CAIIB BRBL Module B UNIT 9 MCQ – Negotiable Instruments Act, 1881

Correct Answer: C. To pay the cheque when duly required to do so. Section 31 mandates that a drawee bank, holding adequate and available funds of the drawer, must honour a cheque upon proper presentation. Failure to do so can lead to the bank being liable to compensate the drawer for any loss or damage caused by such default.

Correct Answer: C. The drawer of the cheque. In case of wrongful dishonour of a cheque, Section 31 specifies that the drawee bank must compensate the drawer for any loss or damage caused by such default. The liability is directly to the drawer, not typically to the payee or other holders, except in specific circumstances like the bank’s winding up or incorrect payment heedless of crossing.

Correct Answer: B. The funds must be sufficient and properly applicable to the payment. For the bank’s duty to pay to arise, there must be an adequate credit balance in the customer’s account, or an overdraft facility, and these funds must be available for payment, meaning not subject to any lien or restraining order.

Correct Answer: B. When duly required so to do. This implies that the cheque must be properly drawn, signed by the drawer, and presented in a valid manner for the bank’s obligation to pay to be triggered.

Correct Answer: B. Payment made in accordance with the apparent tenor of the instrument in good faith and without negligence. This means the payment aligns with what appears to be the drawer’s intention on the face of the instrument, made honestly and without carelessness, to a person in possession under circumstances that do not suggest they are not entitled to receive payment.

Correct Answer: B. The payment should be in accordance with the intention of the drawer as it appears on the face of the instrument. This means the payment must align with the instructions visible on the cheque, and it cannot be made before the maturity date, nor can post-dated cheques be paid prematurely.

Correct Answer: B. The payment must be made in good faith and without negligence. Section 10 offers no protection to a banker who acts dishonestly or carelessly, such as by failing to notice irregularities in endorsements.

Correct Answer: B. Payment should be made to any person in possession thereof, under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment. This means that if circumstances suggest the possessor is not the rightful party (e.g., payment of the cheque has been stopped by the drawer), payment to such a person would not be ‘in due course’.

Correct Answer: B. Discharge by payment in due course even if the payee’s indorsement is forged. Section 85(1) protects a paying banker who makes payment in due course of an order cheque, even if an indorsement by or on behalf of the payee is subsequently found to be forged, as bankers cannot typically verify the signatures of payees or endorsers who are not their customers.

Correct Answer: B. The drawee is discharged, notwithstanding any indorsement (in full or blank) appearing thereon. For a cheque initially payable to bearer, payment in due course to the bearer discharges the bank, regardless of any subsequent indorsements, even if those indorsements attempt to restrict further negotiation.

Correct Answer: B. Because paying bankers cannot ordinarily be expected to know the signatures of payees and various endorsers who are usually not their customers. This protection acknowledges the practical difficulty for a paying bank to verify the authenticity of every indorsement on an order cheque.

Correct Answer: B. The bank may be considered to have acted in good faith and without negligence if reasonable precautions were taken. If the bank took steps like verifying the company seal and the manager’s identity through a known constituent, it may be deemed to have acted without negligence, even if the endorsement was fraudulent, thus fulfilling a condition for ‘payment in due course’.

Correct Answer: B. An alteration that substantially changes the instrument or the liabilities of the parties to it. A material alteration is one that changes the ‘business effect’ or legal character of the instrument, regardless of whether it benefits or prejudices any party.

Correct Answer: C. Alteration of the amount payable. Changing the sum payable on a cheque is a very common form of fraudulent alteration and is considered material as it directly impacts the core obligation of the instrument.

Correct Answer: B. That the alteration is confirmed by the drawer’s signature or made with their consent/authority. To avoid issues with altered cheques, any material change should be authenticated by the drawer, typically by their signature next to the alteration.

Correct Answer: B. If the alteration is not apparent and payment is made according to the apparent tenor in due course. If an alteration is so skilfully made that it is not noticeable through ordinary diligence, and the bank pays the cheque as it appears, in good faith and without negligence, the bank is protected.

