Law relating to Negotiable Instruments for CS Executive

What this chapter covers

Law relating to Negotiable Instruments: topics in the order to study them

1. 1Negotiable Instruments: Meaning and CharacteristicsEverything else rests on what makes an instrument negotiable, so start with the idea and its features.
2. 2Promissory Note, Bill of Exchange and ChequeYou need the definitions and the differences between the three instruments before studying parties or procedure. Learn the bill of exchange as an unconditional written order signed by the maker, directing a certain person to pay a certain sum to, or to the order of, a certain person or to the bearer.
3. 3Parties to Negotiable Instruments and Holder in Due CourseOnce you know the instruments, learn who is who: maker, drawer, drawee, payee, holder and holder in due course. Capacity of parties, including the position of a minor, belongs here.
4. 4Negotiation, Endorsement and Inchoate InstrumentsThis shows how the instrument moves between parties and how rights pass. Inchoate stamped instruments depend on the holder concept you just learnt.
5. 5Presentment, Acceptance and PaymentThis is the normal working of an instrument, and you must know it before you can understand what goes wrong.
6. 6Dishonour, Noting, Protest and CompensationDishonour is the failure of the normal path, so it follows presentment and payment. Compensation rules, including the interest and expenses an indorser can claim, are tested here.
7. 7Dishonour of Cheques and PenaltiesThis is the special regime for cheques and builds on general dishonour rules, so study it after them.
8. 8Foreign Instruments and International Law RulesKeep this for last. It applies the earlier ideas to cross-border cases, and the rules are short but need the earlier vocabulary.

How to prepare Law relating to Negotiable Instruments

1. Read the chapter once in the order given, without trying to memorise, to see how an instrument moves from making to payment.
2. Make a one-page table of promissory note, bill of exchange and cheque with their parties, key features and differences.
3. Learn the core definitions word for word, such as bill of exchange, holder and holder in due course, because examiners reward precise wording.
4. Draw a timeline of an instrument: making, negotiation, presentment, acceptance, payment or dishonour, noting, protest, compensation. Attach the rules to each stage.
5. Practise short fact-based problems. For each, write the provision, apply it to the facts, and give a clear conclusion naming the section where you are sure of it.
6. Revise the cheque dishonour procedure as a step-by-step sequence with its time limits, checking each limit against your study material.
7. Finish with the foreign instruments rules: which law governs the maker, the acceptor and the indorser, and when protest is needed.

Common mistakes in Law relating to Negotiable Instruments

• Calling any person who holds the instrument a holder in due course.

  Fix: Check each condition: consideration, becoming holder before maturity, and no sufficient cause to believe the title was defective. Also check it is a bearer instrument or that he is the payee or indorsee of an order instrument.

• Writing a loose definition of bill of exchange or cheque.

  Fix: Learn the key words: writing, unconditional order, signed by the maker, certain person, certain sum only. Each word can decide a problem.

• Saying a minor cannot be involved in an instrument at all.

  Fix: State that a minor may draw, indorse, deliver and negotiate so as to bind all parties except himself.

• Mixing up the amount an inchoate instrument can be completed for.

  Fix: Say the holder may complete it up to the amount covered by the stamp, and that only a holder in due course can recover more than the signer intended.

• Applying one law to every party of a foreign instrument.

  Fix: Split the parties: maker or drawer by the law of the place of making, acceptor and indorser by the law of the place of payment, unless a contract says otherwise.

• Giving a conclusion without the provision and application.

  Fix: Write in three parts: the rule, the facts applied to it, and a clear conclusion citing the section where you are certain of it.

Last-day revision: Law relating to Negotiable Instruments

• ✓A bill of exchange is a written, unconditional order signed by the maker, directing a certain person to pay a certain sum only to, or to the order of, a certain person or the bearer.
• ✓A promise or order is not conditional merely because payment is due after an event that is certain to happen, even if its timing is uncertain.
• ✓The sum can still be certain if it includes future interest or an indicated rate of exchange.
• ✓A holder is entitled in his own name to possess the instrument and to receive or recover the amount from the parties.
• ✓A holder in due course gave consideration, became holder before the amount became payable, and had no sufficient cause to believe the title was defective.
• ✓A minor may draw, indorse, deliver and negotiate an instrument so as to bind all parties except himself.
• ✓A corporation can make, indorse or accept instruments only where the law in force empowers it.
• ✓On an inchoate stamped instrument, the holder has prima facie authority to complete it for any amount up to the amount covered by the stamp.
• ✓Only a holder in due course can recover from the signer more than the amount the signer intended to be paid.
• ✓A drawee paying a bearer cheque in due course is discharged despite any endorsement on it.
• ✓An indorser who paid is entitled to the amount with interest at eighteen per cent per annum from payment until tender or realisation, plus expenses.
• ✓For foreign instruments, the maker's or drawer's liability follows the law of the place of making, and the acceptor's and indorser's follows the law of the place of payment; foreign law is presumed the same as Indian law until the contrary is proved.

Law relating to Negotiable Instruments practice questions

• A promissory note is dishonoured and the law requires it to be protested. Which statement about notice correctly reflects the Negotiable Ins…
• Anil, a minor, draws a cheque on his account in favour of Deepa, who endorses it to Farhan for value. The cheque is dishonoured. Which state…
• Under the Negotiable Instruments Act, 1881, which of the following is a negotiable instrument when payable either to order or to bearer?
• A dispute arises over a cheque drawn in a foreign country, and neither party proves what that country's law on cheques provides. How will th…
• Ravi Menon signs a promissory note form that is properly stamped but leaves the amount and payee blank, and hands it to Suresh. Under the Ne…
• Rohit Traders holds a bill of exchange drawn on Sameer, who has no known place of business or fixed residence. The bill specifies no place f…
• In an Indian court, a party relies on a bill of exchange governed by the law of a foreign country but leads no evidence on what that country…
• A bill of exchange must be protested for dishonour within a specified time. The holder has the bill noted for protest by a notary before tha…

Law relating to Negotiable Instruments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• CMA IntermediateNegotiable Instruments Act, 1881
• CMA FoundationNegotiable Instruments Act, 1881
• CSEETElements of Law relating to Negotiable Instruments
• CA FoundationThe Negotiable Instruments Act, 1881