Last Updated on: 14th May 2025, 10:47 am

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Complete resources on Negotiable Instruments Act

Complete resources on Parties to Negotiable Instruments

Parties to a Negotiable Instrument-MCQ

1. ‘X’ makes a promissory note in favour of Y in respect of a debt owed by ‘X’ to ‘Y’. After X’s death, the note is found among some of his papers. In the above situation, can Y recover the amount on this instrument?
(a) Y cannot recover the amount on this instrument
(b) Y can recover the amount from the legal heirs of the deceased X
(c) Y can recover the amount from the property of X
(d) None of the above.

Intent:
To determine whether a promissory note is enforceable if it is found among the deceased’s papers without delivery.

Options Analysis:

(a) Y cannot recover the amount on this instrument – Correct. According to Section 46 of the Negotiable Instruments Act, 1881, a promissory note is valid only if it has been delivered. Since it was found among X’s papers and not delivered, it remains incomplete.

(b) Y can recover the amount from the legal heirs of the deceased X – Incorrect. The promissory note was not delivered, making it legally unenforceable.

(c) Y can recover the amount from the property of X – Incorrect. Since the note was never delivered, it does not bind the estate of X.

(d) None of the above – Incorrect. The correct answer is explicitly provided in option (a).

Correct Answer: (a) Y cannot recover the amount on this instrument

Logical Deliberation:
A negotiable instrument must be delivered to be valid. Since X never delivered the note, it remains unenforceable.

Ans. According to Sec.46 of the Negotiable Instruments Act, 1881 the making, acceptance or indorsement of a promissory note, bill of exchange or cheque is completed by delivery, actual or constructive. If the negotiable instrument is not delivered it cannot bind the parties to the instrument. Until that, every contract on the instrument is incomplete and revocable. Hence, Y, cannot recover the amount on this instrument. So, option (a) is the correct answer.

2. Which of the following is/are not the privileges of holder in due course?
(a) No party can claim against a holder in due course that the instrument had been lost or was obtained by him by unlawful means or consideration
(b) Any defect in title in the instrument does not affect the rights of the holder in due course even if he had knowledge of the defect and he himself is a party to the fraud
(d) Every prior party to a negotiable instrument is liable thereon to a holder in due course until the Instrument is duly satisfied
(d) None of the above.

Intent:
To test the protections granted to a holder in due course under the Negotiable Instruments Act, 1881.

Options Analysis:

(a) No party can claim against a holder in due course that the instrument had been lost or was obtained by unlawful means – Incorrect. A holder in due course enjoys protection against previous defects.

(b) Any defect in title in the instrument does not affect the rights of the holder in due course even if he had knowledge of the defect and he himself is a party to the fraud – Correct. Section 53 states that a holder in due course is protected only if they are not a party to the fraud. If they were involved in the fraud, they lose this privilege.

(c) Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied – Incorrect. A holder in due course can enforce payment against prior parties.

(d) None of the above – Incorrect. A correct answer exists in option (b).

Correct Answer: (b) Any defect in title in the instrument does not affect the rights of the holder in due course even if he had knowledge of the defect and he himself is a party to the fraud

Logical Deliberation:
A holder in due course is protected from prior defects unless they were involved in the fraud.

Ans. According to section 53 of Negotiable Instruments Act, 1881, any defect in title in the instrument does not affect the rights of the holder in due course, unless he himself is not a party to the fraud. Hence, option (b) is the correct answer.

3. X, Y and Z are the joint promisors of a note payable to P, Y is a minor. P endorsed the note to Q, who is also a minor.
Select the wrong statement:
(a) Q can enforce payment on the note against X
(b) Q can enforce payment on the note against Z
(c) Q can enforce payment on the note against P
(d) Q can enforce payment on the note against Y.

Intent:
To analyze the liability of joint promisors and minors in a negotiable instrument.

Options Analysis:

(a) Q can enforce payment on the note against X – Correct. Minors can hold others liable but are not personally liable.

(b) Q can enforce payment on the note against Z – Correct. Z, as a joint promisor, is liable for payment.

