1. Who are the different Kinds of Parties to a Negotiable Instrument?

Ans: Drawer: The maker of a note, bill or cheque is called the drawer.

Drawee: The person who is directed to pay is called the drawee.

Acceptor: In case of a BOE, the drawee becomes the acceptor when he signs his assent upon the bill and delivers the same or gives notice of such acceptance to the holder or to some person on his behalf. A cheque is not required to be accepted by the drawee.

Payee: The person to whom the payment is to be made is called the payee.

Indorser: The person who indorses the NI in favour of another is called the indorser. Indorsee: the person to whom a NI is indorsed is called the Indorsee.

2. Define Promissory Note.

Promissory Note:  It is defined under Section.4 of the N.I Act and Section 2(K) of the Limitation Act, 1963.

Promissory note:- A promissory note is an instrument in writing (not being a bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain person or to the bearer of the instrument.

Ex: I promise to pay B or order Rs 500.

Limitation Act: It says Promissory Note means any instrument whereby the maker engages absolutely to pay as a specified sum of money to another at a time therein limited, or on demand, or at sight.

3. Bill of Exchange:

It is defined u/S.5 of the N.I Act, 1881 and s.2(c) of the Limitation Act, 1963.

A  Bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay the bearer of the instrument. There are three parties to a bill of exchange viz., a drawer, drawee and payee.

Limitation Act:  It says bill of exchange includes a hundi and cheque.

4. Define Cheque.

Cheque:- It is defined under S.6 of the N.I Act, 1881.A cheque is a bill of exchange drawn upon a specified banker and payable on demand. Thus cheque is Bill of exchange, with the following two additional qualifications :(i) it is always drawn on a specified banker, (ii) it is always payable on demand.

5. Distinction between Pro note and BOE:

1) In a Pro note there only two parties – the maker and the payee, In BOE there may be three parties- the drawer, the drawee, the payee. A note is never payable to the maker himself, while in the bill the drawer and the payee may be the same person. 2) A note contains an unconditional promise to pay a certain sum of money to the payee or his order, while a Bill contains an unconditional order upon the drawee to pay a certain sum of money to the payee or to his order. 3) the liability of the maker of a note is primary and absolute and in case of BOE it is secondary and conditional. 4) the maker of a note stands in immediate relation with the payee, while the drawer of a bill stands in immediate relation with the acceptor and the payee. 5) In case of dishnour of a bill, due notice of dishonour must be given to the drawer and the immediate indorsers, but no such notice is required to be given to the drawer in case of dishnour of a note.

6. Distinction between Cheque and BOE:

1) A BOE may be drawn on any person, while a cheque is always drawn on a banker 2) A BOE may be payable on demand, or on the expiry of a certain period, or on a certain date, or at sight, while a cheque is always payable on demand. 3) A bill must be accepted before payment can be demanded on it, where a cheque requires no acceptance as it is intended for immediate payment. 4) A grace of three days is allowed in case of time bills, while no such grace is allowed on cheques. 5) A cheque doesn’t require any stamp whereas bill is ordinarily stamped. 6) A cheque may be crossed, but not bill. 7)A cheque is not required to be noted or protested for dishonour, while a bill is required to be noted and even protested in some cases.

7. Holder: – It is defined u/S.8 of the Negotiable Instruments Act, 1881. Any person on his own name entitled to the possession and to receive or recover the amount due thereon from the parties thereto of a Negotiable Instrument. If the negotiable instrument is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.

8. Holder in due course: – It is defined u/S.9 of the Negotiable Instruments Act, 1881. Holder in due course means any person who for consideration became the possessor of a Negotiable instrument if payable to bearer, or the payee or indorsee 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.

9. A minor issues a cheque in discharge of a liability and it was dishonored, whether he is liable to be prosecuted u/S.138 of the N.I Act.

Minor or unsound person is incompetent to enter into a contract as per S.11of the Indian Contract Act, 1872. However, S.26 of the Negotiable Instruments Act 1888 permits unsound or minor to draw, indorse, deliver and negotiate a negotiable instrument so as to bind all parties except himself.  Thus they are empowered to convey valid title and acquire rights over the negotiable instrument but can’t be burdened with liability.

10. What is meant by Material Alternation?

S.87 talks about Material alteration. Any alteration or changes in the instrument which changes the rights and liabilities of the parties to the instrument is called material alteration. Material alteration makes the instrument void. Material alteration discharges those who became parties prior to the alteration. It makes no differencec whether the alteration is beneficial or prejudicial. Ex: Alteration or Change of amount or interest rate in the instrument contrary to contract is a material alteration.

11. What is meant by Indorsemnt?

Ans: The act of signing on the back of the instrument by the transferor so as to complete negotiation is called as Indorsement.

12. What is Negotiation and how it is done?

Ans: Negotiation means the transfer of property or ownership of the instrument from one person to another in such a manner as to convey title and to constitute the transferee, the holder thereof. Negotiation can be done by two ways: a) Indorsemnt and delivery, if, it is payable to order b) Mere delivery without any indorsemnt, if it is payable to bearer.

