University Institute of Legal Studies

Panjab University, Chandigarh

“ holder in due course”

A Project Report Submitted as a part of curriculum of B.Com. LL.B.
(Hons.) in the subject of

“Business Law”

Submitted To: Submitted By:

Ms. Shefali Dishu Kumar
236/18
BCOM LLB
Section-C
 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my teacher Ms.

Shefali who gave me the golden opportunity to do this wonderful project
on the topic Holder in Due Course:Rights and Liabilities which also
helped me in doing a lot of research and I came to know about so many
new things. She provided with guidelines from time to time. Her
profound knowledge of the subject helped me in writing meaningful
content in the project. I am really thankful to her.

Secondly I would also like to thank my parents and friends who

supported me morally as well as helped me in finding relevant material
regarding the project so that I could complete it in the limited time
frame.
 Introduction

9. “Holder in due course”.—“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
indorsee thereof, if 1[payable to order], before the amount mentioned
in it became payable, and without having sufficient cause to believe
that any defect existed in the title of the person from whom he derived
his title.

Holder in due course has a privileged possession and generally he has

a good title even though the title off the transferor may be defective.
Sec 58 provides that when a person has obtained a negotiable
instrument by means of an offence, for example, by means of theft or
has obtained by fraud or by unlawful consideration, the title 0f a
person having such a possession would be defective. But in case if
such a person transferred this negotiable instrument to holder in due
course , the title of the holder in due course would be good.

The title of the transferee from a holder in due course will also be a
good title. As per Sec 36, Every prior party to a Negotiable Instrument
is liable to holder in due course until the instrument is duly satisfied.
The word Prior Party includes maker of a Promissory note, Drawer
of a Bill of Exchange or a Cheque , the drawee or acceptor of a Bill of
Exchange and the Endorsers of the instrument.
 Essentials

1. He must be a ‘holder’, i.e.:

He must be entitled to the possession of the instrument in his own name
under a legal title and to recover the amount thereof from the parties
liable thereto.

IN Firm Kalka Pd Ram Charan V/s Kunwar Lal Thapar, one

Baijnath Sayal sent a Demand Draft for Rs. 4000 to Kunwar Lal Thapar.
The said draft was issued by Imperial Bank, Delhi and payable at
Imperial Bank, Kanpur.The draft came into wrong hands. An
indorsement was made with the forged signature of Kunwar Lal and the
draft handed over to Firm Kalka Prasad Ram Charan after making an
indorsement in blank, gave it for collection to Bharat Bank, Kanpur.
Bharat Bank received the payment from the Imperial Bank ,Kanpur and
paid that amount into the amount of Firm Kalka Prasad. Kunwar Lal
brought an action against Imperial Bank(who made the payment), Bharat
Bank, Kanpur( who collected the payment) and the Firm Kalka Prasad
Ram Prasad , the banks were made performa defendant and the decree
was sought only against Firm Kalka Prasad Ram Charan.

It was held that the forged indorsement did not convey any title to the
Firm Kalka Prasad Ram Charan and they could not be considered to be
the holder in due course. They were liable to make the payment of the
same to the true owner of the draft.

2. He must be a holder for valuable consideration, i.e.:

There must be some consideration to which law attaches value. The
consideration, however, need not be adequate. A donee, who acquires
title to the instrument by way of gift, is not a holder in due course for
want of consideration, although he is a holder.

The consideration must also be lawful. Thus, a debt incurred in

gambling is not valid or lawful consideration, and a person who
acquires a bill or note in consideration of such a debt is not a holder in
due course.
3. He must have become the holder of the negotiable instrument
before its maturity:
The holder who acquires a negotiable instrument after maturity cannot be
a holder in due course. But an accommodation bill can be negotiated
after maturity with all benefits of a holder in due course to the transferee
(Sec. 59).

In case of instruments payable on demand, e.g., a cheque, he must have

taken the instrument within a reasonable time of its issue. After the lapse
of reasonable length of time the cheque becomes over due and anyone
who takes an overdue cheque cannot be a holder in due course.

4. He must take the negotiable instrument complete and regular on

the face of it:
It is the duty of every person who takes a negotiable instrument to
examine its form and contents thoroughly, for if it contains any material
alteration which has not been confirmed by the drawer through his
signature, or if it is incomplete, say, drawer’s name is not there or it is
not properly stamped, he will not become a holder in due course.

5. He must have become holder in good faith:

Without having sufficient cause to believe that any defect existed in the
title of the transferor. This is the most important condition to be satisfied.
He must exercise great care and take all necessary precautions in finding
out if the transferor’s title was defective.

Moreover, he must take the instrument without any negligence on his

part. If there is something to arouse a suspicion and he takes the
negotiable instrument without making proper inquiries he cannot be said
to be acting in good faith and cannot be called a holder in due course.

