A Negotiable Instrument is a signed document that promises a particular payment to a specified person or holder of the instrument. In India, negotiable instruments are governed under the umbrella of the Negotiable Instruments Act, 1881. This is a significant law that governs all means of negotiable instruments in India. The act establishes a regulatory framework for promissory notes, bills of exchange, and cheques. The act was enacted to provide uniform legal regulations to cover all aspects of negotiable instruments in India. Several times, the act has been amended to make sure that it is in line with changing business practices and new judgments.
The Negotiable Instruments Act, 1881 does not define the term negotiable instruments. But while referring Section 13 of the act, provides only three kinds of negotiable instruments; Bills of Exchange, Promissory Notes, and Cheques, these instruments can be payable either to the order or the bearer.
Geeky Takeaways:
- A negotiated instrument is a signed document that promises a particular payment to a specified person or holder of the instrument.
- The Negotiable Instruments Act, 1881, is the governing act to provide a regulatory framework for all types of negotiable instruments.
- Section 13 of the act provides for three kinds of instruments, namely bills of exchange, promissory notes, and cheques.
- A holder is a person who has legally obtained the negotiable instrument, with his name entitled to it, in order to receive payment from the parties liable for payment.
Who is a Holder under Negotiable Instruments Act?
As per Section 8 of the Negotiable Instruments Act, 1881, “The holder of a negotiable instrument means any person entitled to the possession of the instrument in his own name and to receive or recover the amount due thereon from the parties liable thereto.” The holder is either the original payee or the endorsee. In cases where the bill is payable to the bearer, the person who is in possession of such a negotiable instrument is called the ‘Holder’.
Thus, the person is said to be the holder of a Negotiable Instrument if he satisfies two conditions:
- The person is entitled to possess the instrument in his own name; i.e., he can have legal custody of the instrument.
- The person holds the right to receive or recover the amount as mentioned from the parties liable to pay.
Who is Holder in Due Course?
As per Section 9 of the Negotiable Instruments Act, 1881, “The holder in due course means any person who for consideration became the possessor of a negotiable instrument if payable to bearer, or the payee or indorsee thereof if payable to order before the amount mentioned in it became payable, and without sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.”
A holder in due course is a person who acquires the negotiable instrument in good faith for a valid consideration before the instrument becomes due for payment and without having any defective title. A person who acquires the negotiable instrument bona fide for some consideration for an instrument whose payment is still due is called a holder in due course. Section 9 of the Negotiable Instruments Act, 1881 establishes that a holder in due course is the holder itself, who accepts a negotiable instrument in a value-for-value exchange without doubting its title, so ultimately the holder is in good faith. The person who took it for value in good faith becomes the real owner of the instrument and is called the “holder in due consideration.” It can be summarized that every holder in the due course is a holder, but every holder in due course is not considered as a holder.
Conditions to be called Holder in Due Course
1. He must be a Holder: The holder of a negotiable instrument must have the right to possess the instrument in his own name and also the holder must have the right to recover or receive payment from the parties liable to pay for the negotiable instrument.
2. He must be a Holder for a Valid Consideration: The holder of a negotiable instrument must have given lawful consideration to acquire the negotiable instrument. If someone gets a cheque as a gift, he cannot become a holder in due course of that cheque. Therefore, if a person gets an instrument without consideration, he cannot enforce it as a holder in due course.
3. He must Acquire the Instrument before Maturity: The holder of a negotiable instrument must have acquired the instrument either on or before the date of maturity. In the event that the holder acquires the instrument after the date of maturity, the holder will not get a better title than that which is available with the transferor. However, an accommodation bill can be negotiated even after the date of maturity with all the benefits of the holder in due course for the transferee. In the case of an instrument payable on demand; e.g., a cheque, he must have gotten it within a reasonable period of time of its issue.
4. The Instrument should be Complete and Regular: The holder, in due course, must take the negotiable instrument complete and regular on its face. He must examine its form, contents, and material defects in the instrument, such as defects regarding the name of the drawer, date, stamp duty, etc.
5. Holder must take the Instrument in Good Faith: The holder of a negotiable instrument must take the instrument in good faith which means, acting without any negligence and honesty. But good faith, regarding the title of transferor, on the part of the holder is not sufficient. The holder must have taken the negotiable instrument without having any sufficient cause to believe that person from whom he derived his title has a defective title.
Privileges of a Holder in Due Course
1. He gets a Better Title than that of the Transferor: The Holder only gets the same title as his transferor, but a holder in due course gets a better title than that of his transferor, and he is in a privileged position. The liable parties can’t make any defense by making a plea that the instrument was lost, obtained through fraud, or that the instrument is for an unlawful consideration against a holder in due course.
2. Privilege in case of Inchoate Stamped Instruments (Section 20): In the case of an inchoate instrument, if the holder fills in more than the amount for which he was actually authorized, the holder cannot enforce the negotiable instrument for the whole of the amount. If an inchoate instrument is transferred to a person who possesses the title of the holder in due course, he can claim the whole of the amount as mentioned on the instrument and the amount as covered by the stamp.