Correct Answer: B. Such payment shall discharge the banker from all liability thereon. If the obliteration of a crossing is not apparent and the banker pays the cheque as if it were uncrossed, in due course, the banker is protected from liability.

Correct Answer: B. Any difference in the apparent tenor of such electronic image and the truncated cheque. Any discrepancy between how the cheque appears in its electronic form versus its original physical form (before truncation) is considered a material alteration.

Correct Answer: B. To ensure the exactness of the apparent tenor of the electronic image while truncating and transmitting it. The responsibility lies with the bank or clearing house performing the truncation to make sure the electronic image accurately reflects the original cheque.

Correct Answer: C. Verify from the party who transmitted the image that the image so transmitted and received is exactly the same. This provision ensures a check for consistency and accuracy in the transmission process of truncated cheques.

Correct Answer: B. Any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon. This definition emphasizes the legal right to possess and claim the amount, not just physical possession. For instance, a finder of a lost instrument is not a holder.

Correct Answer: C. No, a person receiving an instrument through forgery or other fraudulent methods cannot be a holder. The entitlement in one’s own name and the right to recover the amount are crucial, which are absent in cases of forgery or fraud.

Correct Answer: B. The person became the possessor after the amount mentioned in it became payable. A holder in due course must acquire the instrument before the amount mentioned in it became payable (i.e., before maturity).

Correct Answer: B. The instrument should be complete and regular when the holder takes possession. If an instrument is incomplete or irregular on its face when acquired, the acquirer may not qualify as a holder in due course. For example, an inchoate (incomplete) stamped instrument does not make one a holder in due course.

Correct Answer: B. It becomes a holder for value. By giving value (paying the amount) for the cheque before it is cleared, the bank acquires the rights of a holder for value, which can be stronger than those of a mere collecting agent.

Correct Answer: B. The banker must have acted in good faith and without negligence in receiving payment for a customer of a crossed cheque. This protection shields the collecting bank from liability to the true owner if the customer’s title to the crossed cheque proves defective, provided the bank acted honestly and carefully.

Correct Answer: B. Yes, Explanation I to Section 131 clarifies that the banker is still deemed to receive payment for a customer in such a scenario. Giving immediate credit before collection does not, by itself, negate the protection, provided other conditions like good faith and absence of negligence are met.

Correct Answer: B. To verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery, or tampering apparent on its face with due diligence and ordinary care. This places a responsibility on the collecting bank (or the bank truncating the cheque) to conduct initial checks for obvious issues before processing it through the image-based clearing system.

Correct Answer: C. Any draft, as defined in Section 85-A. Section 131A extends the statutory protection available to collecting bankers for crossed cheques to also cover demand drafts.

Correct Answer: B. Only for a person who is a customer of the bank and for whom all KYC guidelines have been complied with. The protection is available when the bank collects as an agent for its customer. Collecting for a non-customer or failing to adhere to KYC norms could jeopardise this protection.

Correct Answer: B. Two, the maker and the payee. A promissory note involves a person who makes the promise (maker) and a person to whom the promise to pay is made (payee).

Correct Answer: B. Three, the drawer, the drawee, and the payee. A bill of exchange involves a drawer who issues the order, a drawee who is directed to pay, and a payee to whom the payment is to be made, though some of these roles can be held by the same person, reducing the minimum distinct individuals to two.

Correct Answer: B. No, a promissory note cannot be made payable to the maker himself. The nature of a promissory note is an undertaking to pay another person.

Correct Answer: B. An unconditional undertaking to pay. A promissory note contains a clear and absolute promise made by the maker to pay a certain sum of money.

Correct Answer: C. An unconditional order to pay a certain sum of money. A bill of exchange is characterised by the drawer giving an unequivocal directive to the drawee to make a payment.

Correct Answer: B. No, no prior acceptance is required before payment. The maker’s liability arises from the unconditional undertaking itself, without needing a separate acceptance step before the payment is due.

Correct Answer: C. Acceptance may be required before the due date of payment. Depending on the terms of the bill (e.g., if it’s payable after sight), the drawee may need to signify their assent to the order, known as acceptance, before the payment obligation matures.

