Chapter 22: The Negotiable Instruments Act, 1881 — Exercise Solutions
How to Use This Page
1. Read the Key Concepts table first for a quick refresher of all important terms and definitions. 2. Attempt the MCQs — bold answers are provided; try to answer before checking. 3. Fill in the Blanks and True/False test your recall of section numbers, definitions, and technical details. 4. Match the Following reinforces associations between terms and their meanings. 5. Brief and Detailed answers follow the exam format — use the sub-points to structure your own answers. 6. Common Mistakes highlights frequent exam traps; review these before your exam. 7. Exam Checklist is your final revision sheet — tick each item once you are confident.
Key Concepts (Quick Recap)
| Term | Definition |
|---|---|
| Negotiable Instrument | A document entitling a person to a sum of money, transferable by delivery or endorsement and delivery |
| Promissory Note (Sec 4) | An instrument in writing containing an unconditional undertaking to pay a certain sum, signed by the maker |
| Bill of Exchange (Sec 5) | An instrument in writing containing an unconditional order to pay, signed by the drawer, directing the drawee |
| Cheque (Sec 6) | A bill of exchange drawn on a specified banker, payable on demand |
| Holder in Due Course | A person who takes the instrument for consideration, in good faith, before maturity and without notice of defect |
| Endorsement | Signing on the back or face of an instrument for the purpose of negotiation |
| General Crossing (Sec 123) | Two transverse parallel lines across the face of a cheque, with or without "& Co." or "Not Negotiable" |
| Special Crossing (Sec 124) | The name of a specific banker written across the face of the cheque; parallel lines are not essential |
| Allonge | A paper attached to an instrument when there is no space left for further endorsement |
| Grace Days | 3 extra days added to the maturity date of a Bill of Exchange (not applicable to cheques) |
| Stale Cheque | A cheque that is not presented within 3 months from the date of issue |
| Sans Recourse Endorsement | An endorsement where the endorser excludes liability to subsequent holders |
| Facultative Endorsement | An endorsement where the endorser relinquishes the right to give notice of dishonour |
| Bearer Instrument | An instrument payable to the bearer; transferable by mere delivery |
| Order Instrument | An instrument payable to a specified person or their order; transferable by endorsement and delivery |
I. Choose the Best Answer (MCQs)
Textbook MCQs
Q1. The Negotiable Instruments Act was passed in the year
- a) 1880 b) 1881 c) 1882 d) 1883
Q2. A negotiable instrument is freely transferable by delivery if it is a
- a) Order instrument b) Bearer instrument c) Both d) None
Q3. The transferee of a negotiable instrument is the person
- a) Who transfers b) On whose name it is transferred c) Who endorses d) None
Q4. The number of parties in a bill of exchange is
- a) 2 b) 4 c) 3 d) 5
Q5. Section 6 of the Negotiable Instruments Act deals with
- a) Promissory Note b) Bill of Exchange c) Cheque d) Endorsement
Q6. Which of the following cannot be a bearer instrument?
- a) Cheque b) Bill of Exchange c) Promissory Note d) Hundi
Q7. The crossing that restricts further negotiation of a cheque is
- a) Not negotiable crossing b) General crossing c) Special crossing d) Restrictive crossing
Q8. The endorsement that relieves the endorser from liability is called
- a) Sans Frais b) Facultative endorsement c) Restrictive d) Conditional
Q9. A cheque becomes stale after
- a) 3 months b) 6 months c) 12 months d) 24 months
Q10. Document of title to goods excludes
- a) Bill of Lading b) Dock Warrant c) Warehouse Receipt d) Invoice
Additional MCQs
Q11. Number of parties to a cheque
- a) 2 b) 3 c) 4 d) 5
Q12. Number of parties to a Promissory Note
- a) 1 b) 3 c) 4 d) 2
Q13. A bill of exchange drawn on a specified banker is called
- a) Promissory Note b) Cheque c) Hundi d) Draft
Q14. Section defining Bill of Exchange
- a) Section 4 b) Section 6 c) Section 5 d) Section 7
Q15. Section defining Cheque
- a) Section 4 b) Section 5 c) Section 6 d) Section 7
Q16. Grace days allowed for Bill of Exchange
- a) 3 b) 5 c) 7 d) 10
Q17. A person who signs on the back of an instrument to transfer it is called
- a) Drawer b) Endorser c) Drawee d) Payee
Q18. A paper attached to an instrument for endorsement when space is insufficient is called
- a) Allonge b) Draft c) Hundi d) Endorsement
Q19. "Pay to Nehan, if he got 595 marks" is an example of
- a) Blank endorsement b) Special endorsement c) Conditional endorsement d) Restrictive endorsement
Q20. "Pay to Noohu or Bearer" is an example of
- a) Bearer instrument b) Order instrument c) Hundi d) None
Q21. "Pay to Nathifa or order" is an example of
- a) Order instrument b) Bearer instrument c) Conditional instrument d) None
Q22. Two transverse parallel lines are not essential in
- a) General crossing b) Special crossing c) Not negotiable crossing d) Restrictive crossing
Q23. IFSC is an
- a) 10 character code b) 11 character code c) 12 character code d) 9 character code
Q24. Odd one out: Promissory Note, Bill of Exchange, Cheque, MNC
- a) Promissory Note b) Bill of Exchange c) Cheque d) MNC
Q25. Odd one out: Stock Exchange, Bullion Market, Produce Exchange, Commodity Exchange
- a) Stock Exchange b) Bullion Market c) Commodity Exchange d) Produce Exchange
II. Fill in the Blanks
1. The Negotiable Instruments Act was enacted in the year 1881. 2. A Promissory Note has two parties — Maker and Payee. 3. A Bill of Exchange has three parties — Drawer, Drawee, and Payee. 4. Section 4 of the Negotiable Instruments Act defines Promissory Note. 5. Section 5 defines Bill of Exchange. 6. Section 6 defines Cheque. 7. A cheque becomes stale after 3 months from the date of issue. 8. Three grace days are allowed for a Bill of Exchange. 9. A paper attached to a negotiable instrument for endorsement when space is insufficient is called an Allonge. 10. The crossing that contains the name of a specific banker across the face of a cheque is called Special Crossing.
