

Conclusion: Negotiable instruments such as cheques, bills of exchange, and promissory notes play a crucial role in modern business transactions. Their distinct characteristics—free transferability, legal protection, and certainty of payment—make them an essential part of the financial system.

6. Discuss the Liabilities of Drawer and Drawee in Case of Dishonour of Cheque.

Answer: A cheque is a negotiable instrument drawn by a customer (drawer) on a banker (drawee) directing the bank to pay a specified sum of money to a person (payee) or to the bearer of the cheque. When the banker refuses to make payment, the cheque is said to be dishonoured. In such a case, both the drawer and the drawee (banker) have specific liabilities under the Negotiable Instruments Act, 1881.

i) Liabilities of the Drawer:

Primary Liability to the Payee or Holder: The drawer of a cheque is primarily liable to ensure that there are sufficient funds in his account to honour the cheque. If the cheque is dishonoured, he must compensate the holder for the loss.
Liability under Section 138 of the NI Act: If a cheque is dishonoured due to insufficient funds or exceeds the arrangement made with the bank, the drawer is criminally liable under Section 138 of the Negotiable Instruments Act, 1881.
Penalty or Imprisonment: The Act provides for imprisonment up to two years or a fine which may extend to twice the amount of the cheque, or both.
Notice of Dishonour: The holder of the cheque must issue a written notice to the drawer within 30 days of receiving information about dishonour. If the drawer fails to make payment within 15 days from the receipt of the notice, legal action can be initiated.
Liability to Pay Compensation: The drawer is also liable to pay compensation, including interest and legal costs, to the holder for non-payment of the cheque.

ii) Liabilities of the Drawee (Banker):

Contractual Liability to the Customer: The drawee bank is under a contractual duty to honour the cheque if sufficient funds are available and all formalities are complied with. Wrongful dishonour can make the bank liable to the drawer for damages.
No Liability to the Payee or Holder: The banker is not directly liable to the payee or holder of the cheque because there is no contractual relationship between them.
Liability for Wrongful Dishonour: If a bank wrongfully dishonours a cheque despite having sufficient funds, the customer (drawer) can claim damages for injury to his credit and reputation.
Liability Ends on Valid Grounds: The banker is not liable if the cheque is dishonoured for valid reasons such as insufficient funds, signature mismatch, post-dating, or a stop payment order.

Conclusion: The drawer bears the principal responsibility to maintain sufficient balance, while the drawee (banker) is responsible for correctly executing payment instructions. Both have legal consequences in the event of cheque dishonour, ensuring integrity and trust in banking operations.

7. Explain the Bouncing of Cheque and Legal Remedies.

Answer: Meaning: When a cheque presented to a bank is returned unpaid due to insufficient funds, incorrect signature, closure of account, or any other reason, it is known as bouncing or dishonour of cheque. It is a punishable offence under Section 138 of the Negotiable Instruments Act, 1881.

i) Causes of Cheque Bouncing:

Insufficient Funds: The most common reason is that the drawer’s account does not have enough balance to cover the cheque amount.
Signature Mismatch: The signature on the cheque does not match the specimen signature with the bank.
Overwriting or Alteration: Any overwriting or material alteration without proper authentication leads to dishonour.
Post-Dated or Stale Cheque: A cheque presented before its date or after three months of its date may be dishonoured.
Stop Payment Order: If the drawer gives instructions to stop payment, the cheque will not be honoured.
Closed Account: If the drawer’s account has been closed before the cheque is presented, it will bounce.

ii) Legal Remedies Available:

Notice to Drawer: The payee must issue a written notice to the drawer within 30 days of receiving the dishonoured cheque memo from the bank.
Fifteen Days’ Time for Payment: The drawer must make payment within 15 days of receiving the notice. Failure to do so leads to legal consequences.
Filing of Complaint: The payee can file a criminal complaint under Section 138 of the NI Act within 30 days from the expiry of the 15-day notice period.
Punishment: The court may impose imprisonment up to 2 years, or a fine up to twice the cheque amount, or both.
Civil Remedy: The payee can also file a civil suit to recover the cheque amount along with interest and damages.
Jurisdiction: The complaint can be filed in the court where the payee’s bank is located.

Conclusion:
Cheque bouncing is a serious financial offence that affects business credibility and financial discipline. The Negotiable Instruments Act ensures legal protection to payees and imposes strict penalties to maintain trust in cheque-based transactions.

