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

Mehta Traders delivers a bearer cheque to Joshi on the condition that it is not to take effect unless Joshi's shipment is cleared by customs. The shipment is not cleared, and Joshi passes the cheque to Kiran, who gave value and had no notice of the condition. Which statement is correct under Section 47?

Joshi cannot negotiate the cheque until the event happens, but Kiran, who took it for value without notice of the condition, is protected. Section 47 makes a conditionally delivered instrument non-negotiable except in the hands of such a holder for value.

  1. AThe cheque is not negotiable in Joshi's hands until the event happens, but Kiran as a holder for value without notice is not affected by the conditionCorrect
  2. BThe cheque is not negotiable even in Kiran's hands, because the event has not happened
  3. CThe cheque is fully negotiable in Joshi's hands because it is a bearer cheque
  4. DThe cheque is void and cannot be delivered to anyone

Explanation

Under the Exception to Section 47, an instrument delivered on condition that it is not to take effect except in a certain event is not negotiable unless the event happens. The exception is that a holder for value without notice of the condition is not bound by it. Kiran fits that description, so the second option is wrong.

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