HOLDER AND HOLDER IN DUE COURSE – A COMPARATIVE

ANALYSIS OF BILLS OF EXCHANGE ACT (U.K.) AND THE

NEGOTIABLE INSTRUMENTS ACT (INDIA)

:- Mr. Bhupender Singh

Room No. 411, Nagendra Singh Halls of Residence

National Law University, Jodhpur (Raj.)
India
Phone: +91 098293-31964
E-mail: s.bhupender@gmail.com

ABSTRACT:

Present paper is based on the Comparative Analysis of the Bills of Exchange Act (U.K.)

and the Negotiable Instruments Act (India). 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. 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.
 HOLDER AND HOLDER IN DUE COURSE – A COMPARATIVE

ANALYSIS OF BILLS OF EXCHANGE ACT (U.K.) AND THE

NEGOTIABLE INSTRUMENTS ACT (INDIA)

:- Mr. Bhupender Singh

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.

According to the Mercantile Law, an owner of a negotiable instrument is a person who

under certain circumstances can give a valid discharge for the instrument, and also can

give a good title to a person taking it from him bona fide, for value and without notice.

The effect of excluding such a de facto possessor of the instrument from the definition

is not as serious as it might appear at first sight, because an instrument payable to

bearer is discharged by a payment in due course under Sec. 82 (c).

The phrase ‘Holder in Due Course’ shortens considerable the cumbrous English

equivalent ‘bona fide holder for value without notice.’ Sec. 9 of the Negotiable

Instruments Act imposes a more stringent condition on a Holder in Due Course as

compared to one under Section 29 (1) (b) of the Bills of Exchange Act, 1882 (herein

after referred as BE Act). HE must not only have acquired the bill, note or cheque

for valid consideration but should have acquired the instrument without having

sufficient cause to believe that any defect existed in the title of the person from

whom he received the instrument.

It has been argued in plethora of decisions before the Hon’ble Supreme Court that

whether a Negotiable Instrument can be assigned or not? It has been held that the

same can be done under section 130 of the Transfer of Property Act 1882, i.e. transfer

of actionable claims. The assignee of a promissory note can, sue the maker for

recovering the amount due on the note by virtue of his rights under that Act. The

assignee, however, takes the instrument, subject to the liabilities and equities to which

the assignor was subject at the time of the assignment. But an assignment of a

promissory note at a partition to a member of a joint family does not amount to a

transfer by act of parties but by operation of law; no document in support of the

assignment is, therefore, required under s 130, the Transfer of Property Act 1882. Where

the properly in a promissory note gets transferred by operation of law the special modes

of transfer envisaged in the Negotiable Instruments Act, are not required and a person

to whom the property in the negotiable instruments stands so transferred is entitled to

sue on the note as such.

HOLDER:

Definition of the term holder according to the Negotiable Instruments Act is:

“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.” But it does

not include a person, who though in possession of the instrument, has not the right to

recover the amount due.

If we look at the above definition we will find that it talks about the person

entitled in his own name. What does the expression Person Entitled in His

Own Name means? Its definition in 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 meant by the expression is that he

should be entitled to possession in his own name and sue upon it though his

name does not appear on it. T h e e xp r e s s i o n “ i n his own name” was

introduced by the Legislature with a view to prevent any one from claiming the

rights of a holder under the Act on the ground that the ostensible holder is a mere

name lender. A reference to sections 27, 28, 32 and 78 confirms the above view.

The property in the instrument being transferable by a mere endorsement or by

delivery, mercantile usage requires that the contract appearing on the face of the

instrument should he taken as the real contract. The rule that undisclosed

principals could not sue on a bi l l or note is an exception to the general rule that a

principal can sue on contracts entered into by his agent though his name is not

disclosed. Conversely, it must follow that the term ‘holder’ in the section should
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.” Probably, the phrase is used to signify 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. Finders, thieves and such other persons as are mentioned in section 58

are not holders under this section. Similarly a person 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.1 Therefore, to qualify as a holder, a person should have derived title to the

instrument in a lawful manner.

WHO CAN SUE?

Whether the beneficial owner can maintain a suit on a negotiable instrument, if he is not

the holder is the question on which there is a considerable amount of difference in the

Judicial Opinion. Several decisions support the proposition that only a holder can bring

a suit on a negotiable instrument, and that no person can sue on a negotiable instrument
1
Lachmichand v. Modanlal, AIR 1947 All. 52
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.2 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 impleaded in the suit. 3 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 lo 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 78 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 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

2
Bacha Prasad v. Janaki, AIR 1957 Pat. 380
3
Ibid
or business name.4 On the death of the holder, the holder of the succession certificate can

sue on the instrument.5 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.6 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, 7 but if it is

returned by the endorsee uncollected to the endorser, the former ceases

to be the holder w i t h i n 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 States8 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

4
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
5
Anjanaiah v. Nagappa, AIR 1965 AP 506
6
Champalal Gajanand v. P.C.S. Jain, AIR 1971 MP 133
7
Ramanadhan v. Kathan Velan, 41 Mad. 353 cited from supra note 1 at 139
8
3 Wheaton 172 at 183 cited from supra note 1 at 141
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 ti tl e 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 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 Instrument deals with the concept of Holder

In Due Course. It is essential 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.9 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.10

Consideration shall be something which not only party regards but the law can regard as

having some value.11 It can be either positive in that, it requires doing of something or

negative in that, it requires forbearance.12 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

1872, past consideration is a good consideration and will support a negotiable

9
Muthu Karuppa v. Habib, AIR 1955 Mad. 43
10
Jones v. Gordon, (1877) 2 App. Cas. 616, cited from Supra Note 23 at 61
11
Supra Note 1 at 144
12
Chidambram v. Ranga, AIR 1966 SC 193
instrument. An antecedent debt or liability is sufficient to constitute a valuable

consideration for a negotiable instrument.13 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 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

13
Indian Bank v. K. Nataraja, (1994) 79 Comp Cas 674
payable immediately. The words ‘before it was overdue’ appearing in Sec. 29(1) of

the BE Act are preferable.

