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Discharge of Negotiable instrument – MCQ
1. The parties to a negotiable instrument are discharged from liability by
(a) Payment
(b) Release
(c) Cancellation
(d) (a), (b) and (c) above.
Intent of the Question: To test the knowledge of Section 82 of the Negotiable Instruments Act, 1881, which specifies the conditions under which liability is discharged.
Deliberation of Options:
(a) Payment – Correct, as full payment of the instrument discharges liability.
(b) Release – Correct, as a formal release by the holder relieves liability.
(c) Cancellation – Correct, as physical cancellation of the instrument nullifies obligations.
(d) All of the above – Since all the conditions in (a), (b), and (c) lead to discharge, this is the correct choice.
Ans. According to section 82 of the Negotiable Instruments Act, 1881, the maker, acceptor or endorser of a negotiable instrument is discharged from liability by payment, release, and cancellation. Hence, option (d) is the correct answer.
2. On March 15, 2009 Piyush issued a cheque for Rs.30,000 in favour of Akash drawn on ABC Bank towards the settlement of a debt. Akash did not present the cheque for payment within reasonable time though there was sufficient balance in the account of Piyush. The bank went into liquidation and a scheme for settlement of debts was approved. The bank paid 60 paise for a rupee when the cheque was presented. Who is liable to pay the remaining amount?
(a) Piyush is liable to pay Rs.12,000 with interest
(b) ABC Bank is liable to pay Rs.30,000
(c) Piyush is liable to pay only Rs.12,000
(d) Piyush is not liable to pay any amount.
Intent of the Question: To assess understanding of Section 84 of the Act regarding delay in presenting a cheque and its effect on the drawer’s liability.
Deliberation of Options:
(a) Incorrect – Piyush is discharged, so he is not liable for Rs.12,000.
(b) Incorrect – The bank is insolvent, and only 60% of the claim is paid.
(c) Incorrect – Piyush is discharged, so he is not liable for any amount.
(d) Correct – Since Akash failed to present the cheque within reasonable time, Piyush is discharged.
Explanation: As per Section 84, when a holder fails to present the cheque in a reasonable time and the bank fails, the drawer (Piyush) is discharged to the extent of actual damage suffered (Rs.12,000). Akash must claim the unpaid balance from the bank’s liquidation process.
Ans. According to Section 84 of the Negotiable Instruments Act, 1881, if holder defaults to present the cheque within a reasonable time and the bank fails, the drawer shall be discharged to the actual damages suffered by him (drawer). However, the holder may prove this debt against the insolvent bank.
In the given case, Akash failed to present the cheque, though there was sufficient balance in the account of Piyush. Akash received Rs.18,000 from the bank. Piyush is discharged from liability. Hence, option in (d) is the correct answer.
3. Payment of honour can be made only in case of –
(a) Promissory Note
(b) Cheque
(c) Bills of Exchange
(d) All of these.
Intent of the Question: To verify understanding of the concept of payment for honour in negotiable instruments.
Deliberation of Options:
(a) Incorrect – Promissory notes do not have provisions for payment of honour.
(b) Incorrect – Cheques do not have payment of honour provisions.
(c) Correct – Bills of Exchange allow payment for honour.
(d) Incorrect – Since only (c) is correct, this option is wrong.
Explanation: Payment for honour is applicable only in the case of Bills of Exchange to protect the credit of the drawer or endorser.
Ans. Payment of honour can be made only in case of Bills of Exchange.
Hence, option in (c) is the correct answer.
4. A bill drawn and indorsed in United States, but accepted and payable in Korea, is dishonoured. The notice of dishonour shall be given in accordance with –
(a) the law of Korea
(b) the law of USA
(c) either (a) or (b)
(d) only (b).
Intent of the Question: To test knowledge of Section 135 regarding international bills.
Deliberation of Options:
(a) Correct – The law of the place where the bill is payable governs notice of dishonour.
(b) Incorrect – The country where the bill is drawn is irrelevant.
(c) Incorrect – The choice is not optional; only the place of payment matters.
(d) Incorrect – Only (a) is correct.
Explanation: Section 135 states that notice of dishonour is governed by the law of the country where the bill is payable (Korea in this case).
Ans. According to sec.135 of NI Act, 1881, the notice of dishonour of a note, bill or cheque depends on law of the place where it is made payable and not where it is made or indorsed. So, the notice of dishonour shall be given in accordance with the law of Korea.
Hence, option (a) is the correct answer.
5. By the operation of law, the instrument is discharged under which condition –
(a) Insolvent
(b) Time Barred
(c) Merger
(d) All of the above.
Intent of the Question: To test knowledge of various legal circumstances that lead to discharge of negotiable instruments.
Deliberation of Options:
(a) Correct – Insolvency results in discharge by operation of law.
(b) Correct – Time-barred debts under the Limitation Act are unenforceable.
(c) Correct – Merger occurs when obligations are absorbed into a new contract.
(d) Correct – Since all options are correct, this is the right answer.
Explanation: An instrument is discharged by operation of law if it is time-barred, the obligor becomes insolvent, or obligations are merged into another contract.
Ans. By the operation of law, the instrument is discharged under the conditions of Insolvent, Time Barred and Merger. Hence, option (d) is the correct answer.
6. In case of qualified acceptance, who is discharged from the liability of an instrument
(a) drawer
(b) drawee
(c) Indorser and Indorsee
(d) all the prior parties.
Intent of the Question: To test understanding of Section 86 regarding qualified acceptance.
Deliberation of Options:
(a) Incorrect – The drawer is not necessarily discharged.
(b) Incorrect – The drawee is not discharged.
(c) Incorrect – Only prior parties not consenting are discharged.
(d) Correct – All prior parties who did not consent are discharged.
Explanation: Section 86 states that when a holder accepts a qualified acceptance, all prior parties who did not agree to the modification are discharged.
Ans. According to s.86 of NI Act, 1881, where the holder of the bill consent to qualified acceptance, all the prior parties who did not consent to qualified acceptance are discharged.
Hence, option (d) is the correct answer.
7. A bill payable with 10% interest is altered and 12% is written on it.
(a) Nothing is payable as the instrument becomes invalid
(b) 10% interest is payable on the bill
(c) 12% interest is payable on the bill
(d) None of the above.
Intent of the Question: To test understanding of material alteration under the Act.
Deliberation of Options:
(a) Correct – A material alteration invalidates the instrument.
(b) Incorrect – The original terms do not remain enforceable.
(c) Incorrect – The altered terms are invalid.
(d) Incorrect – (a) is the correct answer.
Explanation: As per the Act, an unauthorized material alteration renders the instrument void.
Ans. Alteration of date, sum payable, time of payment, addition of place of payment, rate of interest etc are considered to be material alteration and vitiates the instrument. So, when a bill payable with 10% interest is altered and 12% is written on it, nothing is payable as the instrument becomes invalid.
Hence, option (a) is the correct answer.
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