HOLDER AND HOLDER IN DUE COURSE CONTROVERSY

(Project towards the fulfillment of assessment in the subject of Commercial Transactions)

Submitted by: - Submitted to:-

NISHTHA OJHA (1563) SHRI BIPIN KUMAR

3rd Semester (U.G.) Faculty of Law

B.A. LL.B. (Hons.) National Law University, Jodhpur

NATIONAL LAW UNIVERSITY, JODHPUR

SUMMER SEMESTER: JULY 2018 – NOVEMBER 2018

SESSION 2018-2019
 TABLE OF CONTENTS

LITERATURE REVIEW .......................................................................................................... 1

I. “Khergamvala on The Negotiable Instruments Act”, OP Faizi and Ashish Aggarwal,

20th edition,2008, (pg.53-69,92-96) ...................................................................................... 1

II. Halsbury’s Laws of India, “Bills of Exchange and Other Negotiable Instruments”,

Vol.4 (pg.30.092-30.165)....................................................................................................... 1

III. “The Concept of Holder in Due Course in Article III of the Uniform Commercial

Code.” Columbia Law Review, vol. 68, no. 8, 1968, pp. 1573–1589. .................................. 1

IV. Bhashyam & Adiga’s, “The Negotiable Instruments Act”, 19th edition, (pg.150-

173,387-392) .......................................................................................................................... 1

V. 11th Law Commission Report Of India ........................................................................... 2

VI. John W. Daniel ‘A Treatise on the Law of Negotiable, 2nd ed. 348 1879 ..................... 2

INTRODUCTION ..................................................................................................................... 3

HOLDER and holder in due course ........................................................................................... 4

WHO CAN SUE? .................................................................................................................. 5

ENDORSEMENT BACK ...................................................................................................... 6

HOLDER IN DUE COURSE .................................................................................................... 7

NOTICE OF DEFECTS ........................................................................................................ 9

PRIVILIGES AVAILABLE TO HOLDER IN DUE COURSE ......................................... 10

DISTINCTION BETWEEN HOLDER AND HOLDER IN DUE COURSE ......................... 13

11th LAW COMMISSION REPORT OF INDIA .................................................................... 15

1
CONCLUSION ........................................................................................................................ 18

BIBLIOGRAPHY .................................................................................................................... 19

2
 LITERATURE REVIEW

The author has identified the following material, which provides the legal image of Holder
and Holder in due course and the anomalies existing therein. It deals with the various
provisions which deals with battle of forms under different statutes and alongwith these, the
view of jurists, provided by them under the case laws and books has been stated:

I. “KHERGAMVALA ON THE NEGOTIABLE INSTRUMENTS ACT”, OP FAIZI AND ASHISH

AGGARWAL, 20TH EDITION,2008, (PG.53-69,92-96)
This book covers the important aspects which are imperative for the in depth
understanding of the Negotiable Instruments Act, 1881 especially in the context of
Holder and Holder in Due course and interpreting section 8 and section 9 of the act in
the light of other such provisions.

II. HALSBURY’S LAWS OF INDIA, “BILLS OF EXCHANGE AND OTHER NEGOTIABLE

INSTRUMENTS”, VOL.4 (PG.30.092-30.165)
This shows the generality of Bills of exchange and other negotiable instruments which
further takes into the consideration the rights, privileges and duties of both, the holder
and holder in due course. And the conditions in which they can be invoked. Further
identify the importance of lawful and bonafide consideration in becoming holder in
due course from a holder so as to get the more privileges.

III. “THE CONCEPT OF HOLDER IN DUE COURSE IN ARTICLE III OF THE UNIFORM
COMMERCIAL CODE.” COLUMBIA LAW REVIEW, VOL. 68, NO. 8, 1968, PP. 1573–1589.
The Columbia Law Review is a leader in legal scholarship around the world. The
journal article identifies the term and concept of the “Holder” and “Holder in due
Course” with reference to the Uniform Commercial Code under the article 3 section
302 of it and provides for various aspects to be looked in case where it is to identify
who all can fall within the definition of holder and holder in due course.

IV. BHASHYAM & ADIGA’S, “THE NEGOTIABLE INSTRUMENTS ACT”, 19TH EDITION,

(PG.150-173,387-392)
This book covers the whole “The Negotiable Instruments Act” along with the clear
distinction between the holder and holder in due course and their respective privileges

1
 available and the circumstances in which the duty of one becomes the privilege of
another. Here there is also the mention of the suggestions given by Law Commision
Report and various commentators regarding the anomalies existing in the Act.

V. 11TH LAW COMMISSION REPORT OF INDIA

The Law Commission of India, under the chairmanship of addressed several
anomalies present in the Negotiable Instruments Act, 1881. Certain literal anomalies
have been pointed out in the report alongwith the suggestions. The report largely
considered the English Bills of Exchange Act, 1882 to deal with the lacunas, which
has helped the researcher to draw a parallel with the English Bills of Exchange Act.

