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Complete resources on Negotiable Instruments Act

Complete resources on Negotiable Instrument Negotiation

Negotiable Instrument Negotiation MCQ

1. An indorser of a negotiable instrument can limit his liability
(a) through a sans recourse indorsement
(b) by making his liability depend upon the happening of a specified event which may not happen
(c) through blank indorsement
(d) Both (a) and (b) above.

Intent:
This question tests the understanding of how an indorser can restrict their liability when endorsing a negotiable instrument.

Options Analysis:

(a) Through a sans recourse indorsement – Correct.

Sans Recours means “without recourse”, meaning the indorser excludes their liability if the instrument is dishonored.

The phrase “Pay X or order without recourse to me” removes the liability of the indorser.

Inference: Correct. This is a valid way to limit liability.

(b) By making his liability depend upon the happening of a specified event which may not happen – Correct.

An indorser can conditionally limit liability by stating that payment will only be required if a specific event occurs.

Inference: Correct. This is another valid way to restrict liability.

(c) Through blank indorsement – Incorrect.

A blank indorsement simply converts an instrument into a bearer instrument, allowing free transfer but does not limit liability.

Inference: Incorrect. A blank indorsement does not reduce the indorser’s liability.

(d) Both (a) and (b) above – Correct.

Since both options (a) and (b) are valid ways to limit liability, this is the best answer.

Inference: Correct. This correctly captures the two ways an indorser can limit liability.

Correct Answer: (d) Both (a) and (b) above

Logical Deliberation: A sans recourse indorsement removes liability entirely, while an indorsement with a condition makes liability contingent on an event.

Ans. Sans Recours means ‘without any remedy’. Here the indorser excludes his liability to the indorsee on the instrument (e.g, Pay Xor order without recourse to me’ or ‘Pay Xor order sans recours’). In case of dishonour, the holder cannot make an indorser liable, even though the holder is a holder in due course. An indorser can also limit his liability by making his liability depends upon the happening of a contingent event which may not happen. Hence, option (d) is the correct answer.

2. ‘M’ the holder of a bill for Rs.1,500 makes an indorsement stating that, ‘pay Rs.800 to N or order and pay Rs.700 to O or order’. With reference to the above negotiation, which of the following is correct? 
(a) the indorsement is invalid
(b) the indorsement to N is not valid
(c) the indorsement to O is not valid
(d) indorsement in equal proportions will be valid.

Intent:
To check the validity of partial indorsements under the Negotiable Instruments Act, 1881.

Options Analysis:

(a) The indorsement is invalid – Correct.

Section 56 of the Negotiable Instruments Act states that a partial indorsement (where only a part of the amount is transferred) is invalid for negotiation.

Inference: Correct. A partial indorsement is not legally valid.

(b) The indorsement to N is not valid – Incorrect.

Since the entire indorsement is invalid, it is incorrect to say only N’s part is invalid.

Inference: Incorrect. Both N and O’s endorsements are invalid, not just N’s.

(c) The indorsement to O is not valid – Incorrect.

Same reasoning as (b). The entire indorsement is invalid, not just O’s part.

Inference: Incorrect. The full indorsement fails, not just O’s.

(d) Indorsement in equal proportions will be valid – Correct.

Section 56 allows a valid indorsement if the amount is equally split.

If M had endorsed Rs.750 to N and Rs.750 to O, the indorsement would be valid.

• Inference: Correct. An equal split in the indorsement would make it legally valid.

Correct Answer: (d) Indorsement in equal proportions will be valid

Logical Deliberation: A partial indorsement is generally invalid, but if done in equal parts, it is valid under Section 56.

Ans. According to sec.56 of the NI Act, 1881, if, by way of indorsement only a part of the amount is purported to be transferred, such indorsement is called as partial indorsement. A partial indorsement is invalid for the purpose of negotiation.

But where the amount in an instrument has been partly paid, a note to that effect may be made on the instrument which may then be negotiated for the balance.

Even though the total amount of the bill has been negotiated, N and O are indorsees for only a part of the amount and hence the indorsement is invalid.

According to the later part of sec.56, indorsement in equal proportions will be valid. Hence, option (d) is the correct answer.

3. Which of the following is considered as restrictive indorsement? 
(a) Which proposes to transfer to the indorsee only a part of the amount payable on the instrument
(b) Which prohibits further negotiation of an indorsement
(c) Which limits the claim made by indorser in full
(d) Both (a) and (b) above.

