Page 98 - DMGT407Corporate and Business Laws

Unit 4: Law of Negotiable Instruments

of absence of consideration cannot be raised against him or against any subsequent holder Notes
deriving title from him (s.43).
5. Where an instrument is negotiated to a holder in due course, the parties to the instrument
cannot escape liability on the ground that the delivery of the instrument was conditional
or for a special purpose only (s.46).
6. Right of an endorsee from a holder in due course: Not only that the title of the holder in due
course is not subject to the defect in previous holder’s title but once that instrument passes
through the hands of a holder in due course, it is purged of all defects. Any person acquiring
it takes it free of all defects, unless he was himself a party to the fraud (s.53).
7. Estoppel against denial of validity: Section 120 provides that no maker of a promissory
note and no drawer of a bill of exchange or cheque shall, in a suit thereon by a holder in
due course, be permitted to deny the validity of the instrument as originally made or
drawn.
8. Estoppel against denial of payee’s capacity: No maker of a note and no acceptor of a bill
payable to order is, in a suit thereon by a holder in due course, permitted to deny the
payee’s capacity at the date of the note or bill to endorse it (s.121).
9. Presumption: Section 118 provides that every holder is deemed prima facie to be a holder
in due course. The burden of proving his title does not lie on him.
10. Prior defects (s.58): The party liable to pay an instrument cannot, as against a holder in due
course, contend that he had lost the instrument or that it was obtained from him by means
of an offence or fraud, or for an unlawful consideration.

Example: A cheque is given to an employee of a company to enable him to withdraw
money for payment of workers’ bonus. He instead transfers the cheque to a bank for consideration.
The bank will be entitled to get the payment on the cheque.
11. Endorser not permitted to deny the capacity of prior parties: The endorser of a negotiable
instrument cannot, in a suit thereon by a subsequent holder, deny the signature or capacity
to contract of any prior party to the instrument (s.122).

Self Assessment

Fill in the blanks:
7. Where the note, bill or cheque is lost or destroyed, ……………..is the person so entitled at
the time of such loss or destruction.
8. In order to be a holder in due course the holder must have obtained the instrument
before….....

4.5 Negotiation of a Negotiable Instrument

The transfer of an instrument by one party to another so as to constitute the transferee a holder
thereof is called ‘negotiation’. A bearer instrument is transferable by mere delivery (s.14). An
instrument payable to order can be transferred by endorsement and delivery (s.46).

4.5.1 Negotiation and Assignment

The negotiation of an instrument should be distinguished from assignment. Let’s first see what
is assignment and what are the common points in negotiation and assignment. When a person

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