Correct Answer: C. Primary and unconditional. The maker of a promissory note is the principal debtor, and their liability to pay is direct and not dependent on any other party’s default.

Correct Answer: B. Secondary and conditional. The drawer’s liability on a bill of exchange typically arises if the drawee fails to accept or pay the bill, making it a secondary liability that is contingent upon such default.

Correct Answer: B. No, protest is generally not required. Unlike certain situations with bills of exchange, formal protest for dishonour is not a standard prerequisite for enforcing a promissory note.

Correct Answer: B. Yes, notice of dishonour is required by the holder to the drawer. To make the drawer liable, the holder must usually inform the drawer about the dishonour of the bill by the drawee/acceptor.

Correct Answer: B. It may be drawn on a person, firm, etc. A bill of exchange can be addressed to any entity capable of being a drawee, including individuals, partnerships, or companies, not just banks.

Correct Answer: B. Always drawn on a Bank. A defining characteristic of a cheque is that it is an order addressed to a specific banker with whom the drawer maintains an account.

Correct Answer: C. No, no acceptance is required for a cheque. Cheques are payable on demand and do not go through a formal acceptance process by the drawee bank in the way some bills of exchange do.

Correct Answer: A. Always payable on demand. A cheque is an instrument that instructs the bank to pay the specified sum immediately upon presentation, provided other conditions are met.

Correct Answer: B. No, no grace period is applicable for cheques. Cheques are payable on demand, and the concept of a grace period, which sometimes applies to bills of exchange, does not extend to cheques.

Correct Answer: B. Such notice (as typically required for bills to hold prior parties liable) is not required for cheques. While a cheque can be dishonoured, the formal notice requirements applicable to drawers and endorsers of bills of exchange are different for cheques; the primary recourse for dishonour of a cheque often involves specific statutory provisions.

Correct Answer: B. No, the concept of crossing does not apply to bills of exchange. Crossing is a specific feature applicable to cheques to direct payment through a bank and not over the counter.

Correct Answer: B. Yes, a cheque may be drawn payable to bearer. This means it is payable to whoever possesses the cheque, without needing an endorsement.

Correct Answer: B. Payment may be countermanded by the drawer. The drawer of a cheque has the right to instruct their bank to stop payment on a cheque they have issued, provided the instruction is given before the cheque is paid.

Correct Answer: B. The maker of a bill of exchange or cheque. The drawer is the individual or entity that creates and signs the instrument, thereby ordering the payment.

Correct Answer: B. The person thereby directed to pay. The drawee is the party (often a bank in the case of a cheque, or another person/entity in a bill of exchange) that is ordered by the drawer to make the payment.

Correct Answer: B. A person named in the bill or indorsement to be resorted to if the original drawee does not pay or accept. This is a provision for an alternative person to approach for payment or acceptance if the primary drawee defaults.

Correct Answer: B. After the drawee has signed his assent upon the bill and delivered it or given notice of such signing. Acceptance is the act by which the drawee signifies their agreement to the drawer’s order, thereby becoming primarily liable on the bill.

Correct Answer: B. A person who accepts a bill that has been noted or protested for non-acceptance or for better security, supra protest for the honour of the drawer or an indorser. This is an intervention by a third party to prevent the bill from being dishonoured to protect the reputation of a party to the bill.

Correct Answer: B. The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid. The payee is the intended recipient of the funds as specified on the instrument.

Correct Answer: B. To honour (pay) the cheques, provided certain conditions are met. A bank has a duty to pay cheques drawn by its customer if there are sufficient funds properly applicable to the payment and the cheque is duly presented.

Correct Answer: C. Debtor and Creditor (banker as debtor, customer as creditor for the balance in account). When a customer deposits money, the bank becomes a debtor to the customer. The payment of a cheque is a discharge of this debt to the extent of the cheque amount.

Correct Answer: B. To Banks only, acting as drawee of a cheque. This section imposes the statutory duty to honour cheques specifically upon bankers, as a cheque by definition (Section 6) is a bill of exchange drawn on a specified banker.

