Holder in Due Course - Negotiable Instruments Act, 1881

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.

Section 8 in the negotiable instruments act, 1881

"Holder": 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.

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.

Section 9 in the negotiable instruments act, 1881

"Holder in due course": "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 indorsee thereof, if 1[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.

Difference between holder and holder in due course

Section 9 of negotiable instrument act, 1881

Holder in due course – means any person who for consideration became the possessor of a Promissory Note, Bill of Exchange of Cheque, if payable to bearer, or the payee or indorsee thereof ,if payable to order, before the amount mentioned in it become payable without having sufficient cause to believe that any defect existed in the title of the person from whom he derived the title of the instrument.

A person claiming to be "Holder in due course "must prove that;

• That, for consideration he became the possessor of a negotiable instrument when it is payable to bearer or the payee or the indorsee thereof when it is payable to order;
• That he became the holder of the instrument before the amount mentioned in it became payable;
• That he became the holder of the instrument, without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

IT MEANS THAT- it means that a Holder in due Course is a person who acquired Negotiable Instrument by paying consideration , before the amount mentioned in the instrument become payable. Tile of the instrument in the hand of Holder In Due Course is free from any defect, it means that title in his hand is beyond doubt or he has acquired instrument by believing that the title in hand of transferee is not defective.

Let's discuss some definitions

• DICTIONARY.COM person who has received a negotiable instrument in good faith and without notice that it is overdue, that there is any prior claim, or that there is a defect in the title of the person who negotiated it.
• LAW INSIDER: Holder in due course means any person who for consideration becomes 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 (Sec. 9).

Some important decided cases

• In India Saree Museum Vs. P Kapurchand 1991(1)(BC)344, 1989 Indlaw KAR 67 the Karnataka High Court held that it is not only the endorsee who becomes a holder in due course but also a person who gets possession of the negotiable instruments for consideration, which means that he need not be an endorsee to be a holder in dure course. Once it is established to the satisfaction of the court that the cheques were issued for discharge of the debt of the company , the bank who had given this debt to the company would be considered as "Holder in due course". The "Holder in due course" of a cheque means any person entitled to receive or recover the amount due from the parties thereto.
• In Anil Kumar Jaiswal Vs. State & Others 2007 CrLJ 377 ALL- 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.
• In Precision Processors ( India) Private Limited Vs. Bank of India 2016(2)CAL HCN 469 2016(2) ICC 192 a person claiming to be "Holder in due course" must show that he acquired the instrument for valuable and lawful consideration and he become the holder of the instrument before amount mentioned in it become payable.
• In Somisetty Subbarao Vs. Mynampati Ramakrishna Rao AIR 2008 AP 19 plaintiff has got the suit promissory note transferred for consideration from the original creditor. Later ,he file the suit against the defendant for recovery of money. Upon the suit being decreed and an appeal having been dismissed , the defendant filed a revision petition urging two grounds to convince High Court that the suit itself was not maintainable as it was filed before the wrong court , which has no jurisdiction to entertain the suit. It was further contended by the defendant that even though there was a transfer endorsement in favour of the plaintiff that the defendant through a registered notice. Therefore the defendant pleaded that the plaintiff cannot become the "Holder in due course" as he cannot have better rights than the transferor and hence, the suit filed within the jurisdiction Ongole is not maintainable.

In this case it was undisputed fact that the transferee of the promissory note had issued legal notice to the defendant demanding the payment of the money covered by the suit promissory-note and subsequent to the demand notice the pronate was transferred in favour of the plaintiff through an endorsement for consideration. In order to get status of "Holder in due course", the plaintiff had to get transfer of the promissory note in his favour before demanding for payment from the defendant.

The High Court noticed that according to the provisions of Section 9 of the NI Act, 1881 there is difference between " A holder for collection" and "Holder in due course". "Holder in due course" is entitled to claim better rights that transferor. Ant defect in the title of the transferor will not affect the rights of "Holder in due course". It is only where the transferee of the payee wants to claim higher rights than transferor that he must satisfy the requirements of a "Holder in due course" as laid down in Section 9.

The High Court Further held that the plaintiff cannot be treated as "Holder in due course", and therefore , he cannot acquire better rights than transferor. When once the plaintiff has no better rights not part of the transaction regarding the execution of the promissory note passing of the consideration took place within territorial jurisdiction of " Ongole". Thus it was held that the Court of Ongole has no jurisdiction to entertain the suit and hence suit dismissed.

In Anil Kumar S. Vs. N. Ramakrishna Kartha Gokulam & Anr [CrLJ 816 NOC Ker., AIR 2009] the question decided by the Kerala High Court is that can a person who was neither the payee nor the indorsee be entitled to file a complaint under Section 138 of NIA ,1881?

In this case the revisional petitioner issued a cheque of Rs. 1,00,000/- in favour of Krishnadas. The first respondent claiming that for consideration he received the cheque from the brother of the payee as the payee is out of India, presented the cheque for encashment and it was dishonoured for want of sufficient funds, sent notice demanding the amount and on the failure, lodged the complaint. The Revisional Petitioner pleaded not guilty. The Magistrate Found Revisional Petitioner guilty and hence convicted and sentenced under Section 138.

