CAF-4 · Chapter 14

Negotiable instruments MCQs with Answers

8 multiple-choice questions on Negotiable instruments for CAF-4 Business Law Dynamics. Try each one before revealing the answer and explanation.

1. Question 1

   Which of the following acts contains the law relating to promissory notes, bills of exchange, and cheques in Pakistan?

   • A) The Contract Act, 1872
   • B) The Negotiable Instruments Act, 1881
   • C) The Companies Act, 2017
   • D) The Partnership Act, 1932
   Show answer & explanation

   Answer: B) The Negotiable Instruments Act, 1881

   The law relating to negotiable instruments in Pakistan is contained in the Negotiable Instruments Act, 1881.

2. Question 2

   A promissory note is defined as an instrument in writing containing an unconditional ________ to pay a certain sum of money.

   • A) Order
   • B) Request
   • C) Undertaking
   • D) Instruction
   Show answer & explanation

   Answer: C) Undertaking

   A promissory note must contain an unconditional undertaking (promise) by the maker to pay a certain sum of money. A bill of exchange contains an 'order'.

3. Question 3

   Evaluate the validity of the following statement written on a document: 'I promise to pay Khalid or order Rs. 12,000 six days after Saad’s death.'

   • A) Invalid, because the time of payment is completely unknown.
   • B) Valid, because death is an event which is certain to happen.
   • C) Invalid, because a promissory note cannot be linked to a person's life.
   • D) Valid, but only if Saad signs it as a guarantor.
   Show answer & explanation

   Answer: B) Valid, because death is an event which is certain to happen.

   An undertaking is considered unconditional if it depends on an event which, according to the ordinary expectation of mankind, is certain to happen (like death), even if the exact time is uncertain.

4. Question 4

   Which of the following phrases makes a promissory note INVALID?

   • A) 'I promise to pay Rs. 10,000 on demand.'
   • B) 'I promise to pay Rs. 6,000 with interest charged at quarterly rests.'
   • C) 'I promise to pay Zubair on demand Rs. 6,000 at my convenience.'
   • D) 'I promise to pay you or your successors Rs. 11,000.'
   Show answer & explanation

   Answer: C) 'I promise to pay Zubair on demand Rs. 6,000 at my convenience.'

   An undertaking to pay 'at my convenience' is a conditional promise, destroying the certainty of the instrument and making the promissory note invalid.

5. Question 5

   Evaluate the validity of this note: 'I promise to pay Adil or order Rs. 5,000 and 500 shares of Sigma Limited.'

   • A) Valid, because both money and shares have financial value.
   • B) Valid, because it is an unconditional undertaking.
   • C) Invalid, because a promissory note must be for the payment of money only.
   • D) Invalid, because the payee is not certain.
   Show answer & explanation

   Answer: C) Invalid, because a promissory note must be for the payment of money only.

   A key essential of a promissory note is that the undertaking must be to pay a 'certain sum of money only'. Adding shares or goods invalidates the instrument.

6. Question 6

   In the context of a cheque, who is the 'drawee'?

   • A) The person writing the cheque.
   • B) The person receiving the payment.
   • C) Always a specified banker.
   • D) Any financial institution or individual with cash.
   Show answer & explanation

   Answer: C) Always a specified banker.

   A cheque is a specialized form of a bill of exchange drawn on a specified banker. Therefore, in the case of a cheque, the drawee will always be a bank.

7. Question 7

   Mujahid owes Rs. 500,000 to Shoaib and wants to issue a time instrument to settle the debt. Which document should Mujahid draft and sign?

   • A) A cheque post-dated to a future time.
   • B) A promissory note containing a promise to pay five months after date.
   • C) A letter of comfort.
   • D) An informal IOU letter.
   Show answer & explanation

   Answer: B) A promissory note containing a promise to pay five months after date.

   To settle the debt with a time instrument, Mujahid would issue a promissory note as a time instrument (e.g., 'Five months after date I promise to pay...') to Shoaib.

8. Question 8

   Is the statement 'Nauman, I shall be highly obliged if you make it convenient to pay Rs. 100,000 to Mahreen' a valid bill of exchange?

   • A) Yes, it is a polite but valid order.
   • B) Yes, because the sum of money is certain.
   • C) No, because it is merely a request and lacks an unconditional order.
   • D) No, because the payee is not mentioned.
   Show answer & explanation

   Answer: C) No, because it is merely a request and lacks an unconditional order.

   A bill of exchange must contain an unconditional order to pay. Using language like 'I shall be highly obliged if you make it convenient' constitutes a request, not an order.