VI. JOHN W. DANIEL ‘A TREATISE ON THE LAW OF NEGOTIABLE, 2ND ED. 348 1879
Through this book Daniel covered the negotiable instrument and specifically a portion
of this book was used in this project on the topic of privileges of holder in due course,
and to interpret the definitions of the Holder and Holder in due course

2
 INTRODUCTION

The Negotiable Instruments Act, 1881 was framed by Sir Charlmers’, in the year 1881. Since
the act has become more than a century old already, there is bound to exist certain anomalies
in the act which were later pointed out. These anomalies range from literal to intentional
behind the legislation. Therefore by way of this project, an effort has been made to
understand and interpret the meaning and scope of “Holder” and “Holder in due course”.
Further a Comparative Analysis of the Bills of Exchange Act (U.K.) and the Negotiable
Instruments Act (India) has also been made and suggestions have been prescribed as to which
provisions can be incorporated in the Indian commercial laws’ ambit.

The author has tried to enumerate the various anomalies which the Negotiable Instruments
Act contains and which should be removed as per the Bills of Exchange Act. An analysis of
Law Commission Report has also been made as even the Law Commission of India has said
in its 11th Report that it would be better if India adopts the concept of Holder and Holder in
Due Course as it exists in U.K. since any divergence from the Bills of Exchange Act would
lead to various legal hazards. At the same time this paper talks about the rights and privileges
of the Holder in Due Course as in the Negotiable Instruments Act and the Bills of Exchange
Act.

The Indian Negotiable Instruments Act, form the Bill of Exchange Act of England as its
basis, however, there existes certain anomalies in the Indian Act which were left unadressesd
by the Britishers, and the definition of Holder as per Sec. 8 of the Negotiable is, due to
various anomalies, not very appropriate. According to the Law Commission the word
‘entitled’ is the source of difficulties. The Law Commission in its 11th Report drafted a new
definition which says: ‘Holder’ means the payee or endorsee of an instrument who is in
possession of the instrument or the bearer thereof, but does not include a beneficial owner
claiming through a benamidar. This definition as given by Law Commission does not seek to
alter the law but to obviate the conflict of judicial opinion and the criticism or comment
which the existing definition has given rise to. This definition is very much similar to one
given under the Bills of Exchange Act. Similar anomalies have been addressed by the author
in the light of comparision with the English Act and the suggestions by Law commission
report.

3
 HOLDER AND HOLDER IN DUE COURSE

HOLDER, as defined under the Section 8 of the Negotiable Instruments Act1 :-

The "holder" of a promissory note, bill of exchange or cheque means any person entitled in
his own name to the possession thereof and to receive or recover the amount due thereon
from the parties thereto.

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.

If the definition above is interpreted, we observe that in order to become a holder, the party
should be the owner at law of the negotiable instrument according to law merchant whatever
such party’s position and liability or in equity may be. However, this definition does not
bring into its fold a person, who though in possession of the instrument, has not the right to
recover the amount due. If the definition is properly analysed and dissected, we observe that
it talks about the person entitled in his own name. What does the expression “Person Entitled
in His Own Name” means? Its definition is exclusive in nature, i.e. it says that a bearer would
be excluded from the definition as his name does not appear on the instrument. In legal
parlance all that is not be so enlarged as to include persons other than those who are entitled
to sue under the terms of the document. The phrase entitled in his own name to the possession
does not convey the idea that possession of the instrument is necessary to constitute a person
as a holder. All that is required is “entitled to the possession thereof.”

The probable intention that can be gauged is with respect to agency, that a mere agent
possessing the note is not a holder. The word ‘entitled’ makes it clear that the title of the
person claiming as holder must be acquired in a legal way. To be a holder, he must have
come into possession of an instrument payable to bearer by negotiation that is by delivery
from the lawful holder. The expression, holder includes even person in lawful possession of
the instrument. As mentioned under Section 58 of the Negotiable Instruments Act2 , which
talks about the instruments obtained by unlawful means or for unlawful consideration,
finders, thieves and such other persons are not holders under this section. Similarly a person

1
Section 8 Negotiable Instrument Act, 1881
2
Section 58 Negotiable Instrument Act, 1881

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taking an instrument under an invalid endorsement is not a holder. Under section 8, a holder
must have the right to receive or recover the amount due on the instrument from the parties
thereto. A right to sue does not include a person who does not have the right to recover the
amount due though he is in possession of the instrument.3

Therefore, to qualify as a holder, a person should have derived title to the instrument in a
lawful manner.

WHO CAN SUE?

