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Instrument acquired after dishonour or when overdue

Section 59 of the Negotiable Instruments Act,1881.

The holder of a negotiable instrument, who has acquired it after dishonour, whether by non-acceptance or non-payment, with notice thereof, or after maturity, has only, as against the other parties, the rights thereon of his transferor.

Accommodation note or bill. Provided that any person who, in good faith and for consideration, becomes the holder, after maturity, of a promissory note or bill of exchange made, drawn or accepted without consideration, for the purpose of enabling some party thereto to raise money thereon, may recover the amount of the note or bill from any prior party.

Illustration. The acceptor of a bill of exchange, when he accepted it, deposited with the drawer certain goods as a collateral security for the payment of the bill, with power to the drawer to sell the goods and apply the proceeds in discharge of the bill if it were not paid at maturity. The bill not having been paid at maturity, the drawer sold the goods and retained the proceeds, but indorsed the bill to A. A’s title is subject to the same objection as the drawer’s title.

Position of transferee of dishonoured and overdue instruments

The first paragraph of the section deals with the position of a transferee of an overdue or dishonoured negotiable instrument. Ordinarily a bona fide holder for value takes the instrument free from all defects and makes all prior parties liable. An exception is, however, made in the case of dishonoured or overdue instruments. The section does not, except in the case of accommodation notes, confer upon such transferee the advantageous rights of a holder in due course.

Just as a current coin circulates because it has a standing value so a negotiable instrument circulates because it carries along with it a standing unconditional undertaking to pay. When, therefore, the instrument is dishonoured by non-acceptance or non-payment the unconditional undertaking for payment disappears and the holder, after such dishonour, takes it subject to that risk. Similarly, when an instrument is overdue, that is, when it remains unpaid on or after the due date it naturally creates suspicion that there is something wrong with it and the holder, after it is overdue, as in the case of dishonour, takes it subject to that risk.

In neither case is the holder entitled to the rights of a holder in due course as non-payment ought to have set him to an enquiry disclosing the defects and the omission to enquire saddles him with negligence for which he should suffer. Therefore, when an overdue bill is negotiated it can only be negotiated subject to any defect of title affecting it at it's maturity and thence forward no person who takes it can acquire or give better title than the person from whom he took it had.

A person who takes an instrument with the knowledge of dishonour or that it is overdue cannot be a holder in due course because it is of the essence of being a holder in due course that he should take it bona fide without knowledge of its defects. Therefore, when a person took an instrument after his agent had been informed that the money on the instrument could not be collected it was held that he took it after dishonour by non-payment. It follows, therefore, that the transferee or the endorsee of an overdue or dishonoured instrument takes it subject to all the equities or defects existing at the time of the transfer eg: total or partial failure of consideration, absence of consideration, existence of condition but not a plea of set off or collateral security, and not subject to any equity that may arise subsequent to the transfer between the maker and the payee. That is to say, all the defences which are available against the transferor are available against the transferee who cannot acquire a better title than that of the transferor unlike a holder in due course.

After maturity the instrument ceases to be negotiable and a transfer only operates as an assignment. Where a note is endorsed after payment has been made to the endorser and the endorsee takes it without knowledge of that fact, if it is an overdue instrument, he will be unable to recover the amount by a suit on the instrument. Where a bill which is not overdue has been dishonoured, any person who takes it with notice of dishonour takes it subject to any defect of title attaching thereto at the time of dishonour. But where a bill is dishonoured by non-acceptance and notice of such dishonour is not given the rights of a holder in due course subsequent to the omission are not prejudiced thereby. It is only when a person presents a hundi for payment within reasonable time, and gives notice of dishonour to the drawer, does a surety get into the shoes of a holder in due course. If a surety pays the amount of a dishonoured hundi he can recover the amount from the drawer. A bona fide holder for value of a note payable on demand cannot be affected by any demand of which he had no notice.

Overdue instrument

Instruments are said to be overdue when they are not paid on or before the due date. If there are days of grace in an instrument it cannot be said to be over due until the expiry of the last day of such grace and, therefore, a transfer of an instrument on the last day of grace is not a transfer of an overdue instrument. Although a note payable on demand is a present debt and is due and payable at once without demand for the purpose of limitation and can be sued for without notice of demand, yet to make it overdue, demand is necessary and in the absence of any notice of demand it is not to be deemed overdue for the purpose of affecting the holder with defects of title only for the reason that a reasonable time for presenting it for payment has elapsed since its issue. Therefore, a note payable on demand cannot be overdue until demand or until expiry of the period fixed in a notice of demand.

The principle of a cheque is not applicable to a promissory note. So when a person took a stale cheque without notice of dishonour or knowledge of defect of the title of the transferor who was not a holder for value and the endorsement in whose favour was fictitious, he could not recover from the drawer as the staleness of the cheque implied that payment was overdue. Indorsement after the due date confers the right, title and interest of the transferor on the transferee and if the transferor was a holder in due course the transferee also virtually becomes so. Under this section the position of the holder becomes affected only if he acquires the note after dishonour. So in an action by the indorsee it is not open to the maker of a note payable on demand to plead against him who is a holder in due course that he has paid the amount before the endorsement. Where the consideration has failed, the payee cannot by endorsing the note after maturity give any rights to the endorsee as against the maker.

Position of endorsee of accommodation note

The proviso to this section applies only to cases of accommodation bills. It makes an exception in favour of a transferee of an accommodation note who is entitled to recover on the note, no matter whether the transfer is made before or after maturity but only if it is for value and is in good faith. Such transferee can recover from all prior parties. The use of the word “good faith” is not quite intelligible. If by good faith it is meant that the holder, when acquiring title to the overdue bill should have no notice of the accommodation character of the instrument then the proviso is not in accordance with the English law. The better opinion perhaps is that it should not be acquired for the purpose of embarrassing or otherwise defrauding the the accommodating party by acting in collusion with the party accommodated, or perhaps it may mean without notice of any vicious character of the bill, such as fraud, duress or illegality of consideration.