WHO IS A HOLDER

According to Section 8 of the Negotiable Instruments Act, 1881, the “holder” of a promissory note, bill of exchange or cheque means any person who is entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Let’s understand the nuances of this section through an illustration.

Illustration:

A lost a cheque, to which he was entitled in his own name to receive the amount, and B finds the cheque near a shop in the market. Now B has the possession of the cheque in the name of A.

Now the question is, does B have the right to deposit the cheque and receive the amount?

As you see, we have highlighted three phrases in the definition of the “holder”, those three words are the requirements to determine whether the person is a “holder” or not.

• Entitled in his own name: The person in the possession of either of the instruments must be legally entitled to it. Mere possession of the instrument does not give the person the right to its title. The person in the possession of the instrument must be named as the payee, which would be one of the components that would imply his right of legal title. In case of a bearer instrument, the person can be a bearer of the instrument.

• Possession: It is necessary that the person should have the possession of the instrument to receive the payment. But if we look at Section 8 of NI Act, 1881 further, it is written that “where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.” This implies that if the “holder” misplaces his/her instrument, it is lost or destroyed, then the person who is the “holder” at the time of such loss or destruction has the right of legal title to it, which means losing possession does not mean losing the right of legal title. It is worth noting that Section 8 states the person must be ‘entitled’ to ‘possession’
• Entitled to receive or recover the payment: The person holding the instrument must also have not only the right to legal possession but also possess the right to receive or recover the payment due.

Now we can answer the question that was posed in the illustration. B has the possession of the cheque but he is neither entitled to possess it in his own nor to receive or recover payment due. Thus, he is not the “holder”. A is the right of legal title because he was the holder at the time of cheque being lost.

WHO IS A HOLDER IN DUE COURSE

According to Section 9 of the Negotiable Instruments Act, 1881, “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. Let’s understand the nuances of this section through an illustration.

Illustration:

A gave a cheque to B, who in turn endorsed it to C as salary. C accepted the cheque in good faith before it became due and he believed that no defect existed in the title of B from whom he derived his title. Here B was the holder but C became the “holder in due course”.

There are certain requirements to be a “holder in due course” that we are going to deduce from the definition mentioned in Section 9 of the NIA, 1881.

• Consideration: The person must hold the instrument for a valuable consideration. The consideration makes the “holder in due course” entitled to receive the payment. It is to be noted that consideration must be legal.

• Possessor: The person must have been legally entitled to the possession, this right is also depicted by the consideration against which he/she is getting the negotiable instrument.

• If payable to order, before the amount mentioned in it became payable: The person becomes “holder in due course” of the instrument if he/she receives it before it matures.

• Without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title: Though NIA nowhere mentions ‘good faith’ specifically, it is presumed that there was no defect or error in the instrument. This presumption does not mean that the “holder in due course’ can ne negligent. The phrase sufficient cause implies that the person receiving the negotiable instrument must be careful while obtaining it.

• The negotiable instrument should not be incomplete, it should fulfil all the requisites and it must be regular.

Holder in due course has the highest title to any negotiable instrument, and he/she has more rights and privileges.

FEW POINTS OF DIFFERENTIATION BETWEEN A HOLDER AND A HOLDER IN DUE COURSE

• “Holder” of an instrument cannot sue all prior parties whereas “holder in due course” has the right to sue all prior parties for payment due. Though, it should be noted that the “holder in due course” will lose his right to sue if he is involved in any fraud with the person whose cheque was endorsed to “holder in due course”, though being aware of the fraud does not affects his/her right to sue for payment.

• Consideration is necessary to become “holder in due course” as he acquires an unchallenged title to the negotiable instrument, whereas consideration is not necessary for “holder”, thus he doesn’t get the same rights as that of a “holder in due course”.

• For becoming a “holder in due course” it is necessary that negotiable instrument must be obtained in good faith i.e. it should be presumed that there was no defect or error, but due diligence must be employed.

• A person can become “holder in due course” only before the maturity of negotiable instrument whereas a person can become “holder” before or after the maturity of the negotiable instrument.

CONCLUSION

It can be seen that there is a lot of difference between “holder” and “holder in due course”. “Holder in due course” enjoys considerably more number of rights and privileges as compared to a “holder”. A “HDC” holds the highest status to a negotiable instrument. The “HDC” have all the components of a “holder”, therefore it is necessary to be a “holder” first in order to become a “holder in due course”.

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