8. Discuss the Rules of Negotiation and Endorsement.

Answer : Meaning of Negotiation: Negotiation means the transfer of a negotiable instrument from one person to another in such a way that the transferee becomes the holder of the instrument. According to Section 14 of the NI Act, 1881, “When a negotiable instrument is transferred to any person so as to constitute that person the holder thereof, the instrument is said to be negotiated.”

i) Rules Regarding Negotiation:

By Delivery (Bearer Instruments): If the instrument is payable to bearer, it can be transferred by mere delivery without endorsement.
By Endorsement and Delivery (Order Instruments): If the instrument is payable to order, it can be transferred only by endorsement and delivery.
Holder in Due Course: The transferee becomes a holder in due course if the instrument is obtained for valuable consideration, in good faith, and before maturity.
Effect of Forgery: A forged endorsement passes no title; therefore, negotiation through forgery is void.
Negotiation after Maturity: If negotiated after maturity, the transferee does not become a holder in due course but only a holder with limited rights.
Lost or Stolen Instruments: A lost or stolen instrument can still be validly negotiated to a holder in due course who obtains it in good faith.
Right of the Holder: The holder has the right to recover the amount from all prior parties unless the instrument is discharged.

ii) Rules Regarding Endorsement:

Signature on Back or Face: Endorsement is generally made on the back of the instrument, but if space is insufficient, it may be continued on an attached slip (allonge).
Endorsement Must Be Complete: It must be signed and delivered to the endorsee to be valid.
Sequence of Endorsement: The endorsements should be regular and in proper order to transfer legal ownership.
Partial Endorsement Invalid: An endorsement that transfers only part of the amount payable is invalid.
Types of Endorsement: They include blank, special, restrictive, conditional, sans recourse, and facultative endorsements.

Conclusion: Negotiation and endorsement are vital processes that enable the free circulation of negotiable instruments. These rules ensure legality, smooth transfer, and protection of all parties involved in financial transactions.

9. Discuss the Essentials of a Valid Promissory Note.

Answer: Definition: According to Section 4 of the Negotiable Instruments Act, 1881, a Promissory Note is an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money to a certain person or the bearer of the instrument.

Essentials of a Valid Promissory Note:

In Writing: The instrument must be in writing. Oral promises or verbal undertakings are not valid under the Act.
Unconditional Undertaking to Pay: The promise to pay must be unconditional. If payment depends on any event or contingency, it is invalid.
Signed by the Maker: The promissory note must bear the signature of the maker, showing his consent to pay.
Certain Sum of Money: The amount payable must be certain and expressed clearly in figures and words.
Payable to a Certain Person: The payee must be clearly identifiable. Payment to an uncertain or fictitious person invalidates the note.
Payable on Demand or at a Fixed Time: The time of payment must be specified—either on demand or after a certain period.
Stamping: The promissory note must be duly stamped according to the Indian Stamp Act; otherwise, it cannot be used as evidence in court.
Delivery: The promissory note becomes complete only after it is delivered to the payee.
Consideration: It is presumed that every promissory note is made for valuable consideration unless proved otherwise.

Example: “I promise to pay B or order the sum of ₹10,000 after three months.” (Signed) A Kumar.

Conclusion: A valid promissory note serves as a written proof of debt and ensures certainty of payment. It is a vital instrument in commercial credit transactions and carries legal enforceability under the NI Act.

10. Discuss the Essential Features of a Bill of Exchange.

Answer: Definition: According to Section 5 of the Negotiable Instruments Act, 1881, a Bill of Exchange is an instrument in writing containing an unconditional order, signed by the drawer, directing a certain person (drawee) to pay a certain sum of money to a certain person or to the bearer of the instrument.

Essential Features:

In Writing: The bill must be in written form. Oral orders are not recognized.
Unconditional Order to Pay: The order must be unconditional; any condition attached to payment makes the bill invalid.
Signature of Drawer: The bill must be signed by the drawer, showing his consent and responsibility.
Drawee’s Acceptance: The drawee must accept the bill by signing it, showing his willingness to pay.
Certain Amount of Money: The sum payable must be definite and not dependent on any variable or condition.
Payable to a Certain Person: The payee must be certain or identifiable. Payment cannot be made to an uncertain person.
Payable on Demand or after a Fixed Period: The bill must specify when payment is to be made—either on demand or after a stated period.
Stamped Instrument: A bill of exchange must be properly stamped according to the Indian Stamp Act.
Delivery: The bill must be delivered to the payee or holder to be complete and enforceable.
Three Parties Involved: A bill of exchange always involves three parties – Drawer, Drawee, and Payee.

Acceptance by Drawee: The drawee’s acceptance is necessary for the bill to become a valid and enforceable obligation.

Conclusion: A bill of exchange is a key financial instrument used in trade and credit transactions. It provides legal assurance of payment, promotes credit trade, and maintains smooth commercial relationships among traders and financial institutions.

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