III. True or False (with corrections)
1. True. A negotiable instrument is freely transferable by delivery or by endorsement and delivery. 2. False. A Promissory Note has three parties. — Correction: A Promissory Note has two parties (Maker and Payee); a Bill of Exchange has three parties. 3. True. A cheque is always drawn on a specified banker. 4. False. General Crossing and Special Crossing are the same. — Correction: General Crossing has two transverse parallel lines across the face; Special Crossing has the name of a specific banker and does not require parallel lines. 5. False. A cheque can be discounted like a bill of exchange. — Correction: A cheque cannot be discounted; only a bill of exchange can be discounted. 6. True. Part endorsement is invalid under the Negotiable Instruments Act. 7. False. Cheques have 3 days of grace like bills of exchange. — Correction: Cheques have no grace days; only bills of exchange have 3 days of grace. 8. True. A holder in due course gets a good title free from all defects, even if the transferor had a defective title.
IV. Match the Following
Match Q1.
| Column A | Column B |
|---|---|
| General Endorsement | 4. Simply signed by the endorser |
| Full Endorsement | 3. "Pay to Nehan" |
| Conditional Endorsement | 2. "Pay Noman if he returns the goods" |
| Restrictive Endorsement | 1. "Pay to Nusrath only" |
Match Q2. — Key Sections and Instruments
| Column A | Column B |
|---|---|
| Section 4 | 3. Promissory Note |
| Section 5 | 2. Bill of Exchange |
| Section 6 | 1. Cheque |
| Allonge | 4. Paper attached for endorsement |
| Sans Recourse | 5. Endorser excludes liability |
V. Answer Briefly (2-mark questions)
Q1. Define Negotiable Instrument. A Negotiable Instrument is a document entitling a person to a sum of money and which is transferable by delivery or by endorsement and delivery. It enables debt to be paid conveniently and the holder can sue in his own name.
Q2. Define Bill of Exchange (Section 5). 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 to a certain person or to the order of a certain person or to the bearer of the instrument.
Q3. State any three characteristics of a Promissory Note. 1. It must be in writing. 2. The promise to pay must be unconditional. 3. It must be signed by the maker.
Q4. Define Cheque. A cheque is a printed instrument issued by Commercial Banks for the withdrawal of money. The three parties are: Drawer (account holder), Drawee (bank), and Payee (recipient).
Q5. Define Endorsement. Endorsement is the act of the maker or holder signing his name on the back or face of a negotiable instrument for the purpose of negotiation.
Q6. What is an Allonge? An Allonge is a paper attached to a negotiable instrument when there is insufficient space on the instrument itself for further endorsement. Endorsements can then be made on the Allonge.
Q7. What is Negotiability? How does it differ from Assignability?
| Point | Negotiability | Assignability |
|---|---|---|
| Nature of title | Holder gets better title | Assignee gets only what assignor has |
| Ownership | Complete and independent | Dependent on assignor's title |
| Notice | No notice needed | Notice to debtor is necessary |
Q8. Define Holder in Due Course. A Holder in Due Course is a person who takes a negotiable instrument for consideration, in good faith, and before its maturity date, without having notice of any defect in the title of the transferor. Such a holder gets a good title free from all defects.
VI. Answer in Detail (5-mark questions)
Q1. Explain the presumptions of a Negotiable Instrument. 1. Consideration: Every negotiable instrument is presumed to have been made or drawn for consideration. 2. Date: The date mentioned on the instrument is presumed to be the date of its execution. 3. Acceptance: A bill of exchange is presumed to have been accepted on the date mentioned. 4. Transfer before maturity: The instrument is presumed to have been transferred before its maturity date. 5. Lost instrument duly stamped: A lost instrument is presumed to have been duly stamped. 6. Holder in due course: The holder is presumed to be a holder in due course unless the contrary is proved.
