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HOLDER AND HOLDER IN DUE COURSE

Holder :- According to section 8 of the Act

holder of a negotiable instrument means any

person (a) who is entitled in his own name to the

possession of the negotiable instrument and (b)

who has also the right to receive or recover the

amount due thereon from the parties thereto.

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Eligibility to be Holder

Possession of instrument:-

The person must be a de jure (original/real)holder. He

must be entitled to possess the instrument in his own

name. his possession must be under some legal and validtitle. A thief or any person who finds the instrument or an

endorsee under a forged endorsement though in

possession of the negotiable instrument, is not a holder in

the absence of a legal title to it. Even an agent holding anegotiable instrument for his principal is also not a

holder though he has a right to receive the payment.

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Entitled to receive the amount:-

The person must be entitled to receive the

amount of the instrument and give a valid

discharge to the buyer. A person may be the bearer

of an instrument or payee or endorses of an

instrument but he may not be called a holder of

instrument if he is prohibited by law from

receiving the amount due on the instrument.

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The holders of the negotiable instruments:

Eligibilitya. A principal whose name appears on an instrument as the holder though it

executed in the name of his agent for him

b. Where a negotiable instrument is a bearer one, any person who is in the

possession of such instrument is the holder.

c. Where a negotiable instrument is in the name of a partner of a firm, it

naturally becomes a holder as it is not a separate entity from the partner.

d. The endorsee of a cheque is called a holder.

e. If a holder of a negotiable instrument is dead, the heirs of the deceased

holder between the holders.

f. A principal on whose behalf a pronote is endorsed in blank and is

delivered to his agent, he is a holder of the instrument though his name

does not appear on the instrument though is name does not appear on the

instrument

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No eligibility of Holders:

i. I) A thief or a finder of an instrument is not a

holder though he is in possession of an instrument.

ii. II) The word entitled used in the definition

of a holder shows that the title of the person who claimsto be the holder must be acquired in a lawful manner. A

person obtaining the instrument under forgery is not a

holder.

i III) When the endorseme

collection only the endorsee cannot be a holder

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Holder in due Course

Holder in due course means any person who

for the consideration becomes the possessor of a

promissory note, a bill of exchange or a cheque

if payable to bearer, or the payee or endorseethereof, if payable to order, before the amount

mentioned in it becomes payable and without

having sufficient cause to believe that anydefect existed in the title of the person from

whom he derived his title (section 9) .

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a He must be a holder:

A holder to be a holder in due course must be entitled to the

possession of the instrument in his name under a legal title and he

must also be entitled to recover the amount of the instrument from the

parties liable thereto.

He must be a holder for valuable consideration

To be a holder in due course, a person must be a holder forvaluable consideration and the consideration must not be illegal or

void. However, consideration may be past, present adequate or

inadequate.

A donee acquiring title to the instrument by way of a gift is nota holder in due course because there is no consideration to the contract

and therefore he cannot maintain any suit against the donor in the

court of law. The house hired for illegal purposes and money due on a

promissory note, deposited for the security cannot be recovered by a

suit.

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He must become a holder of the negotiable

instrument before the date of maturity.

If the negotiable instrument is taken after it

becomes due, the person taking it gets the rights of

his immediate transferor against the other partiesand therefore, a person who takes a negotiable

instrument on the day on which it becomes

payable cannot claim rights of a holder in due

course.

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He must become a holder of the negotiable

instrument in good faith:

Here the term good faith implies that he should not

accept the instrument after knowing about the defect or

defects in the title to the instrument. A thing is done ingood faith when it is done honestly. It is the duty of a

person [who takes a negotiable instrument] to examine

its contents thoroughly. If the negotiable instrument

contains any material alteration or if it is incomplete, hewill not become a holder in due course. Thus, he must

become a holder and must take the negotiable

instrument complete and regular on its face.

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Distinction between holder and holder in due course

Holder is different from a holder in due course. A holder

in due course enjoys certain rights and privileges.1. A holder can obtain an instrument without

consideration while a person cannot be a holder in due

course unless he obtains an instrument with consideration

and for value.

