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Unit 10: Negotiable Instruments

after the payee are holders if such instrument is either payable to the bearer or endorsed properly Notes
to their order. The party in possession is not considered to be the holder in a case in which a
necessary endorsement has been forged.”

Holder in Due Course

Section 9 states that a holder in due course is:
i. a person who for consideration, obtains ownership of a negotiable instrument if payable
to bearer, or

ii. the payee or endorsee thereof, if payable to order, before its maturity and without having
enough cause to consider that any defect subsisted in the title of the person from whom he
deduced his title.
In order to be a holder in due course, a person must satisfy the following conditions:
He must be the holder of the instrument.

He should have obtained the instrument for value or consideration.
He must have obtained the negotiable instrument before maturity.
The instrument should be complete and regular on the face of it.
The holder should take the instrument in good faith.
“A holder in due course is in a privileged position. He is not only himself protected against all
defects of the persons from whom he received the instrument as current coin, but also serves as
a channel to protect all subsequent holders. A holder in due course can recover the amount of the
instrument from all previous parties, although, as a matter of fact, no consideration was paid by
some of the previous parties to the instrument or there was a defect of title in the party from
whom he took it.” Once an instrument passes through the hands of a holder in due course, it is
purged of all defects. It is like current coin. Whoever takes it can recover the amount from all
parties previous to such holder.

Self Assessment

Fill in the blanks:
14. A person who has obtained the possession of an instrument by .......................... is not a
holder.
15. A holder in due course is a .......................... position.

10.5 Paying Banker and Collecting Banker

Paying banker and collecting banker can be defined as follows:

“The bank on which a cheque is drawn (the bank whose name is printed on the cheque) and
which pays the amount for which the cheque is written and deducts that sum from the customer’s
account.” The paying banker should use due care and diligence in paying a cheque so as to
refrain from any action potential enough to damage his customer’s credit.
“A Collecting banker is the one who attempts to collect different types of instruments representing
money in favour of his customer or his own behalf from the drawers of these instruments; some
are negotiable instruments as provided for in the Negotiable Instruments Act, 1881.”

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