Q2. Distinguish between Cheque and Bill of Exchange.
| Point | Cheque | Bill of Exchange |
|---|---|---|
| Drawn on | Always drawn on a banker | Drawn on any person |
| Dishonour | Dishonour is a criminal offence | Dishonour is not a criminal offence |
| Grace days | No grace days | 3 days of grace |
| Stamping | Not necessary | Must be stamped |
| Acceptance | Does not require acceptance | Must be accepted |
| Notice | Notice of dishonour not necessary | Notice of dishonour is necessary |
| Discounting | Cannot be discounted | Can be discounted |
| Validity | Valid for 3 months | Valid up to maturity date |
| Payability | Always payable on demand | May be payable on demand or after a period |
Q3. Explain the features of a Cheque. 1. Writing: A cheque must be in writing and printed form. 2. Unconditional orders: The order to pay must be unconditional. 3. Specified banker: It must be drawn on a specified banker. 4. Certain sum: The amount to be paid must be certain. 5. Payee certain: The payee must be a certain person. 6. Signed by drawer: It must be signed by the drawer (account holder).
Q4. What are the requisites for a valid endorsement? 1. It must be on the face or back of the instrument. 2. If there is no space, a paper called "Allonge" may be attached for endorsement. 3. Part endorsement is invalid — the whole amount must be endorsed. 4. Delivery of the instrument is essential for a valid endorsement. 5. Endorsement in block letters is not valid; it must be in the usual handwriting. 6. An illiterate person can use thumb impression for endorsement.
Q5. Explain the kinds of endorsement. 1. Blank/General Endorsement: The endorser simply signs without naming any endorsee. 2. Full/Special Endorsement: The endorser signs and specifies the name of the endorsee. 3. Conditional/Qualified Endorsement: The endorsement is subject to a condition being fulfilled. 4. Restrictive Endorsement: The endorsement restricts further negotiation (e.g., "Pay to X only"). 5. Sans Recourse Endorsement: The endorser excludes liability to subsequent holders. 6. Sans Frais Endorsement: The endorser specifies that no expenses should be incurred. 7. Facultative Endorsement: The endorser relinquishes the right to give notice of dishonour. 8. Partial Endorsement: An endorsement of only part of the amount is invalid.
Common Mistakes to Avoid
- Confusing "order" and "bearer" instruments: "Pay to X or order" creates an order instrument; "Pay to X or bearer" creates a bearer instrument. Do not mix these up.
- Number of parties: A Promissory Note has 2 parties (Maker, Payee), while a Bill of Exchange and Cheque each have 3 parties. This is a frequent exam trap.
- Grace days: Only Bills of Exchange get 3 grace days. Cheques and Promissory Notes have NO grace days.
- Part endorsement: Remember that partial endorsement is always invalid — you cannot endorse only part of the amount.
- General vs Special Crossing: General crossing requires two transverse parallel lines; special crossing requires the banker's name but parallel lines are NOT essential.
- Cheque cannot be a bearer instrument: A cheque is always an order instrument drawn on a specified banker; it cannot be a bearer instrument.
- Section numbers: Section 4 = Promissory Note, Section 5 = Bill of Exchange, Section 6 = Cheque. Mixing these up costs marks.
- Discounting: Only a Bill of Exchange can be discounted; a cheque cannot be discounted. This is a common trap in comparison questions.
- Bearer vs Order: "Pay to X or bearer" = bearer instrument (transferable by delivery). "Pay to X or order" = order instrument (transferable by endorsement and delivery). Do not confuse these.
- Dishonour of Cheque: Dishonour of a cheque is a criminal offence under Section 138 of the Negotiable Instruments Act. Dishonour of a bill of exchange is NOT a criminal offence.
- Notice of Dishonour: For a bill of exchange, notice of dishonour must be given. For a cheque, notice of dishonour is NOT necessary. This is an important distinction in comparison tables.
Exam Checklist
- [ ] Know the difference between Promissory Note, Bill of Exchange, and Cheque (parties, sections, features)
- [ ] Memorize all 8 types of endorsement with one example each
- [ ] Can draw the comparison table between Cheque and Bill of Exchange (9 points)
- [ ] Can list all 6 presumptions of a Negotiable Instrument
- [ ] Understand General Crossing vs Special Crossing (Sections 123 and 124)
- [ ] Know that a cheque becomes stale after 3 months
- [ ] Remember Section numbers: Sec 4 = Promissory Note, Sec 5 = Bill of Exchange, Sec 6 = Cheque
- [ ] Can explain the requisites for a valid endorsement (6 points)
- [ ] Distinguish Negotiability vs Assignability (3-row table)
- [ ] Know the definition and features of a Holder in Due Course
- [ ] Can define Allonge and explain its purpose
- [ ] Remember: Part endorsement is always invalid — full amount only
- [ ] Can list the 3 types of Negotiable Instruments: Promissory Note, Bill of Exchange, Cheque
- [ ] Know that dishonour of cheque is a criminal offence (Section 138) but dishonour of bill is not