Intent:
To test knowledge of restrictive indorsement, where the indorsee’s rights are limited.

Options Analysis:

(a) Which proposes to transfer to the indorsee only a part of the amount payable on the instrument – Incorrect.

This refers to partial indorsement, which is not a restrictive indorsement.

Inference: Incorrect. A restrictive indorsement does not relate to partial payment.

(b) Which prohibits further negotiation of an indorsement – Correct.

If an endorsement limits further transfer, it is a restrictive indorsement (e.g., “Pay the contents to S only”).

Inference: Correct. Restrictive indorsement stops further transfer.

(c) Which limits the claim made by the indorser in full – Incorrect.

This sounds like a sans recourse indorsement, not a restrictive one.

Inference: Incorrect. It does not fully describe restrictive indorsement.

(d) Both (a) and (b) above – Incorrect.

Since (a) is incorrect, this option is also incorrect.

Inference: Incorrect. Only (b) is correct.

Correct Answer: (b) Which prohibits further negotiation of an indorsement

Logical Deliberation: A restrictive indorsement stops further transfer of the instrument, limiting the indorse

Ans. If an indorsement contains some word which expressly takes away the right of the indorsee to further negotiate the instrument, such indorsement is referred as Restrictive Indorsement (e.g ‘Pay the contents to S only). Hence, option (b) is the correct answer.

4. E, the payee-holder of a bill, indorsed it in blank and delivered it to F. F also indorsed it in blank and delivered it to G. G indorsed it in full to H or order, H without indorsement delivered it to I.
(a) I is entitled to receive payment from F
(b) I is entitled to receive payment from G
(c) I is entitled to receive payment from H
(d) None of the above.

Intent:
To analyze the negotiability of an instrument after a full indorsement.

Options Analysis:

(a) I is entitled to receive payment from F – Correct.

Section 55 of the NI Act states that a bill indorsed in blank remains payable to bearer, meaning I can recover from F.

Inference: Correct. Blank endorsement keeps the instrument negotiable.

(b) I is entitled to receive payment from G – Incorrect.

Since the full endorsement to H happened after blank endorsements, I does not have a claim on G.

Inference: Incorrect. G is not directly liable to I.

(c) I is entitled to receive payment from H – Incorrect.

H did not endorse the instrument, so I does not derive title through H.

Inference: Incorrect. I cannot claim from H without an endorsement.

(d) None of the above – Incorrect.

Since (a) is correct, this option is invalid.

• Inference: Incorrect. I has a valid claim against F.

Correct Answer: (a) I is entitled to receive payment from F

Logical Deliberation: Even after a full endorsement, the bill remains payable to bearer if it was originally endorsed in blank.

Ans. According to sec.55 of NI Act, 1881, if an instrument indorsed in blank is subsequently indorsed in full, it remains payable to bearer and negotiable by delivery as against all the parties prior to the indorser in full. In such case the amount of the instrument cannot be claimed by the indorser in full except by the person to it has been indorsed in full, or one who derives title through such person. So, I cannot recover from H nor from G because I does not derive title from G, but can recover from F or any prior party. Hence, option (a) is the correct answer.

5. E draws a bill on F for Rs.1000 payable to his order. F accepts the bill but subsequently dishonours it by non-payment. E sues F on the bill. F proves that it was accepted for value as to Rs.700 and as accommodation to E as to the balance.
Select the correct statement:
(a) Ecan recover only Rs.700 from F
(b) Ecan recover Rs.1000 from F
(c) Ecan not recover anything F
(d) None of the above statement.

Intent: This question tests understanding of partial consideration and its effect on recovery.

(a) E can recover only Rs.700 from F (Correct) Inference: E, as an immediate party, is limited to the actual consideration. Logical Explanation: Section 44 of the NI Act limits recovery to the actual value given when there’s a partial failure of consideration.

(b) E can recover Rs.1000 from F (Incorrect) Inference: E cannot recover the full amount due to the partial failure of consideration. Logical Explanation: Section 44 directly addresses this scenario.

(c) E cannot recover anything from F (Incorrect) Inference: E can recover the value that was given as consideration. Logical Explanation: The agreement is still valid for that portion.

(d) None of the above statement (Incorrect) Inference: Option (a) is the correct statement. Logical Explanation: See explanation for (a).