The question as to who can sue is again a controversial one, and there is a lot of difference in
opinions as to whether the beneficial owner is entitled to maintain a suit on a negotiable
instrument, in case he is not the holder. Soonly the holder can bring a suit on negotiable
instrument, and that no person can sue on a negotiable instrument unless his name appears
thereon as the payee or endorsee, or unless the instrument is made payable to bearer and he is
in possession, thereof. Even a plaintiff who is a benamidar or a trustee or guardian, and has
taken the instrument in his own name, is entitled to sue upon it. While the beneficial owner of
an instrument cannot bring a suit on it, if he is not the holder.4 A person who is not a holder
of a negotiable instrument cannot maintain a suit for recovery of money due under it even
though the holder is admittedly the benamidar and is impeded in the suit5. A beneficiary does
not become a holder of the instrument even upon getting a declaration that he is the beneficial
owner and the payee is only a benamidar. Unless he gets the instrument indorsed in his favor
he cannot directly sue upon the note. Beneficial ownership does not carry with it a legal title
to the property concerned and a declaration that a person is the beneficial owner does not
operate as transfer of the right in the instrument by operation of law.

The next question which arises is that whether a non-holder can sue or not? If we look at the
Negotiable Instruments Act then section 786, which says that “payment of the amount due on
a promissory note, bill of exchange or cheque must, in order to discharge the maker or
acceptor, be made to the holder of the instrument” it does not preclude any one other than the
holder from suing on a negotiable instrument and that a suit by the real owner is
maintainable, if he is in a position to obtain a good discharge of liability for the person liable
thereon. A true owner could maintain a suit on a negotiable instrument if the holder is

3
Lachmichand v. Modanlal, AIR 1947 All. 52
4
Bacha Prasad v. Janaki, AIR 1957 Pat. 380
5
Ibid
6
Section 78 Negotiable Instruments Act, 1881

5
impleaded in the suit as a co-plaintiff or a defendant. The Hon’ble Supreme Court had came
to the conclusion that the right of action of a holder in due course on negotiable instrument is
not a ‘contractual’ but a ‘statutory right’ conferred by the Act. Even the coparceners
governed by the Mitakshara law, carrying on a joint family business can be described as the
holders of a promissory note executed in the family’s collective or business name.7 On the
death of the holder, the holder of the succession certificate can sue on the instrument.8 When
the holder of a negotiable instrument dies, his right passes to his heirs by devolution and all
of them must join in a suit to enforce the deceased holder’s right. If any one of them does not
join as plaintiff, he should be impleaded as a defendant.9 Where, however, on the death of the
payee of a note, his son brought a suit, not as the payee's heir or legal representative but as
the surviving coparcener, the suit was held not maintainable. Where a bill is endorsed for
collection, the endorsee though he may not have the property in the instrument, is a holder
under the Act and is entitled to sue and receive payment and the right to sue survives
notwithstanding the death of endorser pendente lite and the endorsee can continue the suit,10
but if it is returned by the endorsee uncollected to the endorser, the former ceases to be the
holder within the meaning of section 8 of the Act, even though the bill is not re-indorsed.
Where a bill or note has been indorsed in favour of a certain person and there is nothing in
the endorsement itself to show that it should be for collection only, the endorsee is a holder
within the meaning of the section and is the person entitled to sue on the instrument.

ENDORSEMENT BACK
It has been held in the case of Dugan v. United States11 by Linigstone, J that if a person who
indorses a bill of exchange to another, whether for a consideration or for purposes of
collection shall come to the possession thereof again, he shall be regarded unless the contrary
appears in evidence, as a bona fide holder of the bill.

An endorsement back is not necessary to revert title in a negotiable instrument. Such person
shall be entitled to recover notwithstanding there may be on it one or more endorsement in
full subsequent to the one to him, without producing any receipt or endorsement back from

7
Zujya Pascol Damel v. Manmohandas, (1940) 42 Bom LR 248 cited from O.P. ‘Faizi’, Khergamvala on The
Negotiable Instruments Act, (New Delhi, Lexis Nexis – Butterworths, 19th edn., 2003), p. 56
8
Anjanaiah v. Nagappa, AIR 1965 AP 506
9
Champalal Gajanand v. P.C.S. Jain, AIR 1971 MP 133
10
Ramanadhan v. Kathan Velan, 41 Mad. 353 cited from supra note 1 at 139
11
3 Wheaton 172 at 183 cited from supra note 1 at 141

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either of such endorsers whose names he may strike from the bill or note as he may think
proper.

HOLDER IN DUE COURSE

Section 9 of the Negotiable Instruments Act, 1881 deals with Holderin Due course, it says:-

"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 endorsee
thereof, if 9[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.12

It is essential to note that a person who claims to be a holder in due course must show that he
acquired the instrument for valuable and lawful consideration, but court can’t look into such
lawful and valuable consideration.13 However, where the bona fides of the transaction is
impeached, the extent of the consideration given is a factor that the court will consider in
determining the question of bona fides.14 Consideration shall be something which not only
party regards but the law can regard as having some value.15 It can be either positive in that, it
requires doing of something or negative in that, it requires forbearance.16 Inadequacy of
consideration must be distinguished from the absence or failure of a part of the consideration
in which case, the instrument is not valid to that extent between parties in immediate
relationship. It is also necessary that the consideration should be lawful under s 2(d), of the
Indian Contract Act 187217, past consideration is a good consideration and will support a
negotiable instrument. An antecedent debt or liability is sufficient to constitute a valuable
consideration for a negotiable instrument.18 It was formerly thought that an antecedent debt or
liability was not a sufficient consideration for a bill payable on demand but this Doctrine was
overruled in Currie v. Misa in England. But the antecedent debt or liability must be one due

