Page 97 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes 4.4 Holder and Holder in Due Course

4.4.1 Meaning

According to s.8, a holder of a negotiable instruments is “a 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”. Thus, a person who has obtained the possession of an
instrument by theft or under a forged endorsement is not a holder as he is not entitled to recover
the amount of the instrument.
A ‘holder in due course’, on the other hand, is “a person who for consideration became the
possessor of a promissory note, bill of exchange or cheque, if payable to bearer, or the payee or
endorsee thereof, if payable to order, before the amount mentioned in it becomes payable and
without having sufficient cause to believe that any defect existed in the title of the person from
whom he derived his title (s.9)”. Thus, where a person receives a negotiable instrument without
consideration, he may be a holder but will not be called a holder in due course. Besides, the title
of holder of a negotiable instrument is always subject to the title of its transferor whereas a
holder in due course acquires a better title than that of its transferor. So where a lost negotiable
instrument is transferred to a person who takes it, say, without consideration and thus becomes
the holder, he will not be entitled to enforce his claim against its real owner. But, if he is a holder
in due course as per s.9, he will be able to establish his claim even against the real owner of that
instrument. Also, in order to be a holder in due course the holder must have obtained the
instrument before maturity. It he obtains it after the instrument is due, then the right of a holder
is that of his transferor (s.59). From the definition of holder in due course as given in s.9 it can be
inferred that a holder must satisfy the following criteria so as to be known as a holder in due
course: (i) he must have taken the instrument for value; (ii) he must have obtained the instrument
before maturity; (iii) the instrument is not incomplete or irregular and does not have any defect
on the face of it; (iv) he must have taken the instrument in good faith and without notice of any
defect in the title of the person from who he derived his title.

4.4.2 Privileges of a Holder in Due Course

A holder in due course is given certain additional privileges under the Act, which are not
available to a holder:
1. Privilege against inchoate stamped instruments: According to s.20, a person, who signed
and delivered to another a stamped but otherwise inchoate (incomplete) instrument, is
stopped from asserting, as against a holder in due course, that the instrument has not been
filled in accordance with the authority given by him provided the amount filled is covered
by the stamp affixed.
2. As per s.3, every prior party to a negotiable instrument, i.e., the maker or drawer, the
acceptor and all the intermediate endorsers continue to remain liable to the holder in due
course until the instrument is duly satisfied.
3. Fictitious drawer or payee: Where a bill of exchange is drawn by a fictitious person and is
payable to his order, the acceptor cannot be relieved from his liability to the holder in due
course. The holder in due course shall, however, have to prove that the instrument was
endorsed by the same hand as drawer’s signature (s.42).
4. When a negotiable instrument is made, drawn accepted or transferred without consideration
and the negotiable instrument gets into the hands of a holder in due course, then the plea

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