The Session Court has also rejected the case of revision on the basis that the First respondent was not a "Holder in Due Course" and therefore not entitled to file a complaint under Section 142.

The revision petition filed before high court

It was held that in order to make a person other than a payee, a Holder in due course of a cheque payable to order there must be indorsement in his favour and a deliver of cheque as provided u/s. 48. Delivery alone is not sufficient to make a person "Holder in due course" indorsement is necessary.

In case in hand the Kerala High Court observed that the cheque showed that it was payable to Krishnadas. There was not indorsement by the Krishnadas in favour first respondent. Even if there was deliver of Ext.P1 Cheque by the brother of the payee to the first respondent as alleged in complaint and that too for consideration as claimed by the first respondent as alleged in the complaint, the first respondent could not be a holder in due course as defined in Section 9 as long as there be an indorsement in his favour.

Hence first respondent is not considered as "Holder in due Course". When he was not holder in due course, the Magistrate could not have taken cognizance of the offence punishable under Section 138 of the NIA 1881, except upon a complaint in writing by the payee or the holder in due course of the cheque.

The Hon'ble High Court held that- in order to make a person other than a payee , a holder in due course of a cheque payable to order, there must be indorsement in his favour and a delivery of cheque as provided under Section 48 of the NIA,1881. In the instant case the cheque showed that it was payable to Krishnadas. There was not indorsement by Krishnadas in favour of the first respondent. The conditions of Section 9 have not satisfied here and hence first respondent was not Holder in due course.

In Milind Shripad Chandurkar Vs. Kalim M. Khan &Anr. [ 2011 Cr.LJ 1912(SC)4 SCC 275 the claimant was the Sole Proprietor of a firm , had supplied a huge quantity of diesel to the respondent 1 and in order to meet the liability, Respondent 1 made the payment in the name of the said Proprietor Firm for an amount of Rs. 7.00 Lakhs. On deposit and returning of the cheque, the complainant filed a complaint under provisions of Section 138 of the NIA,1881 before Bombay High Court.

The High Court -held that the complainant could not produce ant evidence to establish that he was the Sole Proprietor of the firm in question.

Aggrieved by the Order the petitioner approached before the Supreme Court - It was noticed that the firm namely "Vijaya Automobiles" was the payee and the complainant could not have claimed to be payee of the cheque nor could he be claimed a holder in due course of cheque, unless he established that the cheques were issued to him or in his favour or that he was the Sole Proprietor of the concern and being so, he could also be the payee himself and thus, entitled to make the complaint.

Accordingly, the Apex Court opined that the complainant had miserably failed to prove any nexus or connection by adding any evidence, whatsoever, worth the name with the said firm, namely "Vijaya Automobiles". Mere statement in the affidavit in this regard, was not considered sufficient to meet the requirement of the law. Since the appellant had failed to produce any documentary evidence to connect himself with the firm , thus the judgement given by the High Court hereby confirmed.

In Bank of India Vs. State[2010(7) AD(Delhi) 885,2010(119) DR] Hon'ble Delhi High Court held that Bank is a " Holder in due course" even if there is no indorsement made on the cheques because the moment amount of cheque had gone to the account of the company, it was to go to the Bank towards the loan taken by the company. It was further observed that if a person hands over a cheque to the Bank with clear understanding to the Bank that the cheque was towards the debt payable to the Bank , what is to be seen is that whether the Bank has come into possession of the cheque for a value pursuant to a contract between the parties express or implied. It is not necessary that the cheque should be indorsed in favour of Bank.

Benefits of being holder in due course

Qualifying as a holder in due course (HDC) makes the negotiable instrument more valuable to the holder, as a Holder in due course has a stronger right to payment of the instrument than an ordinary holder. If a holder is not a Holder in due course, her/his rights in the instrument are the same as the original payee of the instrument prior to transfer. That is, her/his right to payment of the instrument depends upon the relationship between the issuer and the original payee. Upon receipt of the instrument, she inherits the rights of the original payee along with whatever claims and defences that the maker or drawer has against the original payee arising out of the contract.

Holder in due course status makes the holder immune from these defences at the time of presenting the instrument. HDC benefits are as follows:

• The payor of the instrument is estopped (stopped from) denying the validity of the instrument or asserting any personal defences to payment of the instrument.
• The instrument may be purged of any defects that are not apparent to the holder in due course.
• The holder in due course may assert her/his right to payment against any prior indorser or immediate transferor of the instrument if the instrument is dishonoured (not paid) upon presentment.
• Liability of transferors or indorsers of a negotiable instrument is discussed separately.

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

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

• 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, 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.
• 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.

Conclusion

From the above discussion and judgements, it is clear that a Holder in due course is a person who has acquired the negotiable instrument or possessed instrument after paying consideration before the amount payable and without having sufficient cause to believe that any defect existed in the title of person from whom he has derived the title. Section 9 of NIA,1881 provides conditions to be fulfilled related to a Cheque that it must be indorsed by the payee in favour of Holder in due course and delivered. 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.

DISCLAIMER: The article presented here is only for sharing information and knowledge with the readers. The views are personal, should not be considered as professionals' advice. In case of necessity do consult with professionals for more clarity and understanding on the subject matter.