12
Section 9 Negotiable Instruments Act, 1881.
13
Muthu Karuppa v. Habib, AIR 1955 Mad. 43
14
Jones v. Gordon, (1877) 2 App. Cas. 616, cited from Supra Note 23 at 61
15
Supra Note 1 at 144
16
Chidambram v. Ranga, AIR 1966 SC 193
17
Section 2(d) Indian Contract Act, 1872
18
Indian Bank v. K. Nataraja, (1994) 79 Comp Cas 674

7
from the maker or negotiator of the instrument and not from a third party. It is only a person
who comes into possession of an instrument after having paid consideration for it and being a
bona fide transferee that can be holder in due course within the meaning of Sec. 9. Section 9
implies and contemplates that there must be a negotiation or a transfer to the holder in due
course by some one who has the authority to transfer the negotiable instrument. The transfer
and the negotiation must be of an inchoate instrument, which is not a negotiable instrument
under the Act. From the point of view of the proviso to the section, it may also be said that in
the case of inchoate document, it would be difficult to hold that the possessor of it is a bona
fide transferee or in possession of the negotiable instrument. The Section talks about the
effective possession of an instrument. The section says that the holder must have become the
possessor of the instrument before the amount mentioned in it became payable. Therefore, a
person who takes a bill or note on the day on which it becomes payable cannot claim the
rights of a holder in due course, because he takes it after it becomes payable, as the bill or
note can be discharged by payment at any time on that day. There is some difficulty in
applying the words ‘before the amount mentioned in it became payable to cheques and
demand bills since they are payable immediately. The words appearing in Sec. 29(1) of the
Bills of Exchange Act19, which defines a holder in due course as the one who has taken a bill,
on the condition that he “became the holder” of it “before it was overdue”

In Gopalan v Lakshminarasamma it was held that a demand promissory note is not payable
until demand is made. Where an endorsee of a promissory note payable on demand is not
aware that the promissory note has been discharged or that any demand was made, he must
be deemed to be a holder in due course even if as a matter of fact, the endorsement was made
after the discharge.20 And the rights of such a holder are coextensive only with those of the
immediate transferor. Under English Law the defendant may have a counterclaim for
unliquidated damages arising out of the same transaction is no defense against an action on a
bill of exchange. There can be a holder in due course of a post-dated cheque.21 It has been
held in various decisions of Hon’ble Supreme Court and various High Courts that in such
cases the rule of limitation has no application Where a note payable on demand is negotiated

19
Section 29(1) bills of exchange act 1882
20
Profulla Kumar v. Harichandra, AIR 1956 Ori. 85
21
Montechhi v. Shimco (U.K.) Ltd., (1980) 1 Lloyd’s Rep. 50 cited from Supra Note 23 at 63.

8
it is not deemed to be overdue by reason that it appeared that a reasonable time for presenting
it for payment has elapsed since its issue.22

The question arises as to when did the amount mentioned in the promissory note become
payable? And the Hon’ble Court answered it as the promissory note became payable from the
moment of execution.23 No demand is necessary before bringing an action upon a note
payable on demand, because its payment is a duty which attaches the moment the loan is
given and the note is made. To put the matter differently, the creditor cannot extend the
period of limitation by omission to make a demand and time runs against him from the date
of the note, on the principle that the cause of action arises instantly on the loan and the
contract on the note is in a state of being broken perpetually. Clearly, these principles have no
application to a case under section 9 of the Act. The true rule applicable is that where a note
payable on demand is negotiated, it is not deemed to be overdue for the purpose of affecting
the holder with defects of title of which he had no notice by reason that it appears that a
reasonable time for preventing it for payment has elapsed since its issue. If a promissory note
payable on demand is after a certain time to be treated as overdue although payment has not
been demanded it is no longer a negotiable instrument. But a promissory note payable on
demand is intended to be a continuing security; it is quite unlike the case of a cheque which is
intended to be presented speedily.24

This is one of the major anomalies that exist and to overcome this difficulty the Law
Commission of India recommends the adoption of the language of the English Act, i.e,
“became overdue”.

