Negotiable Instruments and Cheques: Act, Sections and PYQs

The correct answer is B, cheque. Section 6 of the Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. In plain words it is a written order by an account holder, the drawer, telling the bank, the drawee, to pay a stated sum to the payee named on it, which is exactly what the question describes.

Option A, cash, is money itself and needs no instruction to anyone. Option C, a passbook, is only a record of the entries in an account, so it proves what has happened but orders nothing. Option D, currency, is the legal tender issued by the Reserve Bank and the Government of India, again not an instruction to pay. Only a cheque is an instrument carrying an order to a banker, and that is why it is a negotiable instrument under Section 13 of the Act.

The correct answer is B, there are not sufficient funds in your account. NSF stands for not sufficient funds, and a bank writes it on the return memo when the balance in the drawer's account is less than the amount of the cheque. This is the ground that attracts Section 138 of the Negotiable Instruments Act, 1881, under which issuing such a cheque is an offence punishable with imprisonment up to two years, or a fine up to twice the amount, or both.

Option A describes a know your customer problem, which is dealt with separately and is not what NSF means. Option C, forgery, is returned with a remark about the signature differing or the instrument appearing altered, and material alteration is covered by Section 87. Option D is not a banking return reason at all. Only the shortage of balance is described by the letters NSF.

The correct answer is B, 1881. The Negotiable Instruments Act was enacted in 1881 and came into force on 1 March 1882. It codified the law on promissory notes, bills of exchange and cheques, and it remains the governing statute for cheques in India, amended several times, most notably in 2002 to bring in the electronic and truncated cheque and in 2018 to add Sections 143A and 148.

Option A, 1972, is not connected with this Act. Option C, 1957, is remembered for other laws such as the Copyright Act of that year. Option D, 1950, is the year the Constitution came into force. Candidates often confuse the 1881 Act with the Banking Regulation Act of 1949 and the Reserve Bank of India Act of 1934, so keep the three years separate: 1881 for negotiable instruments, 1934 for the Reserve Bank and 1949 for banking regulation.

The correct answer is A, at maturity. Section 22 of the Negotiable Instruments Act, 1881 says that the maturity of a promissory note or bill of exchange payable otherwise than on demand is the date on which it falls due, and the three days of grace are already counted in arriving at that date. Payment therefore becomes due on the date of maturity itself, and the holder may present the instrument on that day.

Option B, after maturity, is wrong because the instrument is already overdue then and the holder's rights against the earlier parties can be affected. Option C, before maturity, is wrong because no party is bound to pay ahead of the due date, though a bill may be discounted earlier by agreement. Option D is a distortion of the days of grace, which are added while computing maturity and are not a separate day of payment after it. So A alone states the rule correctly.

The correct answer is C, Section 6. Section 6 says a cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand, and it goes on to include the electronic image of a truncated cheque and a cheque in the electronic form, both added by the amendment of 2002.

Option A, Section 4, defines a promissory note, an unconditional undertaking signed by the maker to pay a certain sum. Option B, Section 5, defines a bill of exchange, an unconditional order directing a person to pay. Option D, Section 13, defines the expression negotiable instrument itself and names the three instruments covered by the Act. All four sections sit close together, which is why the paper offers them as a set, but the definition of a cheque is in Section 6.

The correct answer is D, Section 138. Section 138 makes it a criminal offence to issue a cheque that is returned unpaid because the account has insufficient funds or because the amount exceeds the arrangement made with the bank. The punishment may extend to imprisonment for two years, or a fine of up to twice the amount of the cheque, or both, and Section 147 makes the offence compoundable so that the parties can settle.

Option A, Section 118, lays down the presumptions about negotiable instruments, such as the presumption that the instrument was made for consideration. Option B, Section 123, deals with a general crossing. Option C, Section 130, deals with a cheque crossed 'not negotiable'. All three are real sections of the same Act, which makes this a pure recall question, and the section on dishonour is 138.