2. If an instrument is inchoate, a holder of such

instrument cannot get good title in the instrument. While

holder in due course acquires a good title even if theinstrument is inchoate.

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3. A holder of an instrument may acquire the

instrument if it becomes payable. But the person is not

treated as a holder in due course if he acquires an

instrument when it becomes payable.

4. A holder need not bother about the defect, if any, in

the title. But no holder is considered a holder in duecourse who acquires an instrument knowingly the defect

of the title.

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NEGOTIATION AND TYPES OF

ENDORSEMENT

One of the important characteristics of a

negotiable instrument is its free transferability

from one to another person. Such transfer can

take place either by negotiating the instrument

or by assigning the same. According to section

14 of the act, When a promissory note, a bill ofexchange or a cheque is transferred to any

person, so as to constitute that person the holder

thereof, the instrument is said to be negotiated.

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Procedure of transfer or modes of

negotiation:

A negotiable instrument can be transferred to

another person in the following two ways:

a.N

egotiation by delivery; andb. Negotiation by endorsement and delivery

Instruments payable to bearer can be

transferred by mere delivery, while

instruments payable to the order are

transferred by endorsement and delivery:

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Thus delivery of a negotiable instrument is a

voluntary transfer of possession of thenegotiable instrument. When an instrument is

negotiated by delivery it is not necessary for

a transferor to put his or her signature on the

instrument and therefore, there is no privacyof any contract between the transferor and

any subsequent transferee.

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N

egotiation by endorsement and delivery:Subject to the provision of section 58 [which is stated

earlier] a promissory note, cheque or a bill of exchange

payable to order is negotiable by the holder by

endorsement and delivery thereof [section 48]

Thus the delivery is the common element between the

two modes of negotiation i.e. negotiation by mere

delivery and negotiation by endorsement and delivery.

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Types of Endorsement

The literal meaning of the term endorsement is writing onan instrument. But In the negotiable instrument or on a

slip of paper attached thereto which is done for the

purpose of negotiation [section 15]. The person who signs

on the back or on the face of the instrument or on the slipattached thereto is called the endorser and the person to

whom the instrument is endorsed is called the endorsee.

An endorsement can be made by the holder of an

instrument or by the maker who signs it otherwise than a

maker. A payee or an endorsee may also endorse the

instrument if they are holders of the instrument

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Endorsement may be of various types which are a

follows:.

1.General or blank endorsement

2. Full or special endorsement

3. Partial endorsement.

4. Conditional endorsement

5. Restrictive endorsement

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1. General or blank endorsement

When a endorser signs his name either on the back or face of the

instrument, the endorsement is said to be blank or general[section 16(1)]. In a blank endorsement, endorsee is not

specified and therefore the instrument becomes payable to

bearer even though it was made originally payable to order

{section 54]

2, Full or special endorsement:

when an endorser signs the instrument and adds a direction to pay

the amount mentioned therein to or to the order of a specified

person, the endorsement is said to be in full [section 16 (1)].

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a) 3.Partial endorsement:

According to section 56 of the Act, No writing on a negotiable

instrument is valid for the purpose of negotiation if such writing

purports to transfer only a part of the amount appearing to be due

on the instrument; but where such amount has been partly paid, a

note to that effect may be endorsed on the instrument, which maythen be negotiable for the balance

a) 4. Restrictive endorsement :

Restrictive endorsement restricts the further negotiability of the

negotiable instrument. Such endorsement entitles the holder of theinstrument to receive the amount on the instrument for a specific

purpose. The endorsement is restrictive when it contains express

words to that effect.

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Conditional Endorsement:-In the conditional endorsement, the liability of the

endorser is limted or negative. A conditional

endorsement is different from a restrictive

endorsement. A conditional endorsement limits ornegatives the liability of the endorser while a

restrictive endorsement places certain restriction

on the negotiability of the instrument.

