Holder & Holder in due course

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This article is written by Rahul Verma of Aditya Law College, an intern under Legal Vidhiya

Introduction:

As per the Section 8 of The Negotiable Instruments Act,1881 provides the definition of a ‘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.

The “HOLDER” of a promissory note bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties 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. [1]

The holder must have mainly two essentials, first one is the possession of the instrument and the right to recover the money. The party transferring the negotiable instrument must be legally competent. In the case of a negotiable instrument got lost or stolen by someone it does not make them an actual holder of that negotiable instrument because they do not have the specific right to recover the money.

For instance- Mr. A gave his employee Mr. B his monthly salary of Rs.70,000. Here in this scenario, Mr. C will be the holder as he is entitled to the salary cheque bearing his name. But in this same scenario is Mr. C lost this cheque, and it was found by Mr. Y. Then Mr. Y will not be the holder.

Specific Rights of HOLDER:

A cheque or a negotiable instrument payable to bearer can be negotiated by simple delivery of the instrument. The person to whom the bearer instrument is delivered becomes the holder of the instrument. When an instrument is payable to order, once endorsed and delivered the same to the endorsee, the endorsee becomes the holder of that instrument.

The holder has the right to complete the blank endorsement into endorsement in full; he can cross an open cheque; he can add the word not negotiable to the crossing (Section 125 of N.I.Act 1881). The holder has the right to obtain a duplicate of a lost bill. However, the drawer may insist for an indemnity from the holder against loss or damage on account of issuing a duplicate bill and holder has to give such indemnity to the drawer. The holder can negotiate a bill/instrument to third party provided the negotiation is expressly not prohibited.

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.

Right of Holder in Due Course

The following are the rights of Holder in due Course :

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.

Section 36: Every prior party to the instruments is liable to a holder in due course until the instrument is duly satisfied.

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.

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.

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.

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. Even if the negotiable instrument is made without consideration, if it gets into the hands of the holder in due course, he can recover the amount on it from any of the prior parties thereto.

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.

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 honour of the drawer.

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, the 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.

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.

Case Laws :

Anil Kumar Jaiswal Vs. State & Others 2007

Judgement of the Case : While hearing a petition for quashing , it was held by Allahabad High Court that the plea of accused that the complainant is not be “Holder in due course” was not a question of law , since it can be decided on facts and thereof requires investigation which can only be done after evidence had been recorded and all circumstances have come to light.^[2]

Gemini vs Chandran on 14 July, 2006

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.[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.[4]

Jagdish Chander vs Kapoor Jewel Mines Pvt. Ltd.

Judgement of the case :In this case, the court held that learning how the holder of the subject cheques comes to be a holder in due course is an aspect which cannot be judged at such an elementary stage of the transaction and is required to be considered after the evidence of the said transaction is documented. It was said: “Section 9 of the Negotiable Instruments Act, 1881 defines the ‘holder in due course’ and its import cannot be pre-judged.”[5]

Laxmin Dychem v. State of Gujarat(2012)

Judgement of the case: In this case, the court held that till it is proved otherwise, the assumption shall be made that the holder of a negotiable instrument is also the holder in due course. Applying this statement to the existing scenario, the HC did not find it to be a fitting case to quash the complaint as the plea by the petitioner was required to be tested at the trial. Leading to the petition being dismissed.[6]

Conclusion:

In this topic it is mentioned clearly that the Holder and Holder in due course are not the same individuals. Holder refers to an individual who is the payee of the negotiable instrument, who is in possession of it. They are entitled to receive the amount due on the instrument from the parties thereto. Whereas holder in due course refers to an individual who obtains the instrument bonafide before the maturity period, without any knowledge of the defect in the title of the person transferring the instrument.

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