Banking News

Holder in due Course explained


Section 9 of N.I. Act, define holder in due course as under.

“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.”

Holder in due course is a person who takes a negotiable instrument for the value receivable by him in good faith and taken due care and caution while taking such instrument and he had no suspicion or reason to believe any defect existed in the title of the person, from whom he derived title possession of the instrument. Thus, a person claim to be a ‘holder in due course’ should satisfy the following conditions.

  1. He must acquire the instrument for a consideration.
  2. The instrument acquired should be before it is matured for payment. An instrument payable on demand is treated as current, subject to it has not been in circulation for the unreasonable length of time.
  3. It is most important that the holder in the course had no cause to believe that any defect existed in the title of a person from whom he has acquired the instrument.
  4. A person accepting an inchoate (incomplete) instrument cannot be a holder in due course.
  5. The instrument should be complete and regular while taking its possession.
  6. Forged signature conveys no title; as such there cannot be a holder in due course under forged endorsement.

Rights of Holder in due Course

Section 36 of NI ACT1881 reads the rights of Holder in due course.

“Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied.”

In the above section;

Every prior party’ means the maker or drawer, the acceptor, and intervening endorser/s.

Duly satisfied means if the liability of all the parties is extinguished and the instrument is discharged.

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