13. What are the essential ingredients of offence u/S.138 of N.I Act?

To constitute Civil Liability for recovery of cheque amount, mere non-payment of money upon demand is adequate. However, in order to constitute criminal liability the following conditions shall be fulfilled:

1. The cheque shall be issued for the discharge of any legally enforceable debt or other liability.
2. It shall have been presented within the period of six months or within the period of its validity whichever is earlier.
3. The cheque is returned by the bank unpaid due to insufficiency of funds in the accused bank account.
4. The payee has given a notice to the drawer claiming the amount within 30 days of the receipt of the information by the bank.
5. The drawer failed to pay within 15 days from the date of the receipt of notice.
6. If the accused didn’t pay the amount within fifteen days, his omission of non-payment amounts to offence on 16^th day.

The complaint should have been failed within one month from the date of expiry for the payment of amount before a Metropolitan Magistrate or JMFC.

14. What is meant by Crossing of Cheque? What are Different types of Crossing?

A crossed cheque is one which bears on its face two parallel transverse lines, usually on the top left hand corner of the cheque. The payment of a crossed cheque can be obtained only through a banker. The holder has first to open an account with some banker and then deposit the cheque into his account to enable the banker to collect its payment on his behalf and credit it into his account. This makes it easy to trace the receipt of money, if it subsequently turns out that some wrongful person has obtained the payment. On other hand if such crossing is absent such cheque is called open cheque. An open cheque is therefore, prone to a great risk. If the rightful holder of a cheque loses it, any wrongful person who finds it may go to the bank and obtain payment, unless the payment has already been stopped.  Types of Crossing: a) General Crossing b) Special crossing.

1. a) General Crossing: A cheque is said to be crossed generally when two parallel transverse lines are drawn with or without the words ‘and company’, ‘account payee only’ or ‘not negotiable’ or any abbreviation thereof, between the lines, but there is not the name of any bank. When a cheque is crossed generally, the drawee bank shall not pay it unless it is presented by a banker.

1. b) Non-Negotiable Crossing: When the crossing carries the words ‘not negotiable’, it is said to be ‘not negotiable’ crossing. According to S.130 a, mere writing a word of “Not negotiable” does not mean that the cheque is not transferable. It is still transferable, but the transferee cannot get title better than what transferor had. The cheque remains fully negotiable but is negotiable value is diminished. Any person taking such a cheque doesn’t become a HDC, he only gets the rights of the transferor. Ex: Venu drew a blank cheque crossed ‘not negotiable’ and handed it over to his agent to fill in the amount and the name of the payee. The agent fraudulently completed the cheque and transformed to one P, in payment of a debt of his own. Held, the agent had no title to the cheque and as such P had no better title to the cheque.
2. c) Account Payee only Crossing: Theoretically speaking, a cheque crossed ‘account payee only’ remains transferable. In Practise, however, the transferee will find it difficult to get the cheque collected for him. Account payee only crossing is a direction to the collecting banker that the proceeds of the cheque shall be received only for the payee and credited to his account. If the banker receives the proceeds of such a cheque for and on behalf of any person other than payee, the banker will be guilty of negligence. Thus a cheque crossed account payee only becomes non-negotiable for all practical purposes.

Special Crossing: A cheque is said to be crossed specially, when the lines of crossing carry the name of a banker with or without any additional words, in between the lines. The payment of a special crossed cheque can be obtained only through the particular banker whose name appears in between the lines or through its agent bank for collection. A cheque may be crossed by drawer, holder and banker. Drawer: The drawer of a cheque may cross it generally or specially. Holder: Where the cheque is open the holder may cross it generally or specially. Where the cheque is crossed generally, the holder may cross it specially. Banker: Where the cheque is crossed generally or specially, the holder may add the words ‘not negotiable’ Banker: where the cheque is crossed specially, the banker to whom it is cross may against cross it especially to another banker or his agent for collection. This is also known as double crossing and is generally resorted to when the banker in whose favour the cheque is specially crossed is not a member of the clearing house or doesn’t have a branch where the cheque is to be paid.

15. What is difference between Inland and Foreign Instrument?

Ans: Inland and Foreign Instrument: A promissory note, bill or cheque which is both drawn and payable in India or drawn upon any person resident in India, is deemed to be an inland instrument. An instrument which is not an inland instrument is a foreign instrument.

16. What is an Inchoate Instrument?

Ans: An instrument which is incomplete in some respect is called an inchoate instrument. When a person signs and delivers to another, a stamp paper, either wholly blank or after having written thereon an incomplete NI, he thereby authorises that other person to make or complete upon it a negotiable instrument for any amount not exceeding the amount covered by the stamp. The person so signing is liable upon such instrument, in the capacity in which he signed the same, to a HDC, for such amount. However, a person other than HDC, can recover from the person signing that instrument only the amount intended by him to be paid thereon.

17. What is meant by Escrow?

Ans: An Escrow is a NI delivered conditionally or for a special purpose as a collateral security or for safe custody only, and not for the purpose of transferring the property therein absolutely. As between the immediate parties, the liability to pay on an escrow doesn’t arise unless the conditions agreed upon are fulfilled or the purpose for which the instrument was delivered is not satisfied. However, a HDC of an escrow can sue on it irrespective of whether the conditions are fulfilled or the purpose is satisfied or not.