Ans. When there is a partial absence or failure of money-consideration on an instrument, the immediate parties cannot recover more than actual consideration. But this rule does not apply to a holder in due course (Sec. 44). So, E can recover only Rs.700 from F. But if the bill gets into the hands of a holder in due course, he can recover the full amount of Rs.1000. Hence, option (a) is the correct answer.

6. X accepted a bill for Rs.2500 for Y’s own accommodation. Y indorses the bill to Z for a security of Rs.2000. X was held insolvent.
Select the correct statement:
(a) Zcan recover Rs.2000 from
(b) Zcan recover Rs.2500 from Y
(c) Zcannot recover anything from Y
(d) None of the above.

Intent: This question tests understanding of accommodation bills and the extent of liability.

(a) Z can recover Rs.2000 from Y (Correct) Inference: Z can recover the amount he advanced as security. Logical Explanation: Z is a holder for value up to the amount of the security. Y is liable to Z for that amount.

(b) Z can recover Rs.2500 from Y (Incorrect) Inference: Z’s recovery is limited to the amount of the security. Logical Explanation: Z is not a holder in due course for the full amount; he only gave value of Rs. 2,000.

(c) Z cannot recover anything from Y (Incorrect) Inference: Z can recover the amount of his security. Logical Explanation: Y is liable to the extent of the security given.

(d) None of the above (Incorrect) Inference: Option (a) is the correct statement.

Ans. X accepted the bill of Rs.2,500 was for an accommodation to Y. As Y indorses the bill to Z for a security of Rs.2000, Zcan recover Rs.2000 from Y. Hence, option (a) is the correct answer.

7. X Ltd. Co. issued a cheque in favour of M, a creditor of the company. One of the employee forged M’s endorsement and negotiated the cheque to O who took them in good faith and for value. O received payment of the cheque.

Select the correct statement:
(a) X Ltd. Co can recover the amount from O, if the cheque was an order cheque
(b) X Ltd. Co can recover the amount from O, if the cheque was a bearer cheque
(c) X Ltd. Co can never recover the amount from O
(d) X Ltd. Co can always recover the amount from O.

Intent: This question tests understanding of forged endorsements and recovery.

(a) X Ltd. Co can recover the amount from O, if the cheque was an order cheque (Correct) Inference: If it was an order cheque, the forged endorsement breaks the chain of title, and X Ltd. can recover. Logical Explanation: A forged endorsement is treated as no endorsement at all. The cheque remains payable to M, and X Ltd. can recover from O, who received the money without valid title.

(b) X Ltd. Co can recover the amount from O, if the cheque was a bearer cheque (Incorrect) Inference: If it was a bearer cheque, the forgery is irrelevant after negotiation. Logical Explanation: Bearer cheques are transferable by delivery alone. The forged endorsement is immaterial once the cheque is in the hands of a bona fide holder.

(c) X Ltd. Co can never recover the amount from O (Incorrect) Inference: X Ltd. can recover if the cheque was an order cheque.

(d) X Ltd. Co can always recover the amount from O (Incorrect) Inference: X Ltd. can only recover if it was an order cheque.

Ans. In case of forged indorsement, a person cannot acquire the rights of a holder in due course nor any title to the instrument even though if he takes it in good faith and for value. So, X Ltd. Co can recover the amount from O, if the cheque was an order cheque. Hence, option (a) is the correct answer.

8. ‘A’ is the holder of a bill of exchange made payable to the order of ‘B’. The bill of exchange contains the following endorsements in blank:
First endorsement ‘B’, Second endorsement ‘C’, Third endorsement ‘D’, Fourth endorsement ‘E’
‘A’ strikes out without ‘E’s consent, the endorsement by ‘C’ and ‘D’.
Select the correct statement:
(a) A can sue or recover from B
(b) A can sue or recover from C
(c) A can sue or recover from D
(d) A can sue or recover from E.

Intent: This question tests understanding of the effect of striking out endorsements.

(a) A can sue or recover from B (Correct) Inference: B remains liable as a prior endorser. Logical Explanation: Striking out subsequent endorsements doesn’t affect the liability of prior endorsers.

(b) A can sue or recover from C (Incorrect) Inference: C is discharged due to the striking out of their endorsement. Logical Explanation: Section 40 discharges parties whose endorsements are struck out.

(c) A can sue or recover from D (Incorrect) Inference: D is also discharged. Logical Explanation: Same as (b).

