PAYMENT IN DUE COURSE

Section 10 provides that in order to constitute a payment of a negotiable instrument as a

payment in due course, the following conditions must be fulfilled:

a. the payment must be made in accordance with the apparent tenor of the instrument i.e.
according to what appears on the face of the instrument to be the intention of the parties.
It is necessary that payment should be made at or after maturity.

b. The payment must be made in good faith and without negligence and under
circumstances, which do not afford a reasonable ground for believing that the person to
whom it is made is not entitled to receive the amount. Thus where a cheque bears forged
signature of the signature of the drawer and the banker makes payment without exercising
due care then such a payment is not payment is due course.

c. The payment must be made to the person entitled to the possession of the instrument.

d. The payment must be made in money only;

HOLDER

Section 8 of the Negotiable Instrument Act 1881 provides that a holder is a person who is
entitled to the possession of instrument and to recover the amount due thereon.

In order to constitute a holder, the following elements are required.

a. Entitled to the Possession

To be entitled to the possession of the instrument, the person must be named therein as the
payee, e.g. I promise to pay X Tk. 1000/-, or the indoresee (Where the instrument is payable
to order) e.g. indorsed and delivered to X, or he must be the bearer (Where the instrument is
payable to bearer).

A person may not be in the possession of the instrument in fact. He should be a holder in law
(de jure) and not necessarily in fact (de facto). For example, A obtains possession of an
instrument by fraud. Although A is in the possession, yet he is not a holder, since he is not
entitled to the possession of the instrument. Court may grant an injunction restraining A from
alienating instrument.

b. Entitled to recover or receive the amount

In order to be entitled to recover or receive the amount from the drawee, the person must hold
the instrument lawfully. For example, A obtained possession of an instrument by theft. A is
not a holder, since he is not entitled to recover the amount mentioned in the instrument.

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HOLDER IN DUE COURSE

Section 9 of the Negotiable Instrument Act 1881 provides that a holder in due course is a
person who for consideration obtains possession of an instrument before its maturity and
without having sufficient cause to believe that any defect existed in the title of the person
from whom he derived a title.

Requirements of a holder in due course

a. He must be a holder of the instrument under Section 8 i.e. he must be entitled to the
possession of the instrument and also to recover money form the drawee.

b. He must have obtained possession of the instrument before its maturity, i.e. before the date
when the amount mentioned in the instrument becomes payable. Only that person who takes
it before the instrument becomes mature can be holder in due course.

c. He must have obtained possession of the instrument for valuable and lawful consideration.
It may consist of money or any other thing. Marriage has been held to be a valuable
consideration. A donation does not involve consideration and as such a donee cannot be a
holder in due course.

d. He must be a holder in good faith without having sufficient cause to believe that any defect
existed in the title of the transferor. The transferee should take these instruments honestly,
take reasonable caution and use reasonable diligence and satisfy him that it is free from
defect of title. The fact that a holder paid full value for an instrument will go a long way to
prove his good faith. If the transferee takes an instrument, which is defective on the face of it,
e.g torn, or payees name seems to have been altered or erased, a stale cheque, then he is not
acting in good faith.

e. He must take the instrument complete and regular on the face of it. He must also examine
the form of the instrument.

Differences between a holder and holder in due course

a. In the case of a holder, consideration is not necessary, e.g. a donee can be a holder. While,
in the case of a holder in due course, consideration is essential.

b. In the case of a holder, good faith is not necessary, Whereas, in the case of a holder in due
course, good faith is essential.

c. A holder in due course gets a good title to the instrument even though the title of the
transferor was defective. For instance, X obtains an instrument by fraud. He is not a
holder, and as such cannot sue on it. X transfer it to Y under circumstances which makes
Y a holder in due course, e.g. a bearer cheque was transferred to Y, who for consideration,
accepted it without having sufficient cause to believe that any defect existed in the title of
X. Y can recover the amount from the drawee. If payment is refused, Y can sue the
drawee. The drawee can take, as against X, the defense of fraud, but not against Y.

NEGOTIATION

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Section 14 of the Negotiable Instrument Act, 1881 provides that when an instrument is
transferred to any person so as to constitute that person the holder thereof, the instrument is
said to be negotiated.

Who may negotiate

Section 51 of the Negotiable instrument Act, 1881 provides that every maker, drawer, payee
or indorsee and if there are several makers, drawers, payees or indorsees, all of them jointly
can negotiate an instrument provided that the negotiability of such instrument has not been
restricted or excluded by any express words used in the instrument. But the maker, drawee,
payee or indorsee cannot negotiate an instrument unless he is in lawful possession or is
holder thereof.