NOTICE OF DEFECTS

If, at the time when the holder acquires his title as such, he has sufficient notice that a defect
exists in the title of his transferor, he is not a holder in due course. Notice means knowledge
of the facts or a suspicion that something is wrong combined with a willful disregard of the
means of knowledge. Notice of defects may be either actual or constructive. Proof of such
notice may be given by evidence that the transferee received actual notice, or that he was

22
Shaha & Co. v. Bengal National Bank Ltd., 47 Cal. 861 cited from Supra Note 1 at 152
23
Brojindra Kishore v Hindustan Co-operative Insurance Society, 44 Cal. 978
24
Brooks v Mitchell (1841) 9 M&W 15.Same view was held in plethora of decisions starting from Brough v
White, (1837) 2 N and W 461; Glasscock v Balls (1894) 24 QBD 13; Norton v Ella;, Rowe v Young

9
made aware of facts from which knowledge of such defect may reasonably be inferred.25
Notice and knowledge mean not merely express notice but also knowledge or the means of
knowledge to which the party willfully shuts his eyes and a suspicion in the mind of party
and means of knowledge in his power willfully disregarded. Notice affecting the holder in
taking a negotiable instrument must exist at the time when he acquires the paper for then it is
that his relation to the bill is fixed, and subsequent notice will not affect his right to sue upon
it. If a note is retransferred to a former holder in due course, he is not deprived of his original
rights, although on the second occasion he takes with knowledge of defects or after maturity.
However, where a former holder has participated in the fraud or illegality affecting the
instrument or is not originally a holder in due course, he cannot by the repurchase of the note
from such a holder acquire his immunities, but the note is subject to the same equities if it
had never been in the hands of an innocent holder, and a re-transfer by him after maturity to a
former holder in due course does not reinvest the transferee with that status. Actual
knowledge of defects or of equities precludes a transferee from attaining the position of a
holder in due course although he paid the full value for the instrument.

PRIVILIGES AVAILABLE TO HOLDER IN DUE COURSE

Privileges granted to a ‘holder in due course’ under the Negotiable Instruments can be
broadly described as given below:

1) He owns a better title than that which the transferor have.

A holder can only get no title better than that of his transferor whereas a holder in due course
enjoys a privileged position in this aspect, 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 illegal means of an offence or fraud or for an unlawful consideration cannot be
pleaded against a holder in due course. This privilege is available to him by the virtue of
section 58 of negotiable instrument act, 1881 which provides, “when a negotiable instrument
has been lost, or has been obtained by an offence or fraud, or for an unlawful consideration,
no possessor or indorsee who claims through the person who found or so obtained the
instrument is entitled to receive the amount due thereon unless such possessor or indorsee is,
or some person through whom he claims was, a holder thereof in due course.”26

25
Muthis Chetty v. Kasivasi Somasundara, (1911) 10 MLT 79 cited from Supra note 28 at 67
26
Section 58 Negotiable Instrument Act, 1881

10
Further, not only the holder in due course himself gets a good title free from all defects but he
also act as a channel to protect all subsequent holders as it removes 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.”27

2) Privilege in case of inchoate stamped instruments.

Section 20 of the Negotiable Instruments Act provides for the “inchoate stamped
instruments”.28 This situation arises when the defendant have signed the blank instrument and
voluntarily parted with it with the intention that it should be filled up in future and to be used
as such. In these cases problem arises when in case the holder fills more amount than for
which he was authorized, then in that case he cannot enforce the instrument for the whole
amount but only for the actual amount which was authorized, thus only that amount can be
recovered. When the holder exceeds the authority in filling up the blank, he can of course no
benefit from it and American decisions go to the length of holding that his act is an utter
nullity and no advantage can accrue to him even to the extent of the authority given to him.29

But this is not the case with the holder in due course, he gets a privilege in this aspect
because, if in case such an instrument is transferred to a holder in due course, he has a
privilege to claim the whole of the amount so entered conditioned that the amount is covered
by the stamp affixed. Thus, the defence that the amount filled by the holder was in excess of
the authority given cannot be taken against a holder is due course. One situation which can
emerge is that, a holder may become a holder in due course if he acquire the inchoate
instrument or say by making himself a payee, but this situation is not generally possible in
India because the payee is already included in the definition of holder in due course.

3) Liability of prior parties is continued.

Section 36 provide for the liability of prior parties to holder in due course. It states that,
“Every prior party to a negotiable instrument is liable thereon to a holder in due course until
the instrument is duly satisfied.” An instrument is deemed to be fully satisfied if the liability
of all the parties is extinguished, and the instrument is discharged by payment or satisfaction

27
16 Section 53 Negotiable Instrument Act, 1881

29
Leelavathi v Durairaj (1978) 2 MLJ 459 ; Daniel, 6th Edition, para 147

11
thereof by the maker or acceptor before its maturity.30 Thus, what it does is that it make all
prior parties to a negotiable instrument to be in continuation of liability to a holder in due
course both jointly and severally till the time instrument is duly satisfied. Where an acceptor
of a bill pays and takes up the instrument before maturity, he can reissue and further negotiate
it, though he has no right to enforce payment on it against any intervening party to whom he
was previously liable.31 Whereas, for the holder, only preceding party is liable to a
succeeding party, succeeding party being the holder.

4) Privilege in case of Fictitious bills available only to holder in due course.