(d) A can sue or recover from E (Incorrect) Inference: E is also discharged. Logical Explanation: Same as (b) and (c).

Ans. As per section 40 of NI Act, 1881, if a holder destroys or impairs the endorser’s remedy against a prior party without the consent of the endorser, the endorser and all parties subsequent to him are discharged. Consequently, E’s remedy against C and D has been demolished. Therefore, C and D, and the party subsequent to C and D (i.e., E) are discharged from liability. Hence, A is not entitled to recover anything from C, D and E and he (A) can only sue or recover from B. Hence, option (a) is the correct answer.

9. A bill of exchange is drawn payable to X or order. X endorses it to Y ‘sans recours, then Y endorses to Z, Z to A, A to B and B to X. State with reasons, whether X can recover the amount of the bill from Y, Z, A and B, if he has originally indorsed the bill to Y by adding the words ‘sans recourse’
Select the correct statement :
(a) Y is liable to X for amount due on the bill
(b) Z is liable to X  for amount due on the bill
(c) A is liable to  X for amount due on the bill
(d) All of the above.

Intent: This question tests understanding of “sans recours” endorsements and negotiation back.

(a) Y is liable to X for amount due on the bill (Correct) Inference: Even with the “sans recours” endorsement, Y is still liable because the bill was negotiated back to X. Logical Explanation: “Sans recours” generally disclaims liability. However, when the instrument returns to the original endorser, the disclaimer is nullified.

(b) Z is liable to X for amount due on the bill (Correct) Inference: Z is liable as a prior endorser. Logical Explanation: Z’s liability is not affected by X’s “sans recours” endorsement to Y.

(c) A is liable to  X for amount due on the bill (Correct) Inference: A is liable as a prior endorser. Logical Explanation: A’s liability is not affected by X’s “sans recours” endorsement to Y.

(d) All of the above (Correct) Inference: All prior endorsers are liable to X in this “negotiation back” scenario. Logical Explanation: See explanations for (a), (b), and (c).

Ans. If in the due course of negotiation, an instrument comes back in the hands of a person who is already a party of such instrument, it is called ‘Negotiation back’. In such a case, the holder cannot sue such parties to whom he was previously liable as an indorser, but can enforce payment to those parties to whom he was not previously liable.

If negotiation is made by a party by way of ’sans recourse’ endorsement and if it is negotiated back to such party, then all the parties will continue to be liable to such a party.

So, the intermediate parties are not discharged since X had endorsed the bill under sans recourse endorsement. Therefore, all the parties, viz., Y, Z , A and B (as well as drawer and acceptor) are liable to X for payment of the amount due on the bill and he (X) can recover the amount from all or any of them. Hence, option (d) is the correct answer.

10. On a bill of exchange of Rs.10,000, X’s acceptance to the bill is forged. A takes the bill from his customer for value and in good faith before the bill becomes payable.
State the correct statement:
(a) A can get the money from X
(b) A cannot get the money from X
(c) A gets the rights of ‘Holder in Due Course’
(d) The Bill is cleansed of all defects in the hands of A.

Intent: This question tests understanding of forged acceptances.

(a) A can get the money from X (Incorrect) Inference: X is not liable as the acceptance is forged. Logical Explanation: A forged acceptance is not binding on the person whose signature is forged.

(b) A cannot get the money from X (Correct) Inference: X is not liable for the forged acceptance. Logical Explanation: See explanation for (a).

(c) A gets the rights of ‘Holder in Due Course’ (Incorrect) Inference: A cannot be a holder in due course with a forged acceptance. Logical Explanation: A forged acceptance prevents the creation of a valid instrument against the purported acceptor.

(d) The Bill is cleansed of all defects in the hands of A (Incorrect) Inference: Forgery cannot be cleansed. Logical Explanation: A fundamental defect like a forged acceptance cannot be cured.

Ans. In case of forged indorsement, a person cannot acquire the rights of a holder in due course nor any title to the instrument even though if he takes it in good faith and for value.

Since it is a forged indorsement, A shall not derive any title to the bill. Thus, A is not a ‘holder in due course’ even though he might have obtained the bill for consideration, before maturity, bonafide, and in good faith.

Accordingly, A cannot recover the amount of the bill from X. Hence, option (b) is the correct answer.

11. A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C without consideration. C transferred it to D for value.
Select the correct statement:
(a) D can sue C on the Bill
(b) D can sue B on the Bill
(c) D can sue A on the Bill
(d) All of the above.

