Legal Aspects of Business

Assignment No.2
Negotiable Instruments Act, 1881

Q.No.1. Define
(a) Promissory note
 A promissory note is a legal, financial tool declared by a party, promising
another party to pay the debt on a particular day. It is a written agreement signed
by drawer with a promise to pay the money on a specific date or whenever
demanded.

(b) Bill of Exchange

 According to the Negotiable Instruments Act 1881, ‘a bill of exchange is defined
as 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.’

(c) Cheque
 A Cheque is a document which orders a bank to pay a particular amount of
money from a person’s account to another individual’s or company’s account in
whose name the cheque has been made or issued. The cheque is utilised to make
safe, secure and convenient payments.

Q.No.2. A bill is drawn payable at F-10, DDA Flats; Janakpuri, but does not contain the name of
the drawee. W who resides at the said flat, accepts the bill. Is it a valid bill?
 No it is not a valid bill the bill must contain the name of the drawee. As it is one
of the essential elements of bill.

Q.No.3. Explain the terms:

(a) Holder
 Section 8 of Negotiable Instruments Act 1881defines the term Holder as The
holder of a negotiable instrument is any person who is for the time being entitled
in his own name and right to the possession of the instrument and to receive and
recover the amount due on the instrument. A person is said to be held only if he
has possession and entitled for that possession along with entitled to claim
money under it

(b) Holder in due course

  According to Section 9, “Holder in due course means any person who for
consideration became the possessor of a promissory note, bill of exchange or
cheque is payable to bearer, or the payee or endorsee thereof, if payable to order
before the amount mentioned in it became payable and without having sufficient
cause to believe that any defect existed in the title of the person from whom he
derived his title”.

Q.No.4. A draws a cheque in favour of B, a minor. B indorse it in favour of C. The cheque is

dishonoured by the Bank, Discuss the rights of C.
 When a cheque is dishonoured, the bank will issue a ‘cheque return memo’ to
the banker of the payee mentioning the reason behind the dishonor of cheque.
The banker then transfers the cheque return memo along with the dishonored
cheque to the payee. Then the payee may issue a notice to the drawer for the
payment of amount within 15 days from the date of issue of the cheque and
resubmit the cheque within 30 days from the date mentioned on the cheque on a
belief that the cheque will not be dishonored this time If the cheque is being
dishonored again According to Section 138 of the Act[2], dishonour of the
cheque is a criminal offense and is punishable by an imprisonment of two years
along with a monetary compensation as fine or both

Q.No.5. What is an indorsement?

 The act of a person who is holder of a negotiable instrument in signing his or her
name on the back of that instrument, thereby transferring title or ownership. An
endorsement may be made if favour of another individual or legal entity,
resulting in a transfer of the property to that other individual o legal entity.

Q,No.6. What is crossing of cheque?

 Crossing of a cheque is nothing but instructing the banker to pay the specified
sum through the banker only, i.e. the amount on the cheque has to be deposited
directly to the bank account of the payee. Hence, it is not instantly encashed by
the holder presenting the cheque at the bank counter. If any cheque contains
such an instruction, it is called a crossed cheque

Q.No.7. A cheque payable to bearer is crossed generally and is marked ‘not negotiable’. The
cheque is lost and comes into the possession of B, who takes it in good faith and for
value. B deposits the cheque into his account and his banker collects the same.
(a) Discuss the liability of collecting banker and paying banker.
 In the given case, both the collecting banker and the paying bankers would be
exonerated. Since the collecting banker, in good faith and without negligence,
 had received payment for B, who was its customer of the cheque which was
crossed generally, the banker would not be liable, in case the title proved to be
defective, to the true owner by reason only of having received the payment of
the cheque for his customer (Section 131). Since the paying banker on whom the
crossed cheque was drawn, had paid the same in due course, the banker would
also not be liable to the true owner.

(b) Can B be compelled to refund the money to the true owner of the cheque?

 B did not obtain any better title than his immediate transferor, who had found
the cheque and was not the true owner of the cheque. Therefore, as regards the
true owner, B was in no better position than the transferor. B is also liable to
repay the amount of the cheque to the true owner. He can, however, proceed
against the person from whom he took the cheque.