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negotiable-instruments:holder-in-due-course

Holder in due course

Section 9 : “Holder in due course” means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

The words “payable to order” were substituted for the words “payable to, or to the order of,a payee” by section 2 of the NI Amendment Act 1912.

Meaning

In plain language a “holder in due course” means a bona fide holder of an instrument for value before it has become due without notice of any defect. To facilitate negotiability and to safeguard the interests of persons in whose favour an instrument is negotiated, under certain important conditions, this definition is given. The definition lays down three conditions:

  1. The transfer must be for consideration.
  2. It must be before it is due
  3. It must be without notice of any defect.

Consideration

Consideration means, here, valuable consideration as contemplated in the Indian Contract Act. It means some gain or benefit to the person making the promise and corresponding loss or injury to the party to whom it is made. It consists of some act or forbearance of the promisee or of some third person. A pronote executed in consideration of one’s father’s past debt,or ,a pronote executed by A in favour of C in consideration of C forbearing to sue A for a former pronote executed by A to C, is for good consideration. A promissory note executed after attainment of majority for services rendered to the defendant during his minority is for valuable consideration, but not where the maker executed a pronote as a mere name lender for a person whose name was not intended to be disclosed in the document, nor where a note is executed for security for money to be advanced which is, in fact, not afterwards advanced.

Moral obligation is not a valuable consideration. To give up a thing which one is already bound to give, or to relinquish a void instrument, or to acknowledge a non-existent debt, or a debt in respect of which the promisor has obtained his discharge from the court under Insolvency proceedings, is not valuable consideration to make the holder, a holder in due course while the consideration must be valuable it need not be adequate, although adequacy will help to establish bona fide. The consideration should be a lawful consideration and should not be forbidden by law nor should defeat the provisions of any law nor should it be fraudulent, immoral or opposed to public policy as laid down in the Indian Contract Act.

A pledgee or one who has a lien upon a negotiable instrument is deemed to be a holder for value to the extent of his dues. Pledgee must not part with the instrument and, if he can, must collect it at maturity. AGP Note belonging to a certain person is endorsed in blank in favour of a bank as security for the loan from the bank. The bank is not merely the pledgee but is also a holder for value to the extent ot the lien. Delivery of the bond after endorsement passes not merely the equitable title. A donee of a negotiable instrument succeeds only to the rights of the donor and is not a holder for value as there is no valuable consideration for the transfer in his favour. He, however, acquires all the rights of a holder in due course if his donor himself was a holder in due course but he cannot maintain a suit against the donor, but can successfully sue the prior parties. He can negotiate the instrument for value to a third party who becomes a holder in due course. Endorsee of a cheque is a holder in due course. Where, in a partition, a pronote is allotted to a person who never comes in possession of it and the note is payable to a third person and not to bearer, the former cannot be a holder in due course.

Consideration can operate only once

Consideration can operate, as such, only once and the same consideration cannot support more than one promise. Thus, a pronote executed by a person on attainment of majority in consideration of money advanced on a prior note executed by him while a minor, and thus void, was without consideration. A different view has been held by the Calcutta High Court. The latter view, it is submitted, appears to be the more reasonable, for there is no bar in law which precludes a person from paying a debt incurred during his minority after he attains majority. Therefore, a note executed by a person on attainment of majority in consideration of a debt incurred during his minority is a good and valid instrument.

Burden of proof

The holder starts with presumption in his favour that he is a holder for value, for every negotiable instrument shall be presumed to have been executed or endorsed for valid and sufficient consideration. Therefore, the production of a negotiable note makes a prima facie case. In a suit by a holder in due course it is not permissible to go outside the note. A holder in due course cannot be expected to make enquiries concerning a previous promissory note referred to in the body of the instrument and the principal and interest of which are mentioned as consideration for the present note.