Correct Answer: B. The funds should be properly available and not earmarked or restrained by a court order. ‘Properly applicable’ means the funds are not encumbered by liens, garnishee orders, or other legal restrictions that prevent their use for paying the cheque.

Correct Answer: B. An alteration that substantially alters the instrument and the liabilities of the parties to it. A material alteration is one that changes the fundamental legal nature or business effect of the instrument, or the rights and responsibilities of those involved.

Correct Answer: B. An alteration that changes the legal identity or character of the instrument. If a change makes the instrument speak a different language in legal terms than it originally did, or alters its essential nature or the relationship between the parties, it is deemed material.

Correct Answer: B. The cheque may be declared null and void. A material alteration, unless consented to by all parties liable under the instrument or properly authenticated by the drawer, can invalidate the instrument, and a banker should be cautious about paying such a cheque.

Correct Answer: A. Alteration of the date of the instrument which might affect the time of payment. Changing the date can hasten or delay the payment date, which is a significant aspect of the instrument’s terms and thus constitutes a material alteration.

Correct Answer: C. As a material alteration. The identity of the payee is fundamental to an order instrument, and any unauthorized change to it substantially alters the drawer’s mandate.

Correct Answer: B. Alteration of the amount payable. Fraudulently changing the sum of money to be paid is a frequent and serious type of material alteration.

Correct Answer: B. It is considered a material alteration. Changing the fundamental nature of how the cheque is payable (from a specific person or their order, to whoever bears it) is a significant modification of the instrument’s terms.

Correct Answer: B. Where the material alteration does not appear to have been so altered, and payment is made according to the apparent tenor in due course. If an alteration is not visible to the naked eye with ordinary diligence, the banker is protected if they pay the instrument as it appears to be, provided the payment is otherwise in due course.

Correct Answer: B. The banker shall be discharged from all liability thereon. If a crossing is not apparent (e.g., expertly obliterated) and the bank pays the cheque as if it were uncrossed, in good faith and without negligence, it is protected.

Correct Answer: B. Any difference in apparent tenor of such electronic image and the truncated cheque. If the electronic representation of the cheque does not accurately reflect the details of the physical cheque as it was before truncation, this discrepancy is treated as a material alteration.

Correct Answer: B. To ensure the exactness of the apparent tenor of the electronic image while truncating and transmitting the image. The entity responsible for truncation must ensure that the electronic version is a faithful replica of the original cheque’s terms.

Correct Answer: C. To verify from the party who transmitted the image that the image so transmitted to it and received by it, is exactly the same. This is a step to ensure integrity and accuracy in the chain of transmission of the electronic image.

Correct Answer: B. Any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. This definition emphasizes the legal right to possess and claim payment, not merely physical possession. For example, a person who finds a lost bearer cheque is in possession but may not be entitled in their own name to recover the amount if the true owner is known.

Correct Answer: B. The person became the possessor of the instrument for consideration. To qualify as a holder in due course, the acquisition must be for value, among other conditions like acquiring before maturity and in good faith without notice of defect in title.

Correct Answer: B. They must be an endorsee thereof. If an instrument is payable to order, subsequent holders who wish to be holders in due course must have acquired it through a valid chain of endorsements.

Correct Answer: B. The instrument should be complete and regular on its face. Any apparent incompleteness or irregularity at the time of acquisition can prevent the acquirer from becoming a holder in due course.

Correct Answer: B. The bank becomes a holder for value. By giving value (credit) to the customer before the cheque is cleared, the bank acquires rights similar to one who has paid consideration for the instrument.

Correct Answer: B. The banker must have received payment for a customer of a cheque crossed generally or specially to himself, in good faith and without negligence. Protection is afforded when the bank collects a crossed cheque for its customer, acting honestly and with due care.

Correct Answer: B. No, Explanation I to Section 131 clarifies that this action does not, by itself, negate the protection. The bank is still considered to be receiving payment for the customer even if it gives provisional credit.

Correct Answer: B. To verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care. This places a responsibility on the collecting bank to check for obvious issues before truncation.