(c) Q can enforce payment on the note against P – Correct. Since P endorsed the note, he remains liable.

(d) Q can enforce payment on the note against Y – Incorrect. Section 26 states that a minor is not liable on a negotiable instrument.

Correct Answer: (d) Q can enforce payment on the note against Y

Logical Deliberation:
Minors cannot be held liable on negotiable instruments, but they can enforce payment from others.

Ans. . A minor may draw, indorse, or can negotiate an instrument so as to bind all the parties except himself (Sec. 26). So, Q can claim payment of the note from X, Z and P except Y, who is a minor. Hence, option (d) is correct. 

4. P, a minor bought a T.V. set from Q and gave a cheque for the price of TV to Q. Q indorsed the cheque in the favour of R who takes it in the good faith. On presentment of the cheque, it was dishonoured.
Select the correct statement:
(a) R can enforce payment from P only
(b) R can enforce payment from Q only,
(c) R can enforce payment jointly from P & Q
(d) Q can enforce payment from P.

Intent:
To analyze the liability of joint promisors and minors in a negotiable instrument.

(a) R can enforce payment from P only – Incorrect.

P is a minor, and as per Section 26 of the Negotiable Instruments Act, 1881, a minor cannot be held liable on a negotiable instrument.

Minors are not legally bound by contracts, meaning P is not liable to R.

Inference: Incorrect. A minor cannot be sued for payment.

(b) R can enforce payment from Q only – Correct.

Q endorsed the cheque to R, which means Q remains liable as an endorser.

Under Section 35 of the Negotiable Instruments Act, an endorser guarantees payment if the cheque is dishonored, unless there was a specific condition stating otherwise.

Since P is a minor and cannot be held liable, R must demand payment from Q as the endorser.

Inference: Correct. The endorser (Q) is responsible if the cheque is dishonored.

(c) R can enforce payment jointly from P & Q – Incorrect.

While Q (endorser) is liable, P (minor) is not liable.

Since minors are not bound by contracts, they cannot be forced to pay.

Inference: Incorrect. Only Q is liable, not P.

(d) Q can enforce payment from P – Incorrect.

P, being a minor, cannot be legally held liable for payments.

If Q tries to enforce payment from P, the claim would fail in court.

Inference: Incorrect. Minors are protected from liability under contract law.

Correct Answer: (b) R can enforce payment from Q only

Logical Deliberation:

• A minor (P) is not liable for payment, as per the Negotiable Instruments Act, 1881 and Indian Contract Act, 1872.
• The endorser (Q) remains liable for the cheque when it is dishonored unless they have specifically stated they will not be responsible.
• R, as the holder in due course, can enforce payment from Q because an endorsement transfers liability unless it is a restrictive endorsement.

Ans. A minor may draw, indorse, or can negotiate an instrument so as to bind all the parties except himself (Sec. 26). The instrument with Minor as a Party becomes binding to all other parties to it, but minor does not become liable on an Instrument. So, R can recover the payment from Q only. As P is a minor, he is not liable to pay the amount. Hence, option (b) is the correct answer.

5. A cheque was drawn by Z in favour of A, a minor. It was endorsed by A to B and then by B to C. The cheque was dishonoured by Z’s banker.
Select the correct Statement
(a) B can recover payment from Z
(b) C can recover payment from B
(c) C can recover payment from Z
(d) All of the above.

Intent:
To examine the liability of prior parties in a dishonored cheque.

Options Analysis:

(a) B can recover payment from Z – Correct. The drawer (Z) remains liable.

(b) C can recover payment from B – Correct. B endorsed the cheque, making him liable.

(c) C can recover payment from Z – Correct. The holder (C) can enforce payment against the drawer.

(d) All of the above – Correct. Since all previous parties remain liable, this is the best choice.

Correct Answer: (d) All of the above

Logical Deliberation:
All prior parties are liable in case of dishonor, making each of them responsible to the holder in due course.

