Holder And Holder In Due Course Negotiable Instrument

Holder

Any person entitled in his own name to the possession of a promissory note, bill of exchange or cheque, and to recieve or recover the amount due thereon from parties thereto. It is defined in Section 8 of the N.I. Act 1881.

From the given definition we can see that two essential requirements have been provided:-

1. The holder must be entitled in his own name to claim the sum payable, and
2. He must have the right to receive or recover the amount.

A holder is the person who has possession and also has the ‘right to possession’. Thus anyone who obtains it unlawfully cannot claim it. Eg:- A thief or a person taking the instrument by forged indorsement is not a holder.

Holder in Due Course

According to Section 9 of the act, ‘Holder in due course’ means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer or the payee or endorsee thereof, if payable to order before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in in the title of the person from whom he derived his title.

From the definition in the act, we see that a ‘holder in due course’ consists of three essentials. They are:-

1. Holder in due course must acquire the instrument for a consideration.
2. He must acquire the instrument before its maturity.
3. He must not have any cause to believe that any defect existed in the title of the transferor.

Difference Between ‘Holder’ and ‘Holder in Due Course’

All holders in due course are holders but all holders are not holders in due course. Also the object and consideration in the negotiable instruments are same as the general rules in contract in the Indian Contract Act.

1. Consideration

There is no need to pay a consideration when you become a holder.

A holder in due course must obtain his instrument through consideration and that consideration must be lawful. There is no limit of adequate compensation.

2. Maturity

The holder in due course must become the holder of the instrument before its maturity. Even if the person becomes a holder on the payable date, he does not become a holder in due course as that instrument could’ve been discharged at any time of that day. (from Section 59)

The holder can come into the possession of the instrument at anytime lawfully, either before its due date or after its due date. Only his rights will be affected, not his position.

3. Title

The holder in due course gets a fresh title free from any defects of the title of the transferor if he gets it in good faith and with consideration.

The holder gets the same title as that of the transferor, i.e. the defects of the transferor's title shall be passed on to the holder. Also a transfer in good faith is not necessary to become an holder.

4. Right to sue

The holder in due course gets a right to sue against all the prior parties as they are all liable to him until the instrument is duly satisfied.

The holder only gets a right to sue his prior party, i.e. his transferor from whom he obtained the instrument.

Apart from that holder in due course gets some special privileges

Special Privileges of Holder in Due Course

1. Under Section 9, it is given that the holder in due course gets a better title than that of the transferor.

The holder in due course even obtains a good title to an instrument which was originally made or subsequently negotiated for an unlawful consideration if he receives them in good faith (Section 58). Good faith means without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

2. When a holder of a negotiable instrument who derives the title from a holder in due course, which is free from defects, he has the same rights as that of a holder in due course (Section 53). Thus an instrument which passes through a holder in due course is purged of all its defects.

3. As we have seen before, from Section 36, every party to a negotiable instrument is liable to a holder in due course until the instrument is duly satisfied.

4. Privilege in case of Inchoate stamped instruments - is present in Section 20 of the act. Generally, a holder of an instrument that is stamped but blank cannot recover anything between the minimum value assigned to the instrument through the stamp and what was intended to be paid out on that instrument by the one who signed the instrument.

But a holder in due course can claim for whatever the maximum amount assigned to the instrument through the stamp.

5. Privilege in case of fictitious bills of exchange - According to Section 42, titled ‘Acceptance of a bill drawn in fictitious name’, when a person accepts such a Bill and becomes its drawee, he is liable to the holder in due course to whom the instrument is negotiated to.

6. Privilege when an instrument which is delivered conditionally is negotiated - Section 47 says that when a negotiable instrument has been indorsed conditionally, and the condition is not fulfilled, the further indorsement of it shall be invalid.

But if that instrument has been further indorsed in good faith, creating a holder in due course, then his right to further indorse it again is protected. (exception under Section47)

7. Under Chapter XIII (special rules of evidence) of the act, Section 120 and 121 provide for estoppels which are specific for a holder in due course

Under Section 120 (Estoppel against denying original validity of instrument), if a holder in due course files a suit against the maker of a promissory note, or a drawer or drawee or acceptor of a bill of exchange, or drawer of a cheque, they cannot argue that they made an invalid instrument.

8. In Section 121 (Estoppel against denying capacity of payee to endorse), no maker of a promissory note, and no acceptor of bill of exchange payable to order, shall be allowed to deny that the payee was not in a capacity to endorse the instrument in case of a suit by a holder in due course.