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CS Professional · Banking and Insurance - Laws and Practice · Payment and Collection of Cheques and Other Negotiable Instruments

Ramesh Traders issued a promissory note payable to bearer in favour of Sunita. Sunita indorsed it in blank to Vikram, who later indorsed it in blank to Meena. On the due date, Ramesh Traders (the maker) pays Meena the full amount due, in due course. What is the effect on the liability of the parties?

The maker is discharged from liability to all parties to the note. Where an instrument is payable to bearer or indorsed in blank, payment in due course of the amount due by the maker, acceptor or indorser discharges that payer against every party to the instrument.

  1. AOnly the maker is discharged; Sunita and Vikram remain liable to Meena
  2. BThe maker is discharged from liability to all parties to the instrumentCorrect
  3. CNobody is discharged until the note is cancelled by Meena
  4. DOnly the maker and Vikram are discharged, as the last indorser's liability continues

Explanation

Under Section 82(c), where an instrument is payable to bearer or indorsed in blank, the maker, acceptor or indorser who pays in due course the amount due is discharged from liability to all parties thereto. Here the note is bearer/indorsed in blank, so the maker's payment discharges him against everyone. The option keeping Sunita and Vikram liable misreads the rule, which concerns the payer's discharge.

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