The correct answer is A, general crossing. Section 123 of the Negotiable Instruments Act, 1881 provides that where a cheque bears across its face two parallel transverse lines, with or without words such as 'and company', that addition is a general crossing. The effect is that the cheque cannot be paid in cash over the counter and must be collected through a bank account, which protects the true owner if the cheque is lost.

Option B, a special crossing under Section 124, requires the name of a banker to be written across the face, and then only that banker can collect the cheque. Option C, a restrictive crossing, is the account payee crossing of banking practice, which the Act itself does not define. Option D is a crossing to which the words 'not negotiable' are added, bringing in Section 130 so that the transferee gets no better title than the transferor. The plain two lines alone are a general crossing.

The correct answer is B, three months. The Reserve Bank of India directed that cheques, drafts, pay orders and banker's cheques would be payable for three months from the date of the instrument, with effect from 1 April 2012, cutting the earlier period of six months. A cheque presented after that period is called a stale or out of date cheque and is returned unpaid.

Option A, one month, is the period within which a complaint must be filed after the cause of action arises under Section 138, and candidates often import it here. Option C, six months, was the position before April 2012 and remains the commonest wrong answer. Option D, one year, has never been the rule. Note also that the validity runs from the date written on the cheque, so an ante-dated cheque is good only for three months from that written date.

The correct answer is B, three. A bill of exchange, defined in Section 5 of the Negotiable Instruments Act, 1881, is an unconditional order in writing by which the drawer directs another person, the drawee, to pay a certain sum to or to the order of the payee. The drawer, the drawee and the payee are therefore the three parties, and the bill must be accepted by the drawee before it binds them.

Option A, two, is the number of parties to a promissory note, where only the maker and the payee exist, and that is the trap in this question. Option C, four, and option D, five, describe no instrument under the Act, though in practice the same person can hold two roles, as when a drawer draws a bill in their own favour. A cheque, being a species of bill of exchange, also has three parties, with the bank always as the drawee.

The correct answer is B, the transferee gets no better title than the transferor had. Section 130 provides that a person taking a cheque crossed 'not negotiable' shall not have, and shall not be capable of giving, a better title than the person from whom they took it had. The instrument therefore remains transferable, but it loses the special quality of negotiability by which a holder in due course would otherwise get a clean title, and a defect in the title passes down the chain.

Option A is wrong because the words do not stop transfer; they only limit the title that passes. Option C is wrong because the cheque is still crossed, and a crossed cheque under Section 126 cannot be paid over the counter. Option D confuses the crossing with the three month validity of a cheque, which has nothing to do with Section 130. So B states the effect correctly.

The correct answer is B, three days. Section 22 of the Act provides that the maturity of a promissory note or bill of exchange payable after a stated period is the day on which the period ends, and that three days of grace are added in computing that date. So a bill drawn payable one month after a date matures three days after the end of that month, and if the day of maturity is a public holiday, Section 25 makes it fall due on the next preceding business day.

Options A, C and D are round numbers offered to see whether the candidate remembers the exact figure, and none of them appears in the Act. A further point worth holding is that days of grace apply only to instruments payable after date or after sight; they never apply to a cheque, because a cheque is always payable on demand.

The correct answer is B, fifteen days. The Section 138 timeline runs in three steps. The payee must give the drawer a written notice demanding payment within thirty days of receiving information from the bank that the cheque has been returned unpaid. The drawer then has fifteen days from the receipt of that notice to make the payment. Only if the payment is not made within those fifteen days does the cause of action arise, and the complaint must then be filed within one month of that date.

Option A, seven days, appears in no part of this scheme. Option C, thirty days, is the time allowed for sending the notice, not for paying, and is the commonest wrong choice. Option D, forty five days, is not in the Act. Keep the sequence in mind as thirty, fifteen and one month, because papers ask each of the three figures in turn.