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Holder deriving title from holder in due course

Section 53 of the Negotiable Instruments Act,1881.

A holder of a negotiable instrument who derives title from a holder in due course has the rights thereon of that holder in due course.

In the corresponding section of the English Bills of Exchange Act an important qualification has been added to the holder whose position has been dealt with here. There the holder “who is not himself a party to any fraud or illegality” affecting the instrument has all the rights of a holder in due course from whom he derives his title. This is presumably the law in India, although the section is silent on this point, as no party can be allowed to reap the advantage of his own fraud. The section has, therefore, to be read subject to this important qualification.

Rights of transferee of a holder in due course

Ordinarily the transferee acquires all the rights of the “transferor”. Even a transferee for no consideration acquires the rights of the transferor and can sue the maker but cannot have the rights of a holder in due course. A holder in due course acquires the instrument free from all defects and he also conveys the same title to his transferee who becomes the holder and steps into the shoes of the transferor. Once an instrument passes through the hands of a holder in due course it continues free from all defects in the hands of a subsequent holder who acquires title of unimpeachable character even if he is aware that a defect once existed but he was not a party to it. If the subsequent holder gives values for the bill he can sue all the parties to the bill but if he has paid no value to this transferor he can sue all others except the transferor.