Negotiable Instruments MCQ Quiz - Objective Question with Answer for Negotiable Instruments - Download Free PDF

The correct answer is Option 1.

Key Points Section 147 of the Negotiable Instruments Act, 1881
 Offences to be compoundable.—
Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974),every offence punishable under this Act shall be compoundable].

The correct answer is Option 3.

Key Points Section 147 of the Negotiable Instruments Act, 1881: Offences to be compoundable.—Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974),every offence punishable under this Act shall be compoundable.

The correct answer is 'Match List - I with List - II as (A)-(III), (B)-(I), (C)-(IV), (D)-(II)'.

Key Points

• Dishonour of cheque for insufficiency of funds (A) - Section 138 (III):
  • Section 138 of the Negotiable Instrument Act, 1881, deals with the dishonour of a cheque due to insufficient funds or if the amount exceeds the arrangement made with the bank.
  • This provision ensures accountability in financial transactions and prescribes penalties, including imprisonment and fines, for such offences.
• Holder in due course (B) - Section 9 (I):
  • Section 9 defines "Holder in Due Course" as a person who has obtained a negotiable instrument in good faith and for consideration before its maturity.
  • This concept provides certain rights and privileges to the holder in due course, such as immunity from certain defects in the title of the instrument.
• Promissory Note (C) - Section 4 (IV):
  • Section 4 defines a Promissory Note as an instrument in writing that contains an unconditional undertaking to pay a certain sum of money to a specified person or bearer.
  • It is one of the key negotiable instruments outlined in the Act.
• Bill of Exchange (D) - Section 5 (II):
  • Section 5 defines a Bill of Exchange as an instrument in writing containing an unconditional order to pay a certain sum of money to a person or to the order of a person.
  • It is another key negotiable instrument and is primarily used in trade and commerce.

Additional Information

• Explanation of Incorrect Options:
  • Option 2 pairs the provisions and sections incorrectly, such as assigning (A) to (I) and (B) to (II), which does not align with the provisions of the Negotiable Instrument Act.
  • Option 3 misaligns (A) with (IV) and other sections incorrectly, which does not match the legal definitions provided under the Act.
  • Option 4 assigns (A) to (II) and other mismatched pairings, which are not consistent with the Act's framework.
• Importance of the Negotiable Instrument Act, 1881:
  • The Act provides a legal framework for the use and resolution of disputes related to negotiable instruments like cheques, promissory notes, and bills of exchange.
  • It ensures smooth financial transactions and instills trust in trade and commerce by providing remedies for dishonoured instruments.

The correct answer is 1.

Key PointsUnderstanding Inland Instruments

• Option A: Instrument drawn or made in India
  • This option correctly identifies an inland instrument as one that is created within the geographical boundaries of India. Hence, this statement is correct.
• Option B: Instrument made payable in India
  • This option also correctly identifies an inland instrument as one that is meant to be paid within India. Hence, this statement is correct.
• Option C: Instrument drawn upon any person resident in India
  • This option correctly identifies an inland instrument as one that is drawn on a person residing in India. Hence, this statement is correct.
• Option D: Instrument that is passed by Indian Parliament
  • This option incorrectly identifies an inland instrument. The term does not refer to legislation passed by the Indian Parliament. Hence, this statement is incorrect.

Additional Information

• Definition of Inland Instrument
  • An inland instrument is typically one that is drawn, made, or payable within the geographical boundaries of a particular country, in this case, India.
  • It is crucial to distinguish between instruments made within the country and those that involve international transactions.

Based on the explanations above:

• Statement A is correct.
• Statement B is correct.
• Statement C is correct.
• Statement D is incorrect.

Hence, the correct answer is option 1 (A, B, C only).

The correct answer is 'Banker's Demand Draft'

Key Points

• Negotiable Instrument Act:
  • The Negotiable Instruments Act, 1881 is an act in India that defines and governs the use of negotiable instruments, such as promissory notes, bills of exchange, and cheques.
  • Negotiable instruments are documents guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer named on the document.
• Banker's Demand Draft:
  • A demand draft is a negotiable instrument issued by a bank, directing another bank or one of its own branches to pay a specified sum of money to the person named in the draft.
  • It is used for transfer of money and is considered a secure mode of payment because it is signed by the bank and guarantees payment.

Additional Information

• Letter of Credit:
  • A letter of credit is a document from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. However, it is not considered a negotiable instrument under the Negotiable Instruments Act.
• Currency Note:
  • A currency note is a promissory note issued by a country's central bank and is used as legal tender. It is not considered a negotiable instrument under the Negotiable Instruments Act.
• Letter of Guarantee:
  • A letter of guarantee is a type of contract issued by a bank to a third party, guaranteeing that a customer's liabilities will be met. It is not considered a negotiable instrument under the Negotiable Instruments Act.