A bill is said to be a fictitious bill when a bill of exchange is drawn in a fictitious name and is
made payable to the drawer’s order. Such a bill is not enforceable by law. But the acceptor of
such a bill is liable to a holder in due course provided the latter can show that the first
endorsement on the bill and the signature of the supposed drawer are in the same
handwriting. This means that under Indian Law there is no estoppel against the acceptor from
denying the signature of the drawer.32 It is observed that only a holder in due course can
recover in an instrument in which the drawer or payee is fictitious, this is so, because the law
abhors the fraud, and discountenances any instrument whereby fraud can be committed.33

5) Right of holder in due course are not affected when an instrument delivered is
negotiated.

Section 46 and 47 of the act provides for “delivery” and “negotiation by delivery.” 34 Through
these sections it may be shown that the instrument was delivered for particular purpose35
Whenever a negotiable instrument is endorsed or delivered along with a condition attached to
it which may be even for any specific purpose also such as, for any collateral security, and
not with the intent of completely transferring property present, the property in the instrument
will not pass to the endorsee and he will only acquire a limited title of a Bailee and limited
power to negotiate it. If such an instrument is negotiated to a holder in due course, the parties
on the instrument cannot escape their liability. Thus the rights of holder in due course are not
affected by it and it thus act as a privilege for him.

30
Khergamvala on the negotiable instruments act, 20th edition, pg.- 146 para-1
31
Burbridge v Manners (1812) 5 Camp 184; Hubbard v Jackson (1827) 4 Bing 390
32
Indian Evidence Act, Section 117
33
Supra Book.
34
Section 46, section 47 Negotiable Instrument Act, 1881
35
North and South Wales Bank v Macbeth (1908) AC 137

12
 6) Enjoys Non Estoppel against denying original validity of instrument.

Although section 120 makes it clear that no maker of a promissory note or a drawer of a bill
of exchange or cheque be permitted to deny validity of instruments are admitted to be
executed. 36 A person is not precluded under the section from denying the validity if the note
on the ground that he was a minor as on the date of the note, as the specific provision in
section 120 is subject to the general rule enacted in section 26.37But, the parties can challenge
the validity of the instrument on the ground that his signature had been forged or the
instrument is otherwise void ab-initio.

7) Estoppel against denying capacity of payee to indorse.

Section 121 of the act provides that, “No maker of a note and no acceptor of a bill payable to
order shall, in a suit thereon by a holder in due course, be permitted to deny the payee’s
capacity, at the date of the note or the bill to indorse the same”.38

This can be showed through various situations like, an acceptor is not allowed to show that
the payee was an infant39, when he is sued by holder in due course and again the maker of a
note is estopped from showing that the payee of a bill was insolvent, thus incapable of
indorsing the instrument40, nor can the acceptor be allowed to plead that the payee was a
married woman incapable of contracting.41 This mean that a holder in due course has a
privilege that he can claim payment in his own name despite the payee having incapacity to
indorse the instrument. Further the holder in due course 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.

DISTINCTION BETWEEN HOLDER AND HOLDER IN DUE COURSE

36
Saftarasab v B Alliah (2006)2 Bank CLR 418 Kant
37
Chengal Roya v Nainappa (1938) 177 IC 133
38
Section 121 Negotiable Instrument Act, 1881
39
Jones v Dorah (1817) 4 Price 300
40
Drayton v Dale (1823) 2 B & C 293
41
Smith v Marsack (1848) 6 CB 486

13
Under the negotiable instruments such as cheques, bills of exchange and promissory note, the
terms holder and holder in due course are commonly used. As discussed above, they seem
alike, but there is a fine line of differences between holder and holder in due course. The
holder refers to a person who we mean the payee of the negotiable instrument, who is in
possession of it. On the other hand holder in due course means a person who has obtained the
instruments for bonafide consideration and lawfully.

The primary distinction between holder and holder in due course can be traced through points
as follows:

1. A person who has legally obtained the negotiable instrument, with his name entitled
on it, to receive the payment from the parties liable, is called the holder of a
negotiable instrument. Whereas the person who has acquired the negotiable
instrument bonafide for some lawful consideration, whose payment may be due, is
called holder in due course. Through section 8 and 9 of the act42
2. By virtue of section 3643, a holder cannot sue all the prior parties whereas a holder in
due course, has the right to sue all the prior parties for payment.
3. A holder can possess negotiable instrument, even without consideration.Whereas a
holder in due course cannot possess the negotiable instrument without paying
consideration.
4. A holder may or may not have obtained the instrument in good faith. On the other
hand The holder in due course must be a bonafide possessor of the negotiable
instrument, presence of good faith is must, whereas not necessary for a holder.
5. A person can become a holder, before or after the maturity of the negotiable
instrument. On the contrary, a person can become a holder in due course, only before
the maturity of the negotiable instrument.
6. A holder in due course enjoys more privileges in many situations like in the case of
inchoate instruments, fictitious bills and so on as compared to holder, as provided
under section 20 of the act.44

42
Uniform commercial code section 3-302 at 6
43
Section 36, Negotiable Instruments Act, 1881
44
Section 20 Negotiable Instrument Act, 1881

14
 11TH LAW COMMISSION REPORT OF INDIA

The Law Commission of India, under the chairmanship of Shri D. Narsa Raju and Shri S.M.
Sikri, in the eleventh report published on 26th September, 1958 has expressed concern
regarding the anomalies present in the Negotiable Instruments Act.

