Test: Negotiable Instruments Act, 1881 - UGC NET MCQ

- Assertion (A) is true because crossing a cheque does serve to prevent it from being paid out in cash and directs the bank to credit it to the payee's account, which enhances security.

- Reason (R) is false as crossing a cheque is still a relevant practice in modern banking, providing legal protection to the payee.

- Thus, while the assertion is correct, the reason provided does not explain the assertion; therefore, Option B is the correct choice.

A cheque is distinguished from other types of bills of exchange primarily by the fact that it is always addressed to a specific banker, which means that it directs the payment to a particular financial institution. Additionally, a cheque is payable on demand, meaning the payee can present it to the bank whenever they wish to receive the funds, making it a unique form of negotiable instrument within the financial system. An interesting fact about cheques is that they have been used for centuries, with the earliest known cheques dating back to ancient Babylon.

A person qualifies as a "holder" of a negotiable instrument if they are named as the payee, endorsee, or bearer. This means they have the legal right to demand and receive payment. It's important to note that simply possessing the instrument does not confer holder status; for instance, someone who acquires an instrument through theft cannot claim rights to it. Understanding the definition of a holder is crucial in the realm of negotiable instruments, as it directly affects one's ability to enforce payment rights. An interesting fact is that the holder's rights can vary significantly based on how they obtained the instrument, highlighting the importance of lawful transfer in financial transactions.

• Assertion (A) is true: The maker of a promissory note indeed holds the primary liability, acting as the principal debtor.
• Reason (R) is false: In a bill of exchange, the acceptor acts as the principal debtor, not as a surety. The drawer is the one who is liable only upon the acceptor's default.
• Since the assertion is true and the reason is false, Option A is not correct.

A promissory note is defined as a written instrument that contains an unconditional promise made by the maker to pay a specified sum of money to a certain person or the bearer of the instrument. Unlike other financial instruments, it is characterized by its straightforward promise to pay, which must be clearly stated and signed by the maker. An interesting fact is that promissory notes date back centuries and were often used in trade to facilitate credit transactions, demonstrating their longstanding importance in financial dealings.

Statement 1 is correct because if a cheque payable to order appears to be properly endorsed, the banker is released from liability by making payment in due course.

Statement 2 is also correct; if a banker makes payment on a crossed cheque to someone other than the specified banker or their agent, they may be liable to the true owner for any resulting loss.

Therefore, both statements are correct, making the correct answer Option C: Both 1 and 2.

Inland instruments are defined as those that are drawn and payable within India or drawn in India on residents of India, even if they are payable abroad. This means that such instruments are recognized within the domestic legal framework, regardless of where the payment is made. In contrast, demand instruments do not specify a fixed date for payment, and foreign instruments are not limited to transactions in a foreign currency, as they can also be drawn in local currency. Understanding these distinctions is crucial for effective financial transactions and legal compliance in banking and commerce.

Statement 1 is correct because, under sections 138 to 142 of the Negotiable Instruments Act, penalties for the dishonor of a cheque can indeed include imprisonment for up to 2 years or a fine that may extend to twice the amount of the cheque.

Statement 2 is incorrect as the drawer is not exempt from penalties even if the cheque is dishonored due to insufficient funds. The law holds the drawer liable under the specified conditions.

Therefore, the correct answer is Option A: 1 Only.

• The Assertion is correct: A bill of exchange is indeed dishonoured by non-acceptance if the drawee does not accept it within the stipulated 48 hours.
• The Reason is also correct: However, it does not provide a complete explanation of the Assertion. Dishonour by non-acceptance can occur in multiple scenarios, not just when the drawee is incompetent.
• Therefore, while both statements are true, the Reason does not accurately explain why the Assertion is true.

• The assertion is true because presentment is indeed necessary for discharging the maker or acceptor from liability in regular circumstances.
• The reason is also true, as there are specific exceptions where presentment is not required.
• However, the reason does not explain the assertion correctly. While presentment is necessary, the exceptions provided do not negate the general requirement; they simply outline situations where it may be waived.