According to section 13 of the Negotiable Instrument Act, 1881 - A 'negotiable instrument' means a promissory note, bill of exchange, or cheque payable either to order or to bearer. 

A Promissory Note:

• Section 13 of the Negotiable Act defines a promissory note as a financial instrument that includes a written agreement made by one party i.e. the issuer or maker to pay another party i.e. the payee a certain sum of money, either on-demand or at a specific date.
• A promissory note is an instrument containing an unconditional undertaking.
• It is signed by the maker to pay a certain sum of money only to a specific person or the bearer of the instrument. 
• A promissory note must be written and signed by the maker or else it is of no effect.
• If a promissory note does not have a date, it is assumed to have been made when it was delivered.
• Most importantly it must be stamped under the Indian Stamp Act and it is not stamped then that promissory note is considered null. 

Therefore, from the above explanation, it is clear that Statements (II), (III), and (IV) are correct.

Section 145 of the Negotiable Instrument Act, 1881: Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), the evidence of the complainant may be given by him on affidavit and may, subject to all just exceptions be read in evidence in any enquiry, trial or other proceeding under the said Code. 

HintStatement (A) "dispenses with the procedure under section 200 of CrPC": This statement is correct. The Non-Obstante Clause in section 145 of the Negotiable Instruments Act, 1881, indeed allows for the dispensation of the normal procedure outlined under section 200 of the Criminal Procedure Code (CrPC), which typically involves the magistrate examining the complainant and the witnesses present.
Statement (B) "procedure of examination of complainant and witness on oath is done": This statement is correct in the context of what section 145 of the Negotiable Instruments Act, 1881, aims to achieve. The section states essentially simplifies the process and does not necessarily require the examination of the complainant and witnesses on oath in the manner traditionally done under section 200 of CrPC.
Statement (C) "away affidavit of complainant and witness can be accepted": This statement is correct. Section 145 of the Negotiable Instruments Act, 1881, allows for the acceptance of affidavits from the complainant and witnesses. This provision makes the process more efficient by not mandatorily requiring the physical presence of the complainant or witnesses for the initial examination.
Statement (D) "sworn statement recording by the magistrate is dispensed with": This statement is correct. The introduction of section 145 of the Negotiable Instruments Act was to streamline the process and make it less cumbersome, which includes dispensing with the requirement for the magistrate to record sworn statements, thus expediting the proceedings.
Therefore, the correct answer is option 4 - (A), (B), (C), (D), as all these provisions are encapsulated within the Non-Obstante Clause of section 145 of the Negotiable Instruments Act, 1881, to streamline and simplify the process involved.

Key Points

Correct Answer: 3. The holder in due course can obtain a better title than that of the transferor.

Explanation: One of the defining characteristics of negotiable instruments, as outlined in the Negotiable Instruments Act, is that the holder in due course enjoys the privilege of obtaining a title that is free from any defects that might have afflicted the title of the transferor. This means that if the instrument is acquired by the holder in good faith, for consideration, and without knowledge of any defect in the title of the person from whom it was obtained, the holder's title to the instrument is not contaminated by any issues that might have existed previously. This principle is key to ensuring the free and trustworthy circulation of negotiable instruments in the financial market. Options A and B are incorrect as negotiable instruments do not require notarization, stamping, or governmental registration for their validity or transfer. Option D is also incorrect because negotiable instruments can be transferred multiple times until maturity.

The correct answer is option 2.Key Points

•  Section 7 of Negotiable  Instrument Act 1881 deals with  “Drawer” “Drawee”.
• The maker of a bill of exchange or cheque is called the “drawer”; the person thereby directed to pay is called the “drawee”.
• “Drawee in case of need”.
  • When in the Bill or in any indorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need such person is called a “drawee in case of need.”
• “Acceptor”.
  • After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the “acceptor”.
• “Acceptor for honour”:
  • When a bill of exchange has been noted or protested for non-acceptance acceptance or for better security, and any person accepts it supra protest for honour of the drawer or of any one of the indorsers, such person is called an “acceptor for honour”.

Key Points

Correct Answer: 3. Writing the name on the back or face of the instrument coupled with its delivery

Explanation: Endorsement of a negotiable instrument involves the act of signing (endorsing) the instrument, typically on its back (though sometimes on the face if there is no space on the back), by the holder or bearer, and then delivering it to another person. Through this act, the holder transfers the rights of the instrument to the endorsee. This process is critical for the transfer of rights under the Negotiable Instruments Act and facilitates the continued circulation of the instrument in commerce. Option A is partially correct in noting the importance of signing but incomplete as it negates the necessity of delivery. Option B refers to delivery without endorsement, which is insufficient for the legal transfer of rights in most cases involving negotiable instruments. Lastly, option D is incorrect because a verbal agreement alone does not meet the requirements for endorsement under the act; a physical act of endorsement and delivery is required.

