What Does it Mean to be a Holder and Holder-in-Due Course under the Negotiable Instruments Act?

Theoretical overview

The concept and definition of a holder and a holder in due course have been discussed in Section 8 and Section 9 of The Negotiable Instruments Act, 1881 respectively. Generally, the holder of a negotiable instrument is the one who receives it by transfer.

Holder: a/c to section 8 of the negotiable instrument act 1881 any person who is legally entitle to the possession of a negotiable instrument and receive the payment thereof on due date is known as holder. 

Rights of holder under negotiable instrument act

1. Section 8: – Holder has the legal right to possess the instrument and to recover and receive the amount which due as per the instrument.
2. Section 14: – In Negotiation, a holder of a cheque has a right to negotiate to another person. Moreover, in some cases, a holder has a power of negotiation even though cheque has no title or faulty title.
3. Section 45A: – Holder has the right to get a duplicate of the instrument which is lost. In case of misplacing of the cheque, the holder can ask to the drawer to give him another cheque of the same tenor, but holder must give security to the drawer to indemnify him for all the loses if the lost cheque has been found again.
4. Section 50: – Holder has the right to Indorse the instrument which basically means that holder has the right to countersign the instrument. The holder of a cheque indorsed in blank may convert the blank endorsement, by writing above the endorser’s signature which gives direction to pay the cheque to or to the order of himself or any other person.
5. Section 61 and 64: – Holder has the right to present the instrument for acceptance if it is a bill and receive payment if it is any other instrument. If a cheque is an open cheque then the person can take it to the drawee bank and request payment in cash; but in case of crossed cheques one cannot anticipate drawee bank to pay in cash, and he should, therefore, present it to the drawee bank for payment.
6. Section 125: –  In Crossings of cheque after issue; where the cheque is not crossed, the holder may cross it generally or specially. Where the cheque is crossed generally, the holder may cross it specially. He also the option of adding the words like “not negotiable” or “account payee”.
7.  Section 138: – In Notice of Dishonour of cheque, a cheque holder presents the cheque for payment and if it does not get paid then he may give notice of dishonour outright to prior parties in order to hold back their liability to him.

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.

Essentials of holder in due course:

• he person must hold the instrument for the valuable consideration.
• The person can become the holder of the instrument before its maturity.
• The negotiable instrument must be complete in all respects and requirements.
• The holder must have received the instrument in good faith.

Rights of holder in due course:

1. 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.
2. Section 36: – Every prior party to the instruments is liable to a holder in due course until the instrument is duly satisfied.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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
10. 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.
11. 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.

Importance difference

Relevant sections

1. Section 8 defines holder.
2. Section 9defines holder in due course.
3. Section 8: – Holder has the legal right to possess the instrument and to recover and receive the amount which due as per the instrument.
4. Section 14: – In Negotiation, a holder of a cheque has a right to negotiate to another person. Moreover, in some cases, a holder has a power of negotiation even though cheque has no title or faulty title.
5. Section 45A: – Holder has the right to get a duplicate of the instrument which is lost. In case of misplacing of the cheque, the holder can ask to the drawer to give him another cheque of the same tenor, but holder must give security to the drawer to indemnify him for all the loses if the lost cheque has been found again.
6. Section 50: – Holder has the right to Indorse the instrument which basically means that holder has the right to countersign the instrument. The holder of a cheque indorsed in blank may convert the blank endorsement, by writing above the endorser’s signature which gives direction to pay the cheque to or to the order of himself or any other person.
7. Section 61 and 64: – Holder has the right to present the instrument for acceptance if it is a bill and receive payment if it is any other instrument. If a cheque is an open cheque then the person can take it to the drawee bank and request payment in cash; but in case of crossed cheques one cannot anticipate drawee bank to pay in cash, and he should, therefore, present it to the drawee bank for payment.
8. Section 125: –  In Crossings of cheque after issue; where the cheque is not crossed, the holder may cross it generally or specially. Where the cheque is crossed generally, the holder may cross it specially. He also the option of adding the words like “not negotiable” or “account payee”.
9.  Section 138: – In Notice of Dishonour of cheque, a cheque holder presents the cheque for payment and if it does not get paid then he may give notice of dishonour outright to prior parties in order to hold back their liability to him.

10. 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.
11. Section 36: – Every prior party to the instruments is liable to a holder in due course until the instrument is duly satisfied.
12. Section 42: – Acceptor cannot plead against a holder in due course that the bill is drawn in a fictitious name. 
13. 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.
14. 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.
15. 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.
16. 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.
17. 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
18. 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..
19. 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.

Important case laws

1. Gemini vs. Chandran 2007 (1) KHC 698:

Judgement of the case: – In this case, the court held that there is no provision in the act by the holder in due can be presumed as holder but section 118 states that holder is a holder in due in certain cases. Therefore, holder and holder in due does not mean same.

2. Braja Kishore Dikshit vs. Purna Chandra Panda AIR 1957 Orissa 153:

Judgement of the case: – It was held that a suit for recovery of the amount liable through a negotiable instrument can be filed only by a person who is the holder in due course of the negotiable instrument.

• First, he must have become the holder by way of a consideration.
• Secondly, he must have got the right to the instrument before it becomes overdue and, finally, he must be a transferee in bonafide faith and he must have some reason to believe that the title was the transferor’s fault.

3. S.V. Prasad vs. Suresh Kumar AIR 2005 AP 37:

Judgement of the case: – In this case, the court held that the holder in due has the right to recover the amount from the holder of the instrument. The endorsement can be done without the involvement of the maker of the instrument. The holder gets the same right in due course which was with the holder. He can neither rectify nor modify the liability.

Points to remember

1. a/c to section 8 of the negotiable instrument act 1881 any person who is legally entitle to the possession of a negotiable instrument and receive the payment thereof on due date is known as holder.
2. 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”.