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DISHONOUR OF NEGOTIABLE INSTRUMENT

Promissory notes, cheques and bills of exchange are

covered by this Act.Of these negotiable instruments,promissory notes and cheques may be dishonoured by

non payment only while bills of exchange may be

dishonoured by non payment or by non-acceptance as

they require acceptance from drawees. Section 93 of theAct states that when a promissory note or a bill of

exchange or cheque is dishonoured by non-acceptance or

non-payment the holder thereof, or some party thereto

who remains liable thereon, must give notice that theinstrument has been so honored to all other parties whom

the holder seeks to make severally liable thereon, and to

some one of several parties whom he seeks to make

jointly liable thereon

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Dishonour by Non-acceptance:

As mentioned earlier that a bill of exchange is dishonoured by non-acceptance. It stands

dishonoured by non-acceptance in the following cases.

a). when there are several drawees who are not partners and if all of them refuse to

accept.

b). If the drawee refuses to accept the bill within forty eight hours from the time of its

presentment even though the bill is duly presented for his acceptance.

c) where the drawee is not competent to enter into contract.

d) When the presentment of a bill of exchange for acceptance is excused and it remains

unaccepted.

e) where the drawee of the bill of exchange gives a qualified acceptance.

f) Where the drawee is a fictitious person and even after a reasonable search, he couldnot be found.

It should be noted that where a drawee in case of need is named in a bill of exchange or

even in any other instrument, the bill is not considered to be dishonoured unless it has

been dishonoured by such drawee [section 115].

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Dishonour by non-payment:

A negotiable instrument i.e. a bill, a cheque or a promissory note is

said to be. Dishonoured by non-payment when the maker of the

promissory note, acceptor of the bill of exchange or drawee of thecheque makes default in payment upon being duly required to pay the

same. [section 2]. A bill or a promissory note is also said to be

dishonoured by non-payment when presentment for the payment is

excused expressly by the maker of the note or the acceptor of the billand the note or bill remains unpaid or at after maturity [section 76]

If the bill is dishonoured either by non-acceptance or non-payment,

the drawer and all endorsers of the bill are held liable to the holder

provided that a notice of such dishonour is given by the holder. If the

bill is dishonoured by non-payment, the drawee is held liable.

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NOTING AND PROTEST

Noting:

As mentioned above, when a negotiable instrument within the

meaning of this Act is dishonoured, the holder of the instrument,

after giving notice of the same, can sue any or all the prior parties

liable thereon. But before he does so, he can get the fact of thedishonour of the instrument authenticated by noting by a notary

public. Noting is the authentic and official proof of presentment

and dishonour of the instrument.

Noting means nothing but the recording of the fact of dishonor of

the instrument by a notary public within a reasonable time after

dishonour. Of course, nothing is not compulsory neither it affects

the rights of the holder thereon,

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Noting contains the following particulars.

a) The fact and the date of dishonour of the

instrument

b) The reason or reasons if any, assigned for such

dishonour.

c) The rotary charges incurred.

d) If the instrument has not been expressly

dishonoured, the reason as to why the holder wants to

treat the same as dishonoured.

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Protest:

According to section 100 of this Act, when a

promissory note or a bill of exchange has been

dishonoured b non-acceptance or non-payment, the

holder may, within a reasonable time, cause suchdishonour to be noted and certified by a notary public.

Such certificate is called a protest.

Thus protest is a formal certificate of dishonour of an

instrument issued by the notary public. Of Course, it is

issued to the holder of the instrument on his demand

only.

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Contents of protest:

1.Either the instrument itself, or a literal transcript of the instrument and of every

thing written or printed thereupon;

2.The name of the person for whom and against whom the instrument has beenprotested;

3. A statement that payment or acceptance, or better security, as the case may be,

has been demanded of such person by the notary public; the terms of his answer. If

any, or a statement that he gave no answer, or that he could not be found;

4. When the note or bill has been dishonoured, the place and time of dishonour, and

when better security has been refused, the place and time of refusal;

5. The subscription of the notary public making the protest;

1. 6 . In the event of an acceptance for honour or of a payment for honour, the name

of the person by whom, of the person for whom, and the manner in which, suchacceptance or payment was offered and effected.

2. 7. The signature of the notary public.

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