Holder and Holder in Due Course

Synopsis

• Introduction
• Holder
• Holder in Due Course
• Difference between Holder and Holder in Due Course
• Case Law
• Conclusion
• References

 

 

Introduction

The Negotiable Instruments Act, 1881 (hereinafter referred to as the Act) is a statute which regulates the working of instruments which can be negotiated for amount. It lays down the frame work under which these instruments operate and any contravention in these rules has been made punishable.

For the purposes of understanding the working of the negotiable instruments it is imperative to understand the complexities of the parties involved in a transaction in which a negotiable instrument is involved.

Section 8 and Section 9 of the Act discuss the concept and definition of a holder and holder in due course. Generally a holder of a negotiable instrument is one which acquires it by a transfer.

Holder

 

Sec 8 of the Act contemplates that any person who is entitled to get the possession and subsequently receive payment or recover payment from the parties for a promissory note, bill of exchange, cheque which he is entitled to possess.

If the promissory note, bill of exchange, cheque gets lost or destroyed then the holder is the person who is entitled at the time of the loss or destruction.

Ingredients

Following are the ingredients to be satisfied for qualifying to be holder:

1. The person must be entitled for possessing the instrument in his own name. It is not necessary that the person be in actual physical possession of the instrument. The principle is that there must be right a right accruing under a legal title.

 

• The person must be named in the instrument as a payee or indorsee. He can also be a bearer of the instrument if it is a bearer instrument. In cases where the holder dies the heir of such a holder becomes the holder even when he is not a payee or indorsee or a bearer of the instrument.
• A person must be de jure(as per law) holder and not a de facto (as per facts) holder.

 

2. Where a person comes to hold a negotiable instrument and he does not have a title to hold or possess it then he will not be called a holder. A person who finds an instrument lying somewhere or a thief although may acquire possession of such an instrument, no right accrues to them. Therefore they cannot be termed as a holder.

 

• The person by way of the instrument must be entitled to recover or receive a sum of money or amount which the parties are liable to pay the holder. Therefore not only possession but the right to receive is also an important aspect in order to be termed a holder. By receiving the amount the person who was liable to pay is discharged from the liability.

 

• In cases where a person acquires an instrument by either finding it or where a person has committed theft of such an instrument, he is not entitled to receive the amount. Thus he is not called a holder.

 

Rights of a Holder

 

The rights of a holder are:

• As per Sec 8 of the act to possess an instrument and to receive and recover the amount which is due as per the instrument;

 

• As per Sec 50 of the Act to endorse the instrument;

 

• As per Sec 125 of the Act to cross the instrument after it is issued. Where a cheque is crossed the holder may cross it as generally or specifically. He also has the option of adding words like not negotiable or account payee;

 

• As per Sec 49 of the Act to convert blank endorsement to full endorsement;

 

• As per Sec 45 A to get a duplicate of the instrument which is lost;

 

• As per Sec 61 and Sec 64 of the Act to present the instrument for acceptance if it is a bill and if it is some other instrument then get payment for it.

Holder in Due Course

 

Sec 9 of the Act contemplates that any person who becomes the possessor of a promissory note, bill of exchange or a cheque for a consideration and the instrument is payable to bearer or payee or endorsee before the amount became payable and he believes that no defect exists in the title of the person from whom he derived his title is called a holder in due course.

If a negotiable instrument is acquired by a person bonafidely for a value and he believes there is no defect in the title from whom he took the instrument in good faith becomes the true owner of the negotiable instrument and a holder in due course.

Ingredients

 

Following are the ingredients to be satisfied for qualifying to be holder:

• The person must hold the instrument for a valuable consideration;

 

• The person may become the holder of the instrument before it gets matured;

 

• The negotiable instrument must be complete in all forms and requisites;

 

• The holder must have received the instrument in good faith.

If a person acquires the negotiable instrument after it has matured then he does not become a holder in due course.

 

Rights of a Holder in Due Course

 

Sec 53 of the Act contemplates that a negotiable instrument get cleansed of the defects when it passes through the hands of a holder in due unless fraud was committed with regard to the instrument or there was an illegality in the instrument committed by the person holding the instrument;

1. No person who is the maker can deny the validity of a promissory note, bill of exchange or a cheque as originally drawn in a suit by the holder in due course of the instrument.