Intent: This question tests understanding of the effect of lack of consideration.

(a) D can sue C on the Bill (Correct) Inference: D can sue C as a prior party. Logical Explanation: Although the bill was initially accepted without consideration, D is a holder for value and can sue any prior party.

(b) D can sue B on the Bill (Correct) Inference: D can sue B as the acceptor. Logical Explanation: Same as (a).

(c) D can sue A on the Bill (Correct) Inference: D can sue A as the drawer. Logical Explanation: Same as (a).

(d) All of the above (Correct) Inference: D can sue all prior parties. Logical Explanation: Since D is a holder for value, the lack of consideration between prior parties is irrelevant to D’s rights.

Ans. An instrument made, drawn, accepted, indorsed, or transferred without consideration (or for a consideration which fails) creates no obligation of payment between the parties to the transaction. As between immediate parties, the defendant can plead absence of consideration.

Holder acquiring an instrument for consideration (and other subsequent holder deriving the title) can claim or recover the amount due from the transferor or from any prior party thereto. So, subsequent holders having title can recover the amount from any or all of the prior parties once the instrument gets into the hands of a holder in due course.

Since D is a holder for value, he is entitled to claim payment of the bill from all the prior parties, viz., A, B and C. Hence, option (d) is the correct answer.

12. A draws a bill of exchange on B payable to C or order. C indorses it in blank and negotiates it. The bill is thereafter lost and X, who finds it, forges an indorsement in blank of D and negotiates it by delivery to E.
(a) E can sue C on the bill
(b) E can sue B on the bill
(c) None of the above
(d) Both (a) and (b).

Intent: This question tests understanding of forged endorsements and blank endorsements.

(a) E can sue C on the bill (Correct) Inference: E can sue C as a prior endorser. Logical Explanation: E’s title derives from C’s valid blank endorsement, not the forged endorsement of D.

(b) E can sue B on the bill (Correct) Inference: E can sue B as the acceptor. Logical Explanation: Same as (a).

(c) None of the above (Incorrect) Inference: Options (a) and (b) are both correct. Logical Explanation: See explanations for (a) and (b).

(d) Both (a) and (b) (Correct) Inference: E can sue both C and B. Logical Explanation: See explanations for (a) and (b).

Ans. In case of forged indorsement, a person cannot acquire the rights of a holder in due course nor any title to the instrument even though if he takes it in good faith and for value.

In case of blank indorsement, mere delivery is enough to derive a title as it becomes payable to bearer. The transferee can sue any of the parties to the bill overlooking the forgery.

E, the holder, does not derive his title through the forged indorsement of D, but through the indorsement of C which is genuine, he can sue any of the parties to the bill without taking notice of C’s forged indorsement. Hence, option (d) is the correct answer.

13. P, the holder of a bill, transfers it to Q without consideration. Q also transfers it to R without consideration. R transfers it to S for value. Stransfers it to T, without consideration. Discuss the rights of Tagainst P, Q, R and S
(a) T can recover the amount of Bill from P
(b) T can recover the amount of Bill from Q
(c) T can recover the amount of Bill from R
(d) All of the above.

Intent: This question tests understanding of the rights of a holder for value against parties who received the bill without consideration.

(a) T can recover the amount of Bill from P (Correct) Inference: T can recover from P. Logical Explanation: T is a holder for value and can sue any prior party, including those who didn’t give consideration.

(b) T can recover the amount of Bill from Q (Correct) Inference: T can recover from Q. Logical Explanation: Same as (a).

(c) T can recover the amount of Bill from R (Correct) Inference: T can recover from R. Logical Explanation: Same as (a).

(d) All of the above (Correct) Inference

Ans. An instrument made, drawn, accepted, indorsed, or transferred without consideration (or for a consideration which fails) creates no obligation of payment between the parties to the transaction. As between immediate parties, the defendant can plead absence of consideration.

Holder acquiring an instrument for consideration (and other subsequent holder deriving the title) can claim or recover the amount due from the transferor or from any prior party thereto. So, subsequent holders having title can recover the amount from any or all of the prior parties once the instrument gets into the hands of a holder in due course.

No obligation of payment is created between S and T, who are immediate parties, due to absence of consideration. However, T can recover the payment of the bill from R, Q and P (as well as from the drawer and acceptor of the bill), who are not immediate parties. Hence, option (d) is the correct answer.

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