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.14 And the rights of such a holder are co-

extensive 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.15

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 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.16 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.17 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

14
Profulla Kumar v. Harichandra, AIR 1956 Ori. 85
15
Montechhi v. Shimco (U.K.) Ltd., (1980) 1 Lloyd’s Rep. 50 cited from Supra Note 23 at 63.
16
Shaha & Co. v. Bengal National Bank Ltd., 47 Cal. 861 cited from Supra Note 1 at 152
17
Brojindra Kishore v Hindustan Co-operative Insurance Society, 44 Cal. 978
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.18 Anyway to overcome this difficulty the Law Commission of India

recommends the adoption of the language of the English Act, viz., “became overdue”.

Defective Title:

What is the sufficient cause as to the defective title? Under English law, the only

question to be considered is whether the holder took the instrument in good faith and,

once it is proved that he did so, he is entitled to all the rights of a holder in due course

notwithstanding that he was careless, that he made no enquiry, and that he was

informed of facts which would have led a reasonable man to make further inquiry,

provided, however, that he had no notice of any defect in the transferor’s title.

Under sec. 90 of the BE Act it is not necessary that a holder should have actual

knowledge of what the particular wrong was, and if he, suspecting that there is
18
Brooks v Mitchell (1841) 9 M&W 1 5 . S a me v i e w w a s h e ld in p le th o r a o f d e c i s io n s s ta r ti n g
f r o m Brough v White, (1837) 2 N and W 461; Glasscock v Balls (1894) 24 QBD 13; Norton v Ella;,
Rowe v Young
something wrong, avoids inquiry, lest he should come to know of any defect in the title,

he cannot be deemed to be acting honestly. It has been held in the case of Raphael v

Bank of England that it is immaterial whether at the time of taking the instrument, he

was negligent or not.

The Indian law is stricter and requires a higher degree of diligence from the person who

claims to be a holder in due course than in England. Under Indian Law, Privy Council

has held that the defective title of the transferor would not attach to the transferee

merely because of the latter’s negligence. Even the legislature seems to have intended

to make due care and caution on the part of the holder, a test of his bona fides and that

mere good faith on his part would not suffice. Accordingly, it seems negligence on the

part of a holder at the time of taking a negotiable instrument, would disentitle him to

the rights of a holder in due course. Under the Indian law, it is not enough to show that

the holder acquired the instrument honestly, if in fact, he was negligent or careless.

The Negotiable Instruments Act follows the English rule laid down by Lord Tenterden

in Gill v Cubitt19 according to which due care and caution were made the tests of bona

fides. The stricter rule of Indian law makes it difficult for dishonest transferors to part

with negotiable instruments, and honest transferors will not suffer from it, as they have no

real difficulty in persuading the transferees to take the instrument as their title is good, but

the law should be framed not only for the purpose of putting difficulties in the way of

dishonest brokers, but also to protect people who acting honestly take such instruments

for value; for otherwise, the rapidity with which the commercial business is transacted

will be seriously impeded and the very object of negotiable instruments will be defeated.

19
(1824) 3 B&C 466 cited from Ibid
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 made aware of facts from which knowledge of such defect

may reasonably be inferred.20 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.
20
Muthis Chetty v. Kasivasi Somasundara, (1911) 10 MLT 79 cited from Supra note 23 at 67
RIGHTS AND PRIVILEGES OF HOLDER IN DUE COURSE:

Presumptions [S. 118]: The first privilege is that “every holder is

deemed prima facie to be a holder in due course.” If the defendant

intends to set up the defense that there was something wrong in the

inception or subsequent negotiations of the bill the burden of

proving that lies on him. When the burden of establishing his bona

fides is thus cast upon the holder, he has to show either that

subsequently to the alleged fraud or illegality value has in good faith

been given for the instrument or that he is a bona fide holder for value.

Privilege against Inchoate Stamped Instruments [S. 20]:

The logical order of operations with regard to a bill is, no doubt,

that the bill should be first riled up, then it should be signed by the

drawer, then it should be accepted, then it should be negotiated, and

then it should be indorsed by the persons who become successively

holders; but it is common knowledge that parties very often vary, in a

most substantial manner, the logical order of those proceedings, and

Section 20 is intended to deal with those cases. In order, however, to

bring this section into operation the following conditions must be

fulfilled. In the first place, it is of the very essence of this liability that

the defendant should have signed the blank instrument and voluntarily

parted with it with the intention that it should be filled up and is used as

such.
Fictitious Drawer or Payee:

The acceptor of a bill of exchange can not, as against the holder in due

course, say that the other parties to the bill were fictitious. The words

“fictitious payee” means a person who is not in existence or, being in existence, is never

intended by the drawer to have the payment. Where the drawer intends the payee to

have the payment, then he is not a fictitious payee and the forgery of his signature will

affect the validity of the cheque.

Prior Defects [S. 58]:

The party liable to pay an instrument cannot, as against a holder in due course, contend

that he had lost the instrument or that it was obtained from him by means of an

offence or fraud, or for an unlawful consideration. The bank, having acted in good

faith, was held to be not affected by the employee’s fraud.

Endorsee from a Holder in Due Course [S. 53]:

A holder who receives an instrument from a holder in due course gets the rights of

the holder in due course, even if he had knowledge of the prior defects, provided that

he was not a party to them.