 

2. Sec 118 of the Act contemplates that every holder is presumed to be a holder in due course. The burden of proof is on the other parties to show that the person is not a holder in due course. Once it is proved that the holder has acquired the instrument trough illegal means then the onus shifts on the holder.

 

3. Sec 121 of the act contemplates that the maker of a promissory note, bill of exchange or a cheque cannot deny the validity of payee’s capacity at the date of the promissory note, bill of exchange or a cheque to endorse the same. Therefore a holder in due course is entitled to recover amount mentioned in the instrument even though the payee has no capacity to endorse the instrument.

 

4. Sec 36 of the act contemplates that until the instrument is satisfied; all the parties to an instrument are liable to the holder in due course. The liability is joint and several.

 

5. Sec 58 of the act contemplates that the holder in due course has a better title to the transferor of the instrument. In cases where the title of the transferor was defective the holder in due course will get a good title. However, if the title is forged the holder in due course does not get a title since there is no defect in title but rather there is no title.

 

6. Sec 46 and Sec 47 of the act contemplate that the liable parties cannot deny the liability to a holder in due course who negotiates a bill of exchange or promissory note on the ground that the delivery of the instrument was subject to conditions or was for a specific purpose.

 

7. Sec 42 of the Act contemplates that when a bill is drawn in a fictitious person’s name and the signature is of the same person who was the drawer, the acceptor cannot take the plea that the payee was a fictitious person.

 

8. Sec 20 of the act contemplates that when an instrument which is duly signed and stamped and left blank partially or completely and delivered to someone else to be filled up. Then if such a person fills an amount which is more than what he had been authorised to do, then the holder in due course can recover the whole amount mentioned but the amount shall not be more than the amount of the stamp affixed on the instrument.

 

9. Sec 120 of the Act contemplates that when a holder in due course files a suit for recovery of amount which is due on the instrument, then the maker of the promissory note, bill of exchange or cheque cannot take the plea to evade his liability that when the instrument was drawn it was invalid.

 

 

• The maker is estopped (legally prevented) from denying that the instrument was invalid.

 

10. Sec 122 of the Act contemplates that the endorser of a negotiable instrument cannot deny the signatures or the capacity to contract of any party in a suit filed by the holder in due course against an endorser.

 

 

Difference between Holder and Holder in Due Course

 

Holder	Holder in Due Course
Holder is a person who can lawfully possess an instrument and receive or recover the amount from parties	A holder in due course takes the instrument in bonafide faith for a consideration before the instrument’s maturity
Consideration is not necessary	Consideration is necessary
Possession may taken after maturity	Possession can only taken before maturity
Holder does not get a better title than the previous party	The title gets cured from any defects
Holder cannot recover amount from all prior parties. Only from the maker and transferor	Right to recover from all prior parties

 

 

Case Law

1. In the case of Gemini v Chandran 2007 (1) KHC 698, it was held that there is no provision in the Act by which a holder in due course can be presumed to be a holder. There is a presumption by virtue of sec 118 of the Act that a holder is a holder in due course in some specific situations. Therefore holder in due course and holder do not mean the same.

 

2. In the case of S.V. Prasad v. Suresh Kumar AIR 2005 AP 37, it was held that a holder in due course acquires a right to recover the amount from the holder of the instrument. The endorsement can take place without having participation from the maker of the instrument. The holder in due course acquires the same right which was with the holder. He can neither improve nor modify the liability.

 

3. In the case of Milind Shripad Chandurkar v. Kalim Khan (2011) 4 SCC 275, it was held that a suit for recovery of amount which is liable through a negotiable instrument can only be filed by a person who is a holder in due course of the negotiable instrument.

 

4. In the case of Braja Kishore Dikshit v. Purna Chandra Panda AIR 1957 Orissa 153 it was held that there are certain prerequisites for a person to be called a holder in due of a negotiable instrument.

 

• Firstly he must have become the holder by way of a consideration.

 

• Secondly, he must have got the possession of the instrument before it became overdue and lastly, he must be a transferee in bonafide faith and he should have any cause to believe that the title was defective of the transferor.

Conclusion

Thus it can be concluded that a holder is a person who has a possession of a legal instrument. That person must be entitled to possess the instrument legally and also recover the amount which is due from the instrument. He must also have the legal capacity to enforce his rights in his own name.

Whereas a holder in due course is a person who can possess an instrument for a consideration. The person must become the holder of the instrument before it gets matured and the negotiable instrument must be complete in all forms and requisites and the holder must have received the instrument in good faith.