The correct answer is 'Banker's Demand Draft'

Key Points

• Negotiable Instrument Act:
  • The Negotiable Instruments Act, 1881 is an act in India that defines and governs the use of negotiable instruments, such as promissory notes, bills of exchange, and cheques.
  • Negotiable instruments are documents guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer named on the document.
• Banker's Demand Draft:
  • A demand draft is a negotiable instrument issued by a bank, directing another bank or one of its own branches to pay a specified sum of money to the person named in the draft.
  • It is used for transfer of money and is considered a secure mode of payment because it is signed by the bank and guarantees payment.

Additional Information

• Letter of Credit:
  • A letter of credit is a document from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. However, it is not considered a negotiable instrument under the Negotiable Instruments Act.
• Currency Note:
  • A currency note is a promissory note issued by a country's central bank and is used as legal tender. It is not considered a negotiable instrument under the Negotiable Instruments Act.
• Letter of Guarantee:
  • A letter of guarantee is a type of contract issued by a bank to a third party, guaranteeing that a customer's liabilities will be met. It is not considered a negotiable instrument under the Negotiable Instruments Act.

The correct answer is '15 days'

Key Points

• Dishonour of Cheque:
  • When a cheque is dishonoured, the payee must notify the drawer (the person who issued the cheque) of the dishonour.
  • The drawer is given an opportunity to make the payment within a specified period after receiving the notice.
  • According to the law, the drawer cannot be held liable for dishonour unless they fail to make the payment within 15 days of receiving the notice.

Additional Information

• Option 1: 30 days
  • This period is incorrect as per the law. The drawer is given a shorter time frame of 15 days to make the payment after the notice.
• Option 3: 45 days
  • This is also incorrect. The law specifies 15 days, not 45 days.
• Option 4: 50 days
  • This option is incorrect as well. The specified period is 15 days, not 50 days.

The correct answer is Section 31 of the Negotiable Instruments Act, 1881.

Key Points

• Section 31 of the Negotiable Instruments Act, 1881:
  • This section deals with the liability of the drawee of a cheque.
  • According to Section 31, the drawee of a cheque is bound to pay the amount to the holder in due course if the cheque is duly presented.
  • If the drawee dishonors the cheque without any valid reason, the drawee is liable to compensate the holder for any loss or damage caused by such dishonor.

Additional Information

• Section 28:
  • This section outlines the liability of an agent who signs a negotiable instrument on behalf of a principal.
  • It specifies that the agent is not personally liable if the principal's name is clearly disclosed and the agent signs as an agent.
• Section 29:
  • This section deals with the liability of legal representatives who sign a negotiable instrument.
  • Legal representatives are not personally liable unless they expressly assume personal liability.
• Section 30:
  • This section specifies the liability of a drawer of a bill of exchange or cheque.
  • The drawer is liable to compensate the holder if the bill or cheque is dishonored due to insufficient funds or other valid reasons.

The correct answer is Option 4.

Key Points

• Chapter XVI of the Negotiable Instrument Act deals with penalties in case of dishonour of cheques for insufficiency of funds in the accounts.
• Section 142(1)(c) of the act says no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under section 138.
• In simple words, if the bank refuses to pay the amount mentioned in the cheque due to the lack of funds in the account, it is called dishonour of cheque.
• Section 138 of the act makes the dishonour of a cheque an offence.

Key Points

Statement A: It is a promise of President of India or Governor of a state - This statement is correct. Government promissory notes are essentially debt instruments issued by the government and do represent a promise by the President of India or the Governor of a state. They represent a promise by the government to pay the bearer a specified sum at a specified date.
Statement B: It is regulated by the Indian Securities Act, 1886 - This statement is correct. Government promissory notes are indeed regulated by the Indian Securities Act, 1886. This act provides the legal framework for the issuance and regulation of securities, including government promissory notes, in India.
Statement C: They are not negotiable instruments - This statement is incorrect. Government promissory notes are considered negotiable instruments, which means they can be transferred from one person to another, and the holder in due course has the right to the sum mentioned therein.
Statement D: They can be assigned without endorsement - This statement is also incorrect. Generally, for the transfer of certain negotiable instruments, including government promissory notes, an endorsement by the holder is required. This ensures that the legal title to the note is transferred to the new holder.
Hence, the correct answer is option 1, (A), (B) Only:
- Statement A is incorrect as the promise is not specifically from the President of India or the Governor of a state.
- Statement B is correct as government promissory notes are regulated by the Indian Securities Act, 1886.
- Statement C is incorrect because government promissory notes are negotiable instruments.
- Statement D is incorrect as government promissory notes generally require endorsement for their assignment.