3. Liability of Prior Parties (Section 36): All the prior parties liable to a negotiable instrument, including the maker or drawer, acceptor, and intervening endorsers of the negotiable instrument, continue to be liable to a person who has derived the title of a holder in due course, both jointly and severally, until the negotiable instrument is duly satisfied. Whereas, in the case of a holder, only the preceding party is liable to a succeeding party.
4. Privilege in the Case of Fictitious Bills (Section 42): In the case of a fictitious bill, both the drawer and payee are fictitious persons. When a negotiable instrument is drawn in a fictitious name and such an instrument is made payable to the drawer’s order, the bill is said to be a fictitious bill, such a bill is not considered good and cannot be held valid. But the acceptor of such a bill is liable to a person who has the title of the holder in due course, provided the latter can show that the first endorsement and the signature on the instrument of the supposed drawer are in the same handwriting.
5. Privilege when an Instrument Delivered Conditionally is Negotiated (Section 46 and Section 47): When any negotiable instrument is endorsed or delivered conditionally or for a special purpose only and not with the idea of transferring absolute property, the property in the instrument does not pass to the endorsee, and he is merely considered a bailee with limited title and limited power of negotiating the instrument. This, however, does not affect the rights of a person who gains the title of the holder in due course; i.e., if such an instrument is negotiated with a person with the title of the holder in due course, the parties liable for the instrument cannot escape their liability.
6. Estoppel against Denying Original Validity of Instrument (Section 120): In a case where no consideration actually passed between the maker and the payee of a negotiable instrument, it cannot be put forth against the holder in due course by the drawer of a negotiable instrument for the honor of the drawer. However, the above parties are not excluded from challenging the validity of the instrument on the grounds that, at the time of making the instrument, the party was a minor, the signature of the party had been forged, or the instrument is otherwise a void-ab-initio transaction.
7. Estoppel against Denying Capacity of Payee to Endorse (Section 121): A person having the title of the holder in due course can claim payment in his own name despite the fact of the payee’s incapacity to endorse the instrument. As established by Section 51, only the holder or a person in lawful custody of the instrument is competent to endorse it. In this case, any person who receives the negotiable instrument for any gambling debt or for an unlawful consideration cannot negotiate the negotiable instrument. Furthermore, the holder, in due course, enjoys a privilege in this case, and he gets a good title without any defect, even if he holds a negotiable instrument endorsed by a person who received the instrument for an unlawful consideration. As mentioned in Section 121, no maker of a note or acceptor of a bill payable to order shall be permitted to deny the payee’s capacity to endorse the same.
Conclusion
A negotiable instrument is a signed document that promises a particular payment to a specified person or holder of the instrument. In India, negotiable instruments are governed under the umbrella of the Negotiable Instruments Act, 1881. This is a significant law that governs all means of negotiable instruments in India. Section 13 of the Act provides only three kinds of negotiable instruments, which are bills of exchange, promissory notes, and cheques. These instruments can be payable either to the order or the bearer. A person who is legally qualified to possess the negotiable instrument in his own name and to receive the amount mentioned is called a holder. The holder is either the original payee or the endorsee. In cases where the bill is payable to the bearer, the person who is in possession of such a negotiable instrument is called the ‘holder’. A holder in due course is a person who acquires the negotiable instrument in good faith for a valid consideration before the instrument becomes due for payment and without having any defective title. A person who acquires the negotiable instrument bona fide for some consideration for an instrument whose payment is still due is called a holder in due course. It is to be noted that every holder in due course is a holder, but every holder in due course is not a holder.
Holder and Holder in Due Course- FAQs
What is a Negotiable Instrument?
A Negotiable Instrument is a signed document that promises a particular payment to a specified person or holder of the instrument. In India, negotiable instruments are governed under the umbrella of the Negotiable Instruments Act, 1881.
Who is a Holder?
A person who is legally qualified to possess the negotiable instrument in his own name and to receive the amount mentioned is called a holder. The holder is either the original payee or the indorsee. In cases where the bill is payable to the bearer, the person who is in possession of such a negotiable instrument is called the ‘holder’.
What are the conditions for a person to become a Holder?
The person is said to be the holder of a negotiable instrument if he satisfies two conditions:
- The person is entitled to possess the instrument in his own name; i.e., he can have legal custody of the instrument.
- The person holds the right to receive or recover the amount as mentioned from the parties liable to pay.
Who is a Holder in Due Course?
A holder in due course is a person who acquires the negotiable instrument in good faith for a valid consideration before the instrument becomes due for payment and without having any defective title. A person who acquires the negotiable instrument bona fide for some consideration for an instrument whose payment is still due is called a holder in due course.
What are the privileges of a Holder in Due Course in case of an inchoate instrument?
In the case of an inchoate instrument, if the holder fills in more than the amount for which he was actually authorized, he cannot enforce the instrument for the whole amount. If an inchoate instrument is transferred to a person who possesses the title of holder in due course, he can claim the whole of the amount as mentioned on the instrument and the amount as covered by the stamp.
What are the privileges of a Holder in Due Course in case of a Fictitious Bill?
In the case of a fictitious bill, both the drawer and payee are fictitious persons. When a negotiable instrument is drawn in a fictitious name and such an instrument 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 held valid by law. But the acceptor of such a bill is liable to a person who has the title of holder in due course, provided the latter can show that the first endorsement and the signature on the instrument of the supposed drawer are in the same handwriting.
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