The law commission however did not alter the law but made suggestions in order to obviate
the conflict of judicial opinions and the criticism of commentators which the existing
definition has given rise to.

1) The first concern expressed was regarding the expression “persons entitled in his own
name to the possession of the instrument and to receive and recover the amount”. The
commission found this expression to be ambiguous. As, if literal interpretation of the
statement is to be made, a bearer would be excluded from the definition as his name
does not appear on the instrument.
But if that is all is meant by the provisio is that he should be entitled to possession in
his own name and to sue upon it though his name doesn’t appear on it , as bearer may
come within the definition as pointed out by a full bench of Madras High Court, that
the purpose of behind the expression “ in his own name” was introduced only for the
purpose of ruling out the plea that the holder instrument was a benamidar for some
person.
2) The other ambiguity pointed out was with respect to the use of the word ”entitled” As
this word can have wide interpretation, in the sense a person may be entitled as a
payee or indorsee, or as a bearer if it is payable to bearer. If the aspect of Transfer of
Property Act is included, then as per section130 and 132 of the act, an assignment of
actionable claims.
The commission suggested that a transferee by legal devolution is entitled to recover
the amountnot because he is the holder but because he, as the owner of the debt , is
entitled to give a valid discharge even apart from the provisions of section 78 of the
Negotiable Instruments Act, 1881.

3) The report then addresses the English act and points out that there “bearer” is defined
as the person in possession of a bill or note which is payable to bearer, there in case of

15
 instrument payable to order it is clear that a person can not be a holder unless he is the
payee or indorsee thereof and the indorsement is on the instrument itself. The English
definition does not require that the possession should be a lawful possession. The
possession of a finder may therefore be a good possession to make him bearer and
therefore a holder. When compared to our act where, section 58 makes it clear that
such a person is not entitled to receive the amount due thereon from the maker,
acceptor or holder or any party to the holder. He is therefore not entitled to sue and
recover money but as it very often happens, a third party dealing with such a person
may presume the latter’s possession to be lawful, acquire rights under the instrument
from him for consideration and thus become a “holder in due couse”, and rights of
such third parties are protected by virtue of section 48. But suppose a person makes a
payment to a finder or a theif, believing him to be the lawful holder of the instrument.
Such a payment is also protected by virtue of section 82(c), if an instrument is payable
to bearer or has been indorsed in blank, the maker,, acceptor or indorser who makes a
payment in due courseof the amount due thereof gets a complete discharge. These
provisions thus amply protect under our law a thied party dealing with a person a right
to recover the amount due under it in his own right by suing upon the instrument
unless his possession is lawful.
4) Thus, the commission suggested, there should be no jurisdiction to clothe any person
in mere possession with a right to sue and enable himto recover the amount and
proposed to adopt the “bearer” definition as is there in the English Act, as it mandates
the delivery from a lawful holder hence this would also solve the problem of Finders
thieves and other such persons as under section 58 of the Act.
The implication of the word “entitled” in the meaning of “holder” will thus be fully
covered by the changes so proposed.
5) The commission then suggested the removal of the word “ and to receive or recover
the amount due thereon from the parties thereto” as the rights os a holder have been
specified in a separate section.
6) The report then points out flaws in the second half of the provision, which it terms
“unsatisfactory”, as is also been criticized by Chalmers- “It is a stram upon a language
to describe the original owner of a lost instrument as the holder of it. Suppose a
cheque payable to bearer is lost and the person who finds it negotiates it to some other
person who takes it in good faith and for value. The latter becomes the holder in due

16
 course of the instrument. There are then two holdes of the same cheque according to
the Act”
As Bhashyam and Adiga suggest, this absurdity maybe avoided if we construe the
word “lost” as “lost to the world” and “not found again”. The report made a veral
change to this effect and also made it clear that the holder before such loss or
destruction “shall be deemed to continue to be its holder”.
7) Moving on to Holder in due course the commission, it has been suggested that the
word “become overdue” be substituted by “became payable”, as the latter could aptly
be applied to the case of instruments payable on demand. It is well established that in
the case of an instrument payable on demands, limitation for an action on the
instrument starts immediately after its execution. If that rule were to be applied to
section 9, it would exclude the possibility of a person ever becoming a holder in due
course in case of instruments payable on demand , for they become immediately due
after execution. To overcome this difficulty it was suggested to adopt the language of
the English Act and the American Uniform Instruments Law, i.e, “ became overdue”.

