Holder and Holder in Due Course

Introduction to Holder and Holder in Due Course

The concept and definition of a holder and a holder in due course have been discussed in Section 8 and Section 9 of The Negotiable Instruments Act, 1881 respectively. Generally, the holder of a negotiable instrument is the one who receives it by transfer.

The Negotiable Instruments Act, 1881 is a statute that regulates the working of instruments on which amounts can be negotiated. It sets out the framework under which these instruments operate and any violation in these rules has made been punished.

For the purpose of understanding the working of negotiable instruments, it is essential to understand the complexities of the parties involved in a transaction that involves a negotiable instrument.

Who is a holder under negotiable instruments act?

Meaning of Holder: – A holder is a person who legally obtains the negotiable instrument, with his name entitled on it, to receive the payment from the parties liable. According to section 8 of the Negotiable Instruments Act, 1881, a holder is a party who is entitled in his own name and has legally obtained the possession of the negotiable instrument, i.e. bill, note or cheque, from a party who transferred it, by delivery or endorsement, to recover the amount from the parties liable to meet it.

The party transferring the negotiable instrument must be legally competent. It does not include the person who finds the lost instrument payable to the carrier and the one who is in wrongful possession of the negotiable instrument.

Kinds of Holder under negotiable instruments act

The following are the materials to be satisfied to be eligible to be a holder under negotiable instruments act: –

1. De jure: – The holder of the Negotiable Instrument as a matter of legal right.
   • A person should have the right to have the instrument in his own name. It is not necessary that the person has actual physical possession of the instrument. The principle is that a right must be acquired under a legal title.
   • The name of the person should be in the instrument as payee or indorsee. He can also be the bearer of the instrument if it is the bearer instrument. In cases where the holder dies, the heir of such holder becomes the holder even when he is not the recipient or the insurer or the holder of the instrument.

2. De facto: – The holder of negotiable instrument by the virtue of possession but not entitled on his own name.
   • Where any person comes to hold a negotiable instrument and does not have the right to hold or keep it, he shall not be called a holder. A person who finds an instrument lying somewhere or he stole the instrument, though may be in possession of such instrument, but he has no right on that instrument. Therefore he cannot be called holders.
   • The person by means of the instrument shall be entitled to receive the amount which the parties are liable to pay to the holder. So not only possession but also the right to receive the amount is an important aspect to be called as a holder. After receiving the amount, the person who is liable to pay the amount get relief from his/her liability.
   • In cases where a person finds the instrument lying somewhere or where any person has stolen such equipment, he is not entitled to receive the amount. Thus he is not called a holder.

What are the rights of a Holder under negotiable instruments act?

Following are the rights of a Holder under negotiable instruments act: –

1. Section 8: – Holder has the legal right to possess the instrument and to recover and receive the amount which due as per the instrument.
2. Section 14: – In Negotiation, a holder of a cheque has a right to negotiate to another person. Moreover, in some cases, a holder has a power of negotiation even though cheque has no title or faulty title.
3. Section 45A: – Holder has the right to get a duplicate of the instrument which is lost. In case of misplacing of the cheque, the holder can ask to the drawer to give him another cheque of the same tenor, but holder must give security to the drawer to indemnify him for all the loses if the lost cheque has been found again.
4. Section 50: – Holder has the right to Indorse the instrument which basically means that holder has the right to countersign the instrument. The holder of a cheque indorsed in blank may convert the blank endorsement, by writing above the indorser’s signature which gives direction to pay the cheque to or to the order of himself or any other person.
5. Section 61 and 64: – Holder has the right to present the instrument for acceptance if it is a bill and receive payment if it is any other instrument. If a cheque is an open cheque then the person can take it to the drawee bank and request payment in cash; but in case of crossed cheques one cannot anticipate drawee bank to pay in cash, and he should, therefore, present it to the drawee bank for payment.
6. Section 125: –  In Crossings of cheque after issue; where the cheque is not crossed, the holder may cross it generally or specially. Where the cheque is crossed generally, the holder may cross it specially. He also the option of adding the words like “not negotiable” or “account payee”.
7.  Section 138: – In Notice of Dishonour of cheque, a cheque holder presents the cheque for payment and if it does not get paid then he may give notice of dishonour outright to prior parties in order to hold back their liability to him.

Who is holder in due course under negotiable instruments act?

Meaning of holder in due course: – Holder in Due Course is defined as a person who acquires the negotiable instrument in good faith for consideration before it becomes due for payment and without any idea of a defective title of the party who transfers the instrument to him. A person who acquires the negotiable instrument bonafide for some consideration, whose payment is still due, is called holder in due course.

Section 9 of the Negotiable Instrument act, 1881, A holder in due course is a holder itself, who accepts a negotiable instrument in a value-for-value exchange without doubting its legitimacy so ultimately in a good faith. Now the person who took it for value in good faith now becomes a real owner of the instrument and is known as “holder in due consideration”. Every holder in due course is a holder but every holder in due course is not a holder.