Duration of negotiability
Section 60 of the Negotiable Instrument Act, 1881 provides that an instrument may be
negotiated until payment or satisfaction thereof by the maker, drawee, or acceptor at or after
maturity. In other words an instrument can be negotiated until it has been finally discharged
by payment.

Modes of negotiation
a. Negotiation by mere delivery (Section 47)
An instrument payable to bearer is negotiable by delivery thereof. It does not require the
signature of the transfer and the transferee becomes the holder thereof by mere possession.

b. Negotiation by indorsement and delivery (Section 48)

An instrument payable to order is negotiable by indorsement and delivery thereof. Thus
negotiation of an instrument payable to order requires two formalities. (a) indorsement and
(b) delivery.

Section 57 provides that if the holder of an instrument payable to order makes the
indorsement but dies before delivering it to the indorsee, the negotiation remains incomplete
and his legal representatives cannot negotiate it by mere delivery thereof.

DELIVERY

Delivery is a voluntary transfer of possession by one person to another. Both the parties must
agree to the transaction. Delivery is made by doing anything, which has the effect of putting
the instrument in the possession of the other. It may be actual or constructive.

Delivery with the intention of passing ownership is required to complete negotiation

Delivery with the intention of passing the property in the instrument to the person to whom
its delivered is essential to complete any contract on an instrument, whether it be a contract
of making, indorsement or acceptance (Section 46). Mere delivery without the intention of
passing the property is not sufficient to constitute a complete contract. If a person delivers an
instrument to his servant for safe custody or to his lawyer for filing a suit, the delivery
doesnt amount to negotiation and the servant or lawyer acquires no title to the instrument.
INDORESEMENT

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In simple words an indorsement is the signature by the maker or holder usually made on the
back of the instrument for the purpose of negotiation.

Section 15 provides that when the maker or holder of a negotiable instrument signs the same,
for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed
thereto, or so signs for the same purpose a stamped paper intended to be completed as
negotiable instrument, he is said to indorse the same and is called the indorser.

Liability of transferors of an instrument payable to bearer

In the case of dishonour of an instrument payable to bearer the intermediate transferors, are
not liable, since.

a. The transferors do not lend their credit to the instrument (as done by the indorsers)
and
b. The transferors cannot be traced as their names, do not appear on the instrument (as
can be done in the case of indorsements).

Liability of the indorsers of an instrument payable to order

In the case of dishonour of an instrument payable to order, the intermediate indorsers thereof
are liable, since the indorsers guarantee the indorses or subsequent holder.

a. That the instrument is genuine in every particulars;

b. That he has a good title to the instrument and has right to transfer it;
c. That prior indorsements were genuine;
d. That he holds himself liable to pay in the event of dishonour by the maker or acceptor.

KINDS OF INDORSEMNET

a. Full or special indorsement (Section 16[1])

When the indorser adds a direction to pay the amount mentioned in the instrument only to
or to the order of a specified person and signs his name, the indorsement is full or special,
e.g. pay to X or order.

b. Blank or general indorsement (Section 16[1])

When the indorser signs his name only and does not specify any indorsee, the
indorsement is blank or general.

Section 54 provides that a negotiable instrument indorsed in blank is payable to bearer

thereof even though originally payable to order. Section 49 provides that a blank
indorsement can be converted into a full indorsement by inserting some persons name as
the indorsee above the signature of the indorser.

c. Restrictive indorsement

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When the indorser expressly restricts or excludes further negotiation of an instrument, the
indorsement is restrictive, e.g. pay X only, pay X for my use, pay X on account of Y, pay
X for collection, which must be credited to X etc.

Section 50 permits restrictive indorsements.

d. Partial indorsement

When the indorser purports to the indorsee only a part of the amount payable on the
instrument, the indoresement is partial. For instance, when tk. 2000 is payable to X or
order under a bill, and X indorses pay to Y or order tk. 1000 and to Z or order the
remaining tk. 1000, the indorsement is partial.

Section 56 provides that a partial indoresement is invalid and does not operate as a
negotiable instrument. Partial indorsement is not permitted because:

1. It causes inconvenience to prior parties;

2. It subjects them to a plurality of actions;
3. It interferes with the free circulation of the instrument.

e. Sans recourse indorsement

When the indorser expressly excludes his liability, the indorsement is sans recourse
indorsement.

Exclusion of liability: e.g. pay to X or order sans recourse, pay to X or order without
recourse to me, pay to X or order at his own risk, etc.

Section 52 permits sans recourse indorsement.

f. Facultative indorsement

When the indorser extends his liability by stipulating that he waives presentment of notice
of dishonour by the holder, the indorsement is known as facultative. For instance, pay to
X or order, notice of dishonour waived.

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