An endorsee from the payee of a hundi must be presumed, until the contrary is proved, to have been a holder in due course, that is to say, a holder for consideration in a suit based on a negotiable instrument, therefore, the onus to prove want or failure of consideration lies on the defendant. The onus is shifted to the plaintiff if the instrument is proved to have been obtained from the real owner by fraud, etc. The presumption does not apply to non-negotiable instruments

Before payable

Sections 22 to 25 of the Act lay down when an instrument becomes payable. In order to be a holder in due course a person must take possession of the instrument before it becomes payable. If the endorsement is made before but the instrument is delivered after it becomes due, the holder is not a holder in due course. When an instrument becomes overdue and still continues in circulation it raises a suspicion that payment has not been made because of some defect either in the transaction or in the title of the holder. A transferee of an overdue instrument starts with the presumption of knowledge of the defects, if any. Therefore , to derive all the advantages of a holder in due course the holder must have possession of the instrument before it becomes payable. A person taking a stale cheque is put on sufficient notice that payment was overdue and if the transferor was not a holder in due course, as claiming under a fictitious endorsement, the transferee cannot have better rights. A person who takes a negotiable instrument evidencing a transaction which excites the suspicion that there is something wrong in the transaction does not act in good faith if he shuts his eyes to the facts presented to him and is, therefore, not a holder in due course.

Where there is nothing to show that payment of a pronote was demanded or that it was overdue before it was endorsed over, it must be taken that the endorsement was made before the pronote became payable. A transferee on the due date is a holder in due course. A transferee after demand of an on-demand pronote without knowledge of the demand is a holder in due course. In the absence of an actual demand a note payable on demand is not deemed to be overdue by reason merely that a reasonable time has elapsed since its issue.

Without notice of defect

According to section 58 of the Act the title of a person who negotiates a note is defect,if he has obtained it from the maker or holder thereof by means of an offence or fraud, unlawful means or for an unlawful consideration . A holder, in due course, must acquire the instrument without having any sufficient cause to believe that there is any defect in the title of the person from whom he obtains tht instrument. Notice may either be actual or constructive , when a person takes a pronote with the knowledge that the consideration for the pronote failed and that the payee had no title to negotiate it, he is said to have actual notice of the defect and is, therefore, not a holder im due course. Similarly when an endorsee takes a note with knowledge of a prohibitory order of the court against transfer he is not a holder in due course. Where there are circumstances patent on the face of the instrument to create suspicion, that are sufficient in law to impute notice of defects to the transferee who is said to have constructive notice of the defects.

An erasure of a material part or pasting together of a torn note may be cited as an illustration of suspicious circumstances patent on the face of the instrument. When it is prima facie clear that the endorsee either had knowledge of, or could know the actual state of affairs, the presumption in his favour is rebutted. Thus, where a book maker gets a cheque, which had been given in a betting transaction, endorsed in his favour, and it is found that he has transactions for a long time with the endorser, the presumption in his favour as a holder in due course is rebutted. The doctrine of “notice to the agent is notice to the principal” will not apply when the agent is himself a party to the fraud practiced on the principal or when it is to his interest not to disclose the fact to the principal.

Defect of title in this section means defect of title of his immediate transferor and not that of any other holder before his transferor unless, of course, the transferee was himself a party to the fraud or what caused the defect

Effect of negligence

Transferee of a bill should be diligent and not negligent or careless. Negligence, though honest and without bad faith, may be a sufficient cause for the belief in the existence of some defect in the title. Before the passing of this Act mere negligence was not held to charge the party, taking the instrument, with any defective title of the transferor, or to disentitle a party, in the absence of suspicious circumstances, to be a holder in due course. But the provisions of the present Act are stricter. Mere negligence by itself will not matter , but, to disqualify a person from being a holder in due course, bad faith will be inferred from negligence to enquire, if there are suspicious circumstances.

Holder under forged endorsement

There is a distinction between a holder with defective title and a holder without title. To the latter class falls a holder under a forged endorsement who may be a holder for value in good faith and before maturity. He is not a holder in due course as no person can claim title to a negotiable instrument through a forged endorsement. Such an endorsement is a nullity and no endorsement at all, and, therefore, the transferee under such endorsement is not entitled to recover. Similarly, when a guardian, endorses a pronote without any indication that he has endorsed it in his capacity as a guardian the endorsement passes no title to the endorsee.

Rights of Assignees

Where the payee of a promissory note executed by two persons agrees to hold one of them alone liable and relinquishes his claim against the other, the assignees who takes the note with the knowledge of this agreement acquires no better title than what the assignor had and is not entitled to a decree against the person released from liability by the assignor. But where the maker of a promissory note payable on demand has paid the amount to the payee before any demand and has not asked for the return of the note and the note is afterwards endorsed by the payee to a third person without knowledge of the fact of payment the endorsee is entitled to sue as a holder in due course the maker of the note.

Created on 2021/01/26 22:35 by LawPage • Last modified on 2021/01/26 22:47 by LawPage