Negotiable Instruments: Promissory Note, Bill of Exchange, Cheque and Endorsement (Overview) Questions

Question 1

Define cheque.

Accepted Answer

A cheque is a bill of exchange drawn on a specified banker and payable on demand.

Question 2

Define negotiable instrument.

Accepted Answer

A negotiable instrument is a written document that creates a right to receive money and is transferable so that the transferee can sue in his own name.

Question 3

Define promissory note.

Accepted Answer

A promissory note is a written and signed instrument containing an unconditional promise by the maker to pay a certain sum of money to a certain person or order or bearer.

Question 4

Define bill of exchange.

Accepted Answer

A bill of exchange is a written and signed instrument containing an unconditional order by the drawer directing the drawee to pay a certain sum of money to a certain person or order or bearer.

Question 5

What is endorsement?

Accepted Answer

Endorsement is signing on the instrument for the purpose of transferring it to another person.

Question 6

Who is a holder?

Accepted Answer

A holder is a person entitled in his own name to possess the instrument and receive or recover the amount due on it.

Question 7

State any three features/characteristics of negotiable instruments.

Accepted Answer

Features (any three):

1) Freely transferable (negotiable).
2) Holder can sue in his own name.
3) Presumption of consideration and other legal presumptions.

(Any three.)

Question 8

Differentiate between promissory note and bill of exchange (any three points).

Accepted Answer

Promissory note vs bill of exchange:

| Point | Promissory note | Bill of exchange |
|---|---|---|
| Nature | promise to pay | order to pay |
| Parties | 2 (maker, payee) | 3 (drawer, drawee, payee) |
| Acceptance | not required | required by drawee |

Question 9

Differentiate between bill of exchange and cheque (any three points).

Accepted Answer

Bill of exchange vs cheque:

| Point | Bill of exchange | Cheque |
|---|---|---|
| Drawee | any person | bank only |
| Payable | on demand or future date | always on demand |
| Acceptance | required | not required |

Question 10

Explain holder in due course (any three points).

Accepted Answer

Holder in due course (HDC):

1) Takes the instrument for value and in good faith.
2) Takes it before maturity.
3) Has no notice of defects in title; gets better rights than ordinary holder.

Question 11

Explain endorsement and mention any three types.

Accepted Answer

Endorsement is signing for transfer. Types (any three):

1) Blank endorsement (signature only).
2) Full endorsement (names endorsee).
3) Restrictive endorsement (restricts further transfer).

(Also: conditional.)

Question 12

Explain dishonour in brief (any three points).

Accepted Answer

Dishonour means the instrument is not accepted (when acceptance is required) or not paid when due.

1) Dishonour by non-acceptance (bill).
2) Dishonour by non-payment (bill/cheque).
3) Leads to liability of parties and may require notice as per rules.

Question 13

Explain promissory note, bill of exchange and cheque and differentiate them using a table.

Accepted Answer

Negotiable instruments are written documents used in business to make and settle payments. The main negotiable instruments are promissory note, bill of exchange and cheque.

| Basis | Promissory Note | Bill of Exchange | Cheque |
|---|---|---|---|
| Nature | unconditional promise to pay | unconditional order to pay | bill drawn on banker payable on demand |
| Parties | 2 (maker, payee) | 3 (drawer, drawee, payee) | 3 (drawer, bank, payee) |
| Acceptance | not required | required by drawee | not required |
| Payable | on demand or future date | on demand or future date | always on demand |

Thus, promissory note is a promise, while bill and cheque are orders, and cheque is a special type of bill drawn on a bank.

Question 14

Explain endorsement and types of endorsement with a table and examples.

Accepted Answer

Endorsement means signing on a negotiable instrument for the purpose of transferring it to another person. It is usually done on the back of the instrument.

| Type of endorsement | Meaning | Example idea |
|---|---|---|
| Blank | signature only; becomes bearer | endorser signs only |
| Full | names endorsee; payable to that person | “Pay to Ramesh” + signature |
| Restrictive | restricts transfer | “Pay to X only” |
| Conditional | transfer subject to condition | “Pay X if …” |

Endorsement is important because it helps easy transfer of negotiable instruments and determines the rights of holder.

Therefore, correct endorsement ensures safe and valid negotiation of instruments.

Question 15

Explain holder and holder in due course and state why HDC is important. Use points and conclude.

Accepted Answer

A holder is a person entitled in his own name to possess the instrument and receive the amount due on it.

A holder in due course (HDC) is a special kind of holder who takes the instrument:
1) For value (i.e., consideration).
2) In good faith.
3) Before maturity.
4) Without notice of defects in title.

Importance of HDC:
- HDC gets better title and enjoys protection even if previous holder had defective title (subject to law).
- This increases confidence in negotiable instruments and helps smooth business transactions.
- It promotes easy circulation of instruments like cheques and bills.

Thus, the concept of holder in due course protects bona fide transferees and strengthens the negotiability feature in business law.

Negotiable Instruments: Promissory Note, Bill of Exchange, Cheque and Endorsement (Overview)

8 more questions to unlock