Contracts II (2BL335)

Assignment on Holder in Due Course

Submitted to:
Mrs. Manjula Raghav
Assistant Professor
Institute of Law, Nirma University

Submitted by:
Akshat Jain Siddhant Sodhia

21BAL087 21BAL144
Question:

What do you understand by the term “holder in due course”? What are the powers and rights of
“holder in due course”?

Answer:

The section 8 of the Negotiable Instruments Act defines “Holder”. It says:

The "holder" of a promissory note, bill of exchange or cheque means any person entitled in his
own name to from the parties the possession thereof and to receive or recover the amount due
thereon thereto.

Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time
of such loss or destruction.

The section 9 of the Negotiable Instruments Act defines “Holder in Due Course”. It says:

"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 the title of the person from whom he
derived his title.

A person is considered to be the holder in due course of a negotiable instrument when they have
done the following: taken a negotiable instrument for the value that is due to them in good faith
and with due care and caution while taking such an instrument; had no suspicion or reason to
believe that there was a defect in the title of the person from whom they derived title possession
of the instrument; and had taken due care and caution while taking such an instrument.
Therefore, in order to be considered a "holder in due course," one must demonstrate that they
meet all of the conditions listed below. The conditions are as follow:

1. He must acquire the instrument for a consideration.

2. The instrument acquired should be before it is matured for payment. An instrument

payable on demand is treated as current, subject to it has not been in circulation for the
unreasonable length of time.

3. It is most important that the holder in the course had no cause to believe that any defect
existed in the title of a person from whom he has acquired the instrument.

4. A person accepting an inchoate (incomplete) instrument cannot be a holder in due course.

5. The instrument should be complete and regular while taking its possession.
6. Forged signature conveys no title; as such there cannot be a holder in due course under
forged endorsement.

To put it another way, anyone who will take a check as payment is considered to be a Holder in
Due Course. It is not permissible for there to be any indication of fraud on the surface of the
check, nor is it permissible for the person taking the check to be aware of any underlying fraud
that is associated with the cheque. In the event that a recipient, known as the Holder, is unable to
negotiate the terms of a cheque, the Holder has the legal right to sue the drawer, also known as
the cheque issuer, for the full amount that the cheque is written out for and to get a judgement
against the drawer.

Within this section, the concept of "effective possession" of an instrument is discussed.

According to the provision, the holder must have obtained possession of the document before the
amount referred to in it became payable in order to satisfy this requirement. Because of this, a
person who takes a bill or note on the day on which it becomes payable cannot claim the rights
of a holder in due course because he takes it after it has become payable, and the bill or note can
be discharged payment at any time on that day. As a result, this person is unable to claim the
rights of a holder in due course.

Rights of a Holder in Due Course:

The section 36 of the Negotiable Instruments Act, 1881 draws the right and power of Holder in
due course. It reads: “Every prior party to a negotiable instrument is liable thereon to a holder
in due course until the instrument is duly satisfied.”

When we talk about "Every prior party," we're referring to the person who made or drew the
document, the person who accepted it, and any intervening endorsers. In addition, a condition is
said to be "duly satisfied" if it has been discharged from its obligations and the liability of all
parties involved has been eliminated.

Further, the Negotiable Instruments Act provides rights and powers to Holder in Due Course in
six different sections. They are as follows:

1. Section 58 talks about getting a better title than that of the transferor:
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.

2. Section 20 mentions privilege in case of inchoate stamped instruments:

In the case of inchoate stamped instrument, if the holder or original payee fills more
amount than that was authorized, he cannot enforce the instrument for the whole amount
(only actual authorized 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 defense that the amount filled by the holder was in excess of the authority given
cannot be taken against a holder is due course.

3. Section 36 reads liability of prior parties:

All prior parties to a negotiable instrument 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. Whereas, only preceding party is liable to a succeeding party,
if the succeeding party is only a holder.

4. Section 42 talks about the privilege in case of fictitious asset:

When a bill of exchange is drawn in a fictitious name and is made payable to the
drawer’s order, the bill is said to be a fictitious bill. Such a bill is not a good bill and
cannot be enforced by law. But the acceptor of such a bill is liable to a holder in due
course provided the latter can show that the first endorsement on the bill and the
signature of the supposed drawer are in the same handwriting.

5. Section 46 and 47 reads of the 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 endorsee, 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.

6. Section 120 mentions estoppel against denying original validity of instrument:

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 honor of the drawer.

However, the afore stated 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.
Case Laws:

It was decided in the case of Gemini v. Chandran that there is no provision in the Act in due
course that can be presumed to be a holder. This was the conclusion reached by the court.
Because of Section 118 of the Act, there is a presumption that a holder is a holder in due course
in certain circumstances. This assumption applies only to certain scenarios. As a result, the terms
"holder" and "holder in due course" do not mean the same thing.

It was decided in the case of Milind Shripad vs. Kalim Khan that a lawsuit for the recovery of
an amount that is liable through a negotiable instrument can only be filed by a person who is a
holder in due course of the negotiable instrument. This was the conclusion reached in the case.