For example, when he takes a bill which has been torn and the pieces
pasted together, at least if the tears appear to show an intention to cancel
it, without inquiry, he is not a holder in due course.
 Privileges

1) He gets a better title than that of the transferor:

One who is a ‘holder’ only gets no better title than that of his transferor
but a holder in due course is in a privileged position in that he gets a
better title than that of the transferor and the defenses on the part of a
person liable that the instrument has been lost, or has been obtained by
means of an offence or fraud or for an unlawful consideration cannot be
pleaded against a holder in due course (Sec. 58).

Further, not only the holder in due course himself gets a good title free
from all defects but also serves as a channel to protect all subsequent
holders. Once an instrument passes through the hands of a holder in due
course it is purged of all defects. Section 53 states that “a holder of a
negotiable instrument who derives title from a holder in due course has
the rights thereon of that holder in due course.”

2. Privilege in case of inchoate stamped instruments (Sec. 20):

In the case of inchoate stamped instrument, if the holder or original
payee fills more amount than that was authorised, he cannot enforce the
instrument for the whole amount (only actual authorised amount can be
recovered). If such an instrument is transferred to a holder in due course,
he can claim the whole of the amount so entered provided that the
amount is covered by the stamp affixed thereon. Thus, the defence that
the amount filled by the holder was in excess of the authority given
cannot be taken against a holder is due course.

3. Liability of prior parties:

All prior parties to a negotiable instrument (i.e., its maker or drawer,
acceptor and intervening indorsers) continue to remain liable to a holder
in due course both jointly and severally (i.e., he can hold any or all prior
parties liable) until the instrument is duly satisfied (Sec. 36). Whereas,
only preceding party is liable to a succeeding party, if the succeeding
party is only a holder.
4. Privilege in case of Fictitious bills (Sec. 42):
When a bill of exchange is drawn in a fictitious name and is made
payable to the drawer’s order (i.e., where both drawer and payee of a bill
are fictitious persons), the bill is said to be a fictitious bill. Such a bill is
not a good bill and cannot be enforced at law.

But the acceptor of such a bill is liable to a holder in due course provided
the latter can show that the first indorsement on the bill and the signature
of the supposed drawer are in the same handwriting.

5. Privilege when an instrument delivered conditionally is

negotiated:
When a negotiable instrument is endorsed or delivered conditionally or
for a special purpose only, e.g., as collateral security or for safe custody,
and not with the idea of transferring absolutely property therein, the
property in the instrument does not pass to the indorsee, and he is merely
a bailee with limited title and power of negotiating it.

This, however, does not affect the rights of a holder in due course, i.e., if
such an instrument is negotiated to a holder in due course, the parties
liable on the instrument cannot escape liability (Sections 46 and 47).

6. Estoppel against denying original validity of instrument (Sec.

120):
The plea of original invalidity of the instrument; e.g., that no
consideration actually passed between the maker and the payee of a
promissory note; cannot be put forth against the holder in due course by
the drawer of a bill of exchange or cheque or by the maker of a
promissory note or by an acceptor of a bill for the honour of the drawer.

However, the aforestated parties are not precluded from challenging the
validity of the instrument on the ground that at the time of making the
instrument he was a minor or his signature had been forged or the
instrument is otherwise void ab-initio, e.g., where a promissory note is
made ‘payable to bearer’ it is void and illegal as per the Reserve Bank of
India Act.

7. Estoppel against denying capacity of payee to indorse:

“No maker of a note and no acceptor of a bill payable to order shall, in a
suit thereon by a holder in due course, be permitted to deny the payee’s
capacity, at the date of the note or the bill to indorse the same” (Sec.
121).
Thus, a holder in due course can claim payment in his own name despite
the payee’s incapacity to indorse the instrument. As per Section 51, only
a ‘holder’ or a person in lawful possession of the instrument is competent
to indorse. Accordingly, a person who got the instrument for a gambling
debt or for unlawful consideration cannot negotiate the same.

However, the holder in due course enjoys a privilege in this regard and
he gets a good title even if he holds a negotiable instrument endorsed by
a person who got the instrument for unlawful consideration because
Section 121 provides that as against a holder in due course, no maker of
a note and no acceptor of a bill payable to order shall be permitted to
deny the payee’s capacity to indorse the same.
 Conclusion
Consequently, it can be concluded that a holder and holder in due course
do not mean the same. A holder is a person who may or may not possess
a legal instrument. He must entitle to possess it legally and also can
receive the amount due from the instrument. He must have the legal
capacity to enforce his rights in his own name. Considering a holder in
due course, he is a person who can possess a negotiable instrument for
consideration. He must become the holder of it before it gets matured.
The instrument must satisfy all the requisites and he must receive it in
good faith.

A person needs to be a holder first to become a holder in due course, but

in the case of a holder, he need not be a holder in due course first. Here
we have discussed both the concept of holder and holder in due cause
and their differences along with related case laws.