Correct Answer: C. Any draft, as defined in Section 85-A. This extends the protection offered for collecting crossed cheques to the collection of demand drafts as well.

Correct Answer: B. For a person who is a customer of the bank, with KYC guidelines complied with. The bank must be acting as an agent for its own customer in the collection process, and adherence to customer due diligence norms is important.

Correct Answer: B. Imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both. Section 138 introduces criminal liability for the dishonour of cheques under specified conditions.

Correct Answer: B. Within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier. (Note: Current RBI guidelines prescribe a three-month validity). The statutory provision mentions six months, but prevailing regulatory directives on cheque validity (currently three months as of the knowledge cut-off for this document) would also be key.

Correct Answer: C. Within thirty days. The payee/holder has thirty days from the receipt of the dishonour memo to issue a legal notice demanding payment from the drawer.

Correct Answer: B. Within fifteen days. The drawer is given a period of fifteen days from receiving the demand notice to make the payment; failure to do so gives rise to the cause of action for the payee/holder.

Correct Answer: B. It shall be presumed, unless the contrary is proved, that the holder of a cheque received it for the discharge, in whole or in part, of any debt or other liability. This places an initial burden on the drawer to prove that the cheque was not issued for a legally enforceable debt or liability.

Correct Answer: B. Every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of its business. This extends liability to individuals managing the company’s affairs, subject to certain defences.

Correct Answer: C. The payee or, as the case may be, the holder in due course of the cheque. Cognizance of the offence can only be taken upon a complaint filed by the person entitled to receive the cheque amount.

Correct Answer: B. Within one month of the date on which the cause of action arises under clause (c) of the proviso to Section 138. The cause of action arises after the drawer fails to make payment within 15 days of receiving the demand notice.

Correct Answer: C. By a court within whose local jurisdiction the branch of the bank where the payee or holder in due course maintains the account, is situated. This provision specifies the territorial jurisdiction for filing complaints related to cheque dishonour when collected through an account.

Correct Answer: B. Twenty per cent of the amount of the cheque. The court has the power to direct the drawer to pay interim compensation, but it cannot exceed this percentage of the cheque amount.

Correct Answer: B. Within sixty days. The drawer is required to pay the interim compensation within 60 days, though the court may grant an extension of up to 30 additional days on sufficient cause shown.

Correct Answer: B. The Court shall direct the complainant to repay to the drawer the amount of interim compensation, with interest at the bank rate. This provision ensures restitution if the drawer is found not guilty.

Correct Answer: B. Twenty per cent of the fine or compensation awarded by the trial Court. This provision empowers the appellate court to require a deposit from the convicted drawer as a condition for the appeal, with the minimum set at 20%.

Correct Answer: B. Mr. Y finds a bearer cheque lying on the road. A finder of a lost bearer cheque, while in physical possession, is not entitled to it in their own name if the true owner can be found; a holder must be entitled to possession in their own name and to receive or recover the amount.

Correct Answer: C. The cheque must be a crossed cheque. While crossing affects how a cheque can be paid, it is not a prerequisite for a person to attain the status of a holder in due course. The other conditions relate to consideration, acquisition before maturity, and good faith regarding title.

Correct Answer: D. All of the above conditions indicate a material alteration. A material alteration is one that substantially changes the instrument’s terms, its legal effect, or the rights and obligations of the parties to it.

Correct Answer: C. Converting a bearer cheque into an order cheque by striking out “or bearer” and adding a payee’s name, if done by the holder to safeguard it. While this changes the character, some alterations are permissible or do not void the instrument. However, converting an order cheque to bearer is usually material. The question asks what is not an example necessitating refusal; converting bearer to order is sometimes seen as less problematic than other alterations if done by a lawful holder for safety, though bank policies may still require drawer confirmation. Given the options, overwriting dates, obliterating crossings, and altering amounts are more definitive material alterations leading to refusal if unauthenticated.

Correct Answer: C. Debtor (the bank) and Creditor (the customer). When a customer deposits funds into their account, the bank becomes a debtor to the customer for that amount. Paying a cheque is essentially the bank (debtor) repaying a portion of that debt to the order of the customer (creditor).