Chapter 12: Payment and Collection of Cheques and Other Negotiable Instruments (JAIIB - Paper 2)
1. Which Section of the Negotiable Instruments Act, 1881 defines a “Negotiable Instrument”?
A. Section 6
B. Section 31
C. Section 13
D. Section 85
Section 13 of the Negotiable Instruments Act, 1881 defines Negotiable Instruments as promissory notes, bills of exchange, and cheques payable to order or bearer.
2. If a cheque is crossed generally, it must be paid only:
A. Through a bank account
B. Across the counter in cash
C. Only to the drawer
D. To RBI
A generally crossed cheque cannot be encashed directly; it must be collected through a bank account to ensure traceability.
3. A cheque dated 15th January 2025 is presented on 20th July 2025. What will be the status of this cheque?
A. Ante-dated cheque
B. In order
C. Post-dated cheque
D. Stale cheque
A cheque is valid for 3 months from the date of issue. Since presented after 6 months, it becomes a stale cheque.
4. Payment of a cheque by the banker is governed under which section of the Negotiable Instruments Act?
A. Section 13
B. Section 31
C. Section 45
D. Section 138
Section 31 states that a banker is bound to honour cheques drawn by a customer if sufficient funds are available, provided no legal bar exists.
5. Case Study: A customer issues a cheque without sufficient funds in his account. The cheque is dishonoured. Under which section of NI Act can he be prosecuted?
A. Section 31
B. Section 85
C. Section 138
D. Section 143
Section 138 deals with dishonour of cheques for insufficiency of funds. It provides for criminal liability and penalties.
6. As per Section 10 of the Negotiable Instruments Act, “Payment in due course” means:
A. Payment made on a dishonoured instrument
B. Payment in accordance with the apparent tenor of the instrument, in good faith, and without negligence
C. Payment to the payee only
D. Payment to the holder after endorsement only
Section 10 defines "Payment in due course" as payment made in accordance with the apparent tenor of the instrument, in good faith, without negligence, and to the person in possession.
7. Which of the following is NOT a requirement for “Payment in due course”?
A. Payment must be made in good faith
B. Payment must be made without negligence
C. Payment must match the apparent tenor of the instrument
D. Payment must always be made before due date
Payment in due course requires good faith, absence of negligence, and conformity with the tenor of the instrument. It does not require pre-maturity payment.
8. Under Section 31 of the Negotiable Instruments Act, the primary liability of a banker regarding payment of cheques is:
A. To honour cheques of customers if sufficient funds are available
B. To honour only crossed cheques
C. To pay cheques only up to ₹10 lakh
D. To honour only bearer cheques
Section 31 states that a banker must honour a customer’s cheques if sufficient funds are available, unless there is a legal prohibition.
9. Case Study: A bank pays a cheque that bears a forged signature of its customer. Who bears the loss?
A. The customer
B. The collecting banker
C. The paying banker
D. RBI
If a bank pays a cheque with forged signature, it is not “payment in due course” and the paying bank is liable for the loss.
10. If a banker wrongfully dishonours a customer’s cheque despite sufficient funds, the banker is liable for:
A. No liability
B. Civil liability only
C. Criminal liability only
D. Damages for loss of customer’s reputation
Wrongful dishonour of cheques can cause loss of reputation to the customer. The bank is liable to pay damages depending on the status of the customer.
11. The duty of a collecting banker primarily arises under which principle?
A. Doctrine of indoor management
B. Principle of indemnity
C. Principle of agency
D. Principle of estoppel
A collecting banker acts as an agent of the customer while collecting cheques. Thus, duties arise under the principle of agency.
12. Which of the following is NOT a duty of the collecting banker?
A. Duty to verify endorsements
B. Duty to act without negligence
C. Duty to present the cheque promptly
D. Duty to guarantee payment to the payee
The collecting banker has to verify endorsements, act without negligence, and present promptly. Guaranteeing payment is not his duty.
13. Case Study: A bank collects a cheque for its customer, but the cheque later turns out to be stolen. If the bank acted negligently, who is liable?
A. The payee
B. The drawer
C. The true owner
D. The collecting bank
If a collecting banker acts negligently, he loses statutory protection and becomes liable to the true owner of the cheque.
14. Which section of the Negotiable Instruments Act provides statutory protection to a collecting banker acting in good faith and without negligence?
A. Section 31
B. Section 131
C. Section 138
D. Section 85
Section 131 provides protection to a collecting banker if he acts in good faith and without negligence while collecting crossed cheques.
15. A collecting banker’s liability to the true owner of a cheque mainly arises when:
A. The cheque is post-dated
B. The cheque is crossed generally
C. The banker is guilty of negligence in collection
D. The drawer has insufficient funds
If a banker collects without due care (e.g., ignoring suspicious endorsements), he is liable to the true owner for negligence.
16. Which Section of the Negotiable Instruments Act defines “endorsement”?
A. Section 9
B. Section 13
C. Section 31
D. Section 15
Section 15 defines endorsement as the signing of a negotiable instrument for the purpose of negotiation, either on the instrument itself or on an attached slip (allonge).
17. An endorsement in blank converts an order cheque into:
A. A stale cheque
B. A bearer cheque
C. A post-dated cheque
D. A crossed cheque
When the endorser signs only his name without specifying the endorsee, the cheque becomes payable to bearer, i.e., transferable by delivery.
18. If an endorsement restricts further transfer of a cheque, it is called:
A. Restrictive endorsement
B. Conditional endorsement
C. Partial endorsement
D. Facultative endorsement
Restrictive endorsement limits further negotiation, e.g., “Pay to Mr. X only.”
19. A cheque with two parallel transverse lines on its face is known as:
A. Specially crossed cheque
B. Account payee cheque
C. Generally crossed cheque
D. Bearer cheque
A general crossing with two parallel lines indicates that the cheque must be collected through a banker and not encashed directly at the counter.
20. In case of a special crossing, the cheque must be paid only:
A. To any bank
B. To the banker whose name is mentioned in the crossing
C. To the payee in cash
D. Only to RBI
A specially crossed cheque specifies a particular banker, and payment must be made only through that banker.
21. A forged signature on a cheque makes it:
A. Valid if bank is not negligent
B. Voidable at the option of drawer
C. Absolutely null and void
D. Payable if endorsed
A forged instrument is a nullity. A bank making payment on a forged signature cannot debit the customer’s account.
22. Which Section of the Negotiable Instruments Act deals with dishonour of cheque for insufficiency of funds?
A. Section 131
B. Section 10
C. Section 15
D. Section 138
Section 138 makes dishonour of cheque due to insufficiency of funds a criminal offence punishable with imprisonment or fine.
23. For offence under Section 138 to apply, the cheque must be presented to the bank within:
A. 3 months from date of cheque
B. 6 months from date of cheque
C. 1 month from date of cheque
D. 12 months from date of cheque
As per RBI guidelines (effective 2012), validity of a cheque is 3 months. For Sec 138 action, cheque must be presented within this period.
24. Which of the following is NOT a ground for return of cheque under CTS?
A. Funds insufficient
B. Signature differs
C. Alteration not authenticated
D. Absence of payee’s PAN card
PAN card is not a requirement for cheque clearance. Reasons for return are mainly technical (signature mismatch, alteration, post-dated etc.) or financial (insufficient funds).
25. Cheque Truncation System (CTS) primarily aims at:
A. Allowing cheques to be payable across countries
B. Replacing physical movement of cheques with electronic images
C. Converting cheques into demand drafts
D. Eliminating the need for banks
CTS enables electronic transmission of cheque images and MICR data to the clearing house, reducing time, cost and risk of physical cheque movement.
