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CMA Foundation · Fundamentals of Business Laws and Business Communication · Negotiable Instruments Act, 1881

A cheque originally drawn payable to bearer is later indorsed 'Pay Anil only' by its holder. A bank pays it in due course to the bearer who presents it. What is the position under Section 85(2)?

The bank is discharged by paying the bearer in due course. Under Section 85(2), a cheque originally payable to bearer remains payable to the bearer for the drawee's protection, even if an endorsement purports to restrict or exclude further negotiation.

  1. AThe bank is discharged, notwithstanding the endorsement that purports to restrict further negotiationCorrect
  2. BThe bank is not discharged because the endorsement restricted payment to Anil
  3. CThe bank is discharged only if it first obtains Anil's written consent
  4. DThe cheque turns into an order cheque and must be paid only to Anil

Explanation

Section 85(2) states that where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer. This holds notwithstanding any endorsement in full or in blank, including one that purports to restrict or exclude further negotiation. The second option ignores this rule.

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