University Institute of Legal Studies Panjab University, Chandigarh
University Institute of Legal Studies Panjab University, Chandigarh
University Institute of Legal Studies Panjab University, Chandigarh
“Business Law”
The title of the transferee from a holder in due course will also be a
good title. As per Sec 36, Every prior party to a Negotiable Instrument
is liable to holder in due course until the instrument is duly satisfied.
The word Prior Party includes maker of a Promissory note, Drawer
of a Bill of Exchange or a Cheque , the drawee or acceptor of a Bill of
Exchange and the Endorsers of the instrument.
Essentials
1. He must be a ‘holder’, i.e.:
He must be entitled to the possession of the instrument in his own name
under a legal title and to recover the amount thereof from the parties
liable thereto.
It was held that the forged indorsement did not convey any title to the
Firm Kalka Prasad Ram Charan and they could not be considered to be
the holder in due course. They were liable to make the payment of the
same to the true owner of the draft.
For example, when he takes a bill which has been torn and the pieces
pasted together, at least if the tears appear to show an intention to cancel
it, without inquiry, he is not a holder in due course.
Privileges
1) He gets a better title than that of the transferor:
One who is a ‘holder’ only gets no better title than that of his transferor
but a holder in due course is in a privileged position in that he gets a
better title than that of the transferor and the defenses on the part of a
person liable that the instrument has been lost, or has been obtained by
means of an offence or fraud or for an unlawful consideration cannot be
pleaded against a holder in due course (Sec. 58).
Further, not only the holder in due course himself gets a good title free
from all defects but also serves as a channel to protect all subsequent
holders. Once an instrument passes through the hands of a holder in due
course it is purged of all defects. Section 53 states that “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.”
This, however, does not affect the rights of a holder in due course, i.e., if
such an instrument is negotiated to a holder in due course, the parties
liable on the instrument cannot escape liability (Sections 46 and 47).
However, the aforestated parties are not precluded from challenging the
validity of the instrument on the ground that at the time of making the
instrument he was a minor or his signature had been forged or the
instrument is otherwise void ab-initio, e.g., where a promissory note is
made ‘payable to bearer’ it is void and illegal as per the Reserve Bank of
India Act.
Thus, a holder in due course can claim payment in his own name despite
the payee’s incapacity to indorse the instrument. As per Section 51, only
a ‘holder’ or a person in lawful possession of the instrument is competent
to indorse. Accordingly, a person who got the instrument for a gambling
debt or for unlawful consideration cannot negotiate the same.
However, the holder in due course enjoys a privilege in this regard and
he gets a good title even if he holds a negotiable instrument endorsed by
a person who got the instrument for unlawful consideration because
Section 121 provides that as against a holder in due course, no maker of
a note and no acceptor of a bill payable to order shall be permitted to
deny the payee’s capacity to indorse the same.
Conclusion
Consequently, it can be concluded that a holder and holder in due course
do not mean the same. A holder is a person who may or may not possess
a legal instrument. He must entitle to possess it legally and also can
receive the amount due from the instrument. He must have the legal
capacity to enforce his rights in his own name. Considering a holder in
due course, he is a person who can possess a negotiable instrument for
consideration. He must become the holder of it before it gets matured.
The instrument must satisfy all the requisites and he must receive it in
good faith.