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CSEET · Business Laws and Management · Elements of Law relating to Negotiable Instruments

A cheque was originally drawn payable to bearer. Its holder Arjun wrote on the back "Pay Bhavna only" and delivered it to Bhavna. Later a thief stole it from Bhavna and presented it for payment to the drawee bank, which paid in due course. Under Section 85 of the Negotiable Instruments Act, 1881, what is the position of the bank?

The bank is discharged. For a cheque originally payable to bearer, Section 85(2) protects the drawee that pays in due course to the bearer, notwithstanding any indorsement, even one purporting to restrict or exclude further negotiation, such as "Pay Bhavna only".

  1. AIt is liable, because the indorsement restricted further negotiation
  2. BIt is liable, because only Bhavna could receive payment
  3. CIt is discharged, as payment in due course to the bearer is protected despite the restrictive indorsementCorrect
  4. DIt is discharged only if Arjun had indorsed it in blank

Explanation

Section 85(2) says that where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer, notwithstanding any indorsement, whether in full or in blank, and even if it purports to restrict or exclude further negotiation. So the restrictive words do not make the bank liable.

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