17
 CONCLUSION

After a thorough analysis of the concept of “Holder” and “Holder in Due Course” by

interpreting the scope and meaning of the same, the author is of the opinion that the

anomalies pointed out in the provisions shall be addressed, as it is the need of the hour to

provide a clear picture of the haphazardly framed Act. The burden lies more on the shoulders

of the legislature than that of the judiciary as the suggestions can be materialized only after

making amendments by the legislature. The judiciary however has played its role in

providing justice, despite the existing anomalies.

In fact, on the international platform too the U.N. Convention had expressed its desire in

respect to the anomalies present in the old acts, for instance, the Convention suggested to

nicely handle the troubling jus tertii or rights of a third-party problem: A party may not raise

as a defence against a holder who is not a protected holder the fact that a third person has a

claim to the instrument unless: (a) The third person asserted a valid claim to the instrument;

or (b) The holder acquired the instrument by theft or forged the signature of the payee or an

endorsee, or participated in the theft or the forgery.

Therefore, the author concludes on the note and suggestions that the changes suggested by

the law commission shall be emcompassed within the framework as nothing is constant but

the change, especially in commercial laws.

18
 BIBLIOGRAPHY

Cases

Anjanaiah v. Nagappa, AIR 1965 AP 506 ................................................................................. 6

Bacha Prasad v. Janaki, AIR 1957 Pat. 380 ............................................................................... 5

Brojindra Kishore v Hindustan Co-operative Insurance Society, 44 Cal. 978 .......................... 9

Brooks v Mitchell (1841) 9 M&W 15 ....................................................................................... 9

Burbridge v Manners (1812) 5 Camp 184 ............................................................................... 12

Champalal Gajanand v. P.C.S. Jain, AIR 1971 MP 133 ............................................................ 6

Chengal Roya v Nainappa (1938) 177 IC 133 ......................................................................... 13

Chidambram v. Ranga, AIR 1966 SC 193 ................................................................................. 7

Drayton v Dale (1823) 2 B & C 293 ........................................................................................ 13

Hubbard v Jackson (1827) 4 Bing 390 .................................................................................... 12

Jones v Dorah (1817) 4 Price 300 ............................................................................................ 13

Jones v. Gordon, (1877) 2 App. Cas. 616 .................................................................................. 7

Lachmichand v. Modanlal, AIR 1947 All. 52 ........................................................................... 5

Montechhi v. Shimco (U.K.) Ltd., (1980) 1 Lloyd’s Rep. ........................................................ 8

Muthis Chetty v. Kasivasi Somasundara, (1911) 10 MLT 79 ................................................. 10

Muthu Karuppa v. Habib, AIR 1955 Mad. 43 ........................................................................... 7

Profulla Kumar v. Harichandra, AIR 1956 Ori. 85.................................................................... 8

Ramanadhan v. Kathan Velan, 41 Mad. 353 ............................................................................. 6

Saftarasab v B Alliah (2006)2 Bank CLR 418 Kant................................................................ 13

Shaha & Co. v. Bengal National Bank Ltd., 47 Cal. 861 .......................................................... 9

Smith v Marsack (1848) 6 CB 486 .......................................................................................... 13

19
Wheaton 172 at 183 c ................................................................................................................ 6

Zujya Pascol Damel v. Manmohandas, (1940) 42 Bom LR 248 ............................................... 6

Statutes

Indian Bank v. K. Nataraja, (1994) 79 Comp Cas 674 .............................................................. 7

Indian Evidence Act, Section 117 ............................................................................................ 12

Leelavathi v Durairaj (1978) 2 MLJ 459 ................................................................................. 11

North and South Wales Bank v Macbeth (1908) AC 137 ....................................................... 12

Section 121 Negotiable Instrument Act, 1881 ......................................................................... 13

Section 2(d) Indian Contract Act, 1872 ..................................................................................... 7

Section 20 Negotiable Instrument Act, 1881 ........................................................................... 14

Section 29(1) bills of exchange act 1882 ................................................................................... 8

Section 36, Negotiable Instruments Act, 1881 ........................................................................ 14

Section 46, section 47 Negotiable Instrument Act, 1881......................................................... 12

Section 53 Negotiable Instrument Act, 1881 ........................................................................... 11

Section 58 Negotiable Instrument Act, 1881 ....................................................................... 4, 10

Section 78 Negotiable Instruments Act, 1881 ........................................................................... 5

Section 8 Negotiable Instrument Act, 1881 ............................................................................... 4

Section 9 Negotiable Instruments Act, 1881 ............................................................................. 7

Uniform commercial code section 3-302 at 6 .......................................................................... 14

Books

Daniel, 6th Edition, para 147 ................................................................................................... 11

Khergamvala on the negotiable instruments act, 20th edition, pg.- 146 para-1 ...................... 11

Bhashyam & Adiga’s, “The Negotiable Instruments Act”, 19th edition,(pg.150-173,387-

392)………………………………………………………………………………………...…13

20
John W. Daniel ‘A Treatise on the Law of Negotiable, 2nd ed. 348 1879…………………15

Reports

11th LAW COMMISSION REPORT OF INDIA .................................................................... 15

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