If a negotiable instrument is acquired by a person for a price and he believes that there is no defect in title whereby he took the instrument in good faith, then becomes the true owner of the negotiable instrument and the holder in due course.

What are the essentials to be eligible to be a holder in due course?

The following are the materials to be satisfied to be eligible to be a holder in due course: –

• The person must hold the instrument for the valuable consideration;
• The person can become the holder of the instrument before its maturity;
• The negotiable instrument must be complete in all respects and requirements;
• The holder must have received the instrument in good faith.

If a person acquires a negotiable instrument after its maturity, he does not become a holder in due course.

What are the rights of Holder in due course under negotiable instruments act?

Following are the rights of a Holder in due course under negotiable instruments act: –

1. Section 20: – The holder is due course gets a good title even though the instruments were originally stamped but was an inchoate instrument. The person who has signed and delivered an inchoate instrument cannot plead as against the holder in due course that the instrument has not been filled in accordance with the authority given by him. However, a holder who himself completes the instrument is not a holder in due course.
2. Section 36: – Every prior party to the instruments is liable to a holder in due course until the instrument is duly satisfied.
3. Section 42: – Acceptor cannot plead against a holder in due course that the bill is drawn in a fictitious name. In Bank of England vs. Vagliano Bros (1891 – Ac 107) it was held that the acceptor should consider whether the bill was genuine or false before signing his acceptance in it.
4. Sections 46 and Section 47: – The liable parties cannot deny liability to a holder who negotiates a bill of exchange or promissory note on the ground that the delivery of the instrument was subject to the conditions or had a specific purpose.
5. Section 53: – He gets a good title to the instrument even though the title of the transferor or any price party to the instrument is defective. He can recover the full amount unless he was a party to fraud; or if the instrument is negotiated by means of a forged endorsement.
6. Section 58: – The holder in due course has a superior title to the transferor of the instrument. In cases where the transferor’s title was defective, the holder would get a good title in due course. However, if the title is forged, the holder does not get the title in due course because there is no defect in the title, but no title.
7. Even if the negotiable instrument is made without consideration, if it get into the hands of the holder in due course, he can recover the amount on it from any of the prior parties thereto.
8. Section 118: – Every holder is deemed to be a holder in due course. Holder in due course can file a suit in his own name against the parties liable to pay. He is deemed prima facie to be holder in due course. The burden of proof is on the other party to show that the person is not the holder in due course.
9. Section 120: – The validity of the instrument as originally made or dawn cannot be denied by the maker of drawer of a negotiable instrument or by acceptor of a bill of exchange for honor of the drawer
10. Section 121: – The maker of a promissory note, bill of exchange or a cheque shall not deny the validity of the promissory note, bill of exchange or the capacity of the recipient on the date of the bill of exchange, note, or cheque to endorse (countersign) the same. Therefore, a holder is entitled to recover the amount mentioned in the instrument in due course even though the payee has no capacity to indorse the instrument.
11. Section 122: – Endorser is not permitted as against the holder in due course to deny the signature or capacity to contract of any prior party to the instrument.

Difference between holder and holder in due course

Basis of comparison	Holder	Holder in due course
Meaning	A holder is a party who is entitled in his own name and has legally received the negotiable instrument, i.e., bill, note or cheque from a party who is liable to transfer it to recover the amount by delivery or endorsement.	A holder in due is a person who get the possession of the negotiable instrument in a good faith before it becomes due for the payment and he has no idea of the defective title of the person who transfers the instrument to him.
Section	Section 8 of negotiable instrument act,1881	Section 9 of negotiable instrument act,1881
Consideration	In this consideration is not necessary.	In this consideration us necessary.
Right to sue	Holder does not have the right to sue all prior parties.	Holder-in-due course can sue all the prior parties.
Good faith	In this instrument may or may not be in good faith.	In this the instrument must be in good faith.
Maturity	A person can become a holder before or after the maturity of the negotiable instrument.	A person can become a holder in due course only before the maturity of the negotiable instrument.

Case laws

1. Gemini vs. Chandran 2007 (1) KHC 698
   • Judgement of the case: – In this case, the court held that there is no provision in the act by the holder in due can be presumed as holder but section 118 states that holder is a holder in due in certain cases. Therefore, holder and holder in due does not mean same.

2. Braja Kishore Dikshit vs. Purna Chandra Panda AIR 1957 Orissa 153
   • Judgement of the case: – It was held that a suit for recovery of the amount liable through a negotiable instrument can be filed only by a person who is the holder in due course of the negotiable instrument.
     • First, he must have become the holder by way of a consideration.
     • Secondly, he must have got the right to the instrument before it becomes overdue and, finally, he must be a transferee in bonafide faith and he must have some reason to believe that the title was the transferor’s fault.

3. S.V. Prasad vs. Suresh Kumar AIR 2005 AP 37
   • Judgement of the case: – In this case, the court held that the holder in due has the right to recover the amount from the holder of the instrument. The endorsement can be done without the involvement of the maker of the instrument. The holder gets the same right in due course which was with the holder. He can neither rectify nor modify the liability.