Ans. When a negotiable instrument is dishonoured, all prior parties become responsible to the holder in due course. So, B and C both can recover the amount of the chaque from their prior parties. Hence, option (d) is the correct answer.

6. A cheque after endorsement from A to B and then from B to C was dishonoured. The cheque was originally drawn by Z in favour of A, a minor
(a) B can hold Z liable
(b) B cannot hold Z liable
(c) C cannot hold B liable
(d) None of the above.

Intent:
To test liability when a minor is involved in a dishonored cheque transaction.

Options Analysis:

(a) B can hold Z liable – Correct. Z, as the drawer, remains liable.

(b) B cannot hold Z liable – Incorrect. The drawer remains liable regardless of minor involvement.

(c) C cannot hold B liable – Incorrect. An endorser remains liable to the holder.

(d) None of the above – Incorrect. The correct answer exists in option (a).

Correct Answer: (a) B can hold Z liable

Logical Deliberation:
A minor cannot be held liable, but the drawer (Z) remains responsible for the dishonored cheque.

Ans. A minor may draw, indorse, or can negotiate an instrument so as to bind all the parties except himself (Sec. 26). The instrument with Minor as a Party becomes binding to all other parties to it, but minor does not become liable on an Instrument. So, B can recover the payment from Z. Hence, option (a) is the correct answer.

7. X delivered apromissory note in favour of Y. Without Y’s demanding payment, A paid the money due on the note to Y but left the note in his hands. Subsequently Y indorsed the note to Z for consideration. Z had knowledge of the payment made by A.
(a) Z can not recover from X
(b) Z can recover from X
(c) Z can recover from X & Y
(d) Both (b) & (c).

Intent of the Question: This question tests understanding of “holder in due course” and the effect of payment without surrender of the instrument.

(a) Z cannot recover from X (Incorrect) Inference: Z, despite knowing of the prior payment, can still recover as a holder in due course. Logical Explanation: The key here is that Y still possessed the note when he endorsed it to Z. X should have taken the note back after paying. Because X didn’t take the note back, Y was still able to negotiate it to a holder in due course. Z’s knowledge is irrelevant in this specific scenario.

(b) Z can recover from X (Correct) Inference: Z, as a holder in due course, has recourse against the maker (X). Logical Explanation: See explanation for (a).

(c) Z can recover from X & Y (Correct) Inference: Z can also recover from the endorser (Y). Logical Explanation: Endorsers are liable to subsequent holders in due course.

(d) Both (b) & (c) (Correct) Inference: This is the correct answer as both (b) and (c) are true. Logical Explanation: Z, as a holder in due course, can recover from both X (the maker) and Y (the endorser).

Ans. Any person is a ‘holder in due course’ when he became the possessor (when payable to bearer), or the payee or indorsee (when payable to order) of the instrument for consideration. So, as a holder in due course Z can recover the payment from his prior parties i.e., X and Y. Hence, option (d) is the correct answer.

8. D gives a blank acceptance to E who fills it up as a bill payable to the drawer’s order and himself signs it as the drawer and the first endorsement was made to a fictitious person name ‘F’.
(a) D is liable to holder of the Bill
(b) E is liable to holder of the Bill
(c) Both (a) & (b)
(d) None of the above.

Intent of the Question: This question tests knowledge of liability on a bill with a fictitious payee.

(a) D is liable to holder of the Bill (Correct) Inference: D’s blank acceptance makes him liable. Logical Explanation: D gave E the authority to fill in the blanks. Even though E acted fraudulently, D is still liable to a holder in due course.

(b) E is liable to holder of the Bill (Correct) Inference: E is liable as the drawer. Logical Explanation: E signed as the drawer, making him liable to subsequent holders.

(c) Both (a) & (b) (Correct) Inference: Both D and E are liable. Logical Explanation: Both the acceptor (D) and the drawer (E) are liable to a holder in due course.

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

Ans. An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not relieved from liability to any holder in due course claiming under an indorsement by the same hand as the drawer’s signature and purporting to be made by the drawer. So, the holder of the bill can claim from both D and E. Hence, option (c) is the correct answer.

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