Holder & Holder In Due Course

This article is written by Anushka Singh. She is a second-year student, pursuing BBA-LLB at Unitedworld School of Law, Karnavati University. This article aims to explain the terms Holder and Holder in charge.

Negotiating instruments have acquired a front seat when it comes to modern business. They play a very crucial role in making payments or discharging monetary related obligations. When one deals with negotiable instruments such as cheques, promissory notes, bills of exchange, currencies, etc. we are sure to encounter the terms holder and holder in due course. They are defined in the Negotiable Instrument Act, 1881.

Holder

A holder is defined in section 8 of the Negotiable Instrument Act, 1881. It states that the holder of a negotiable instrument is a person who has his name entitled to that instrument and is eligible to recover the amount due from the parties thereto. However, in case the instrument is stolen or lost, the person that finds it doesn’t become the holder.

Therefore, a holder is a person who has the possession and is also entitled to use or enforce the negotiable instrument. For instance- Mr. Z gave his employee Mr. P his monthly salary of Rs.1,10,000. Here in this scenario, Mr. P will be the holder as he is entitled to the salary cheque bearing his name. But in this same scenario is Mr. P lost this cheque, and it was found by Mr. Y. Then Mr. Y will not be the holder.

Following individuals are considered to be holders of the negotiable instruments:

A person whose name appears on an instrument as the holder even though it is executed in an agent’s name.
In case a negotiable Instrument is a bearer one, the person who is in possessing the instrument to become the holder.
When a negotiable instrument is in the name of a partner at the firm, the firm naturally becomes a holder.
In case a holder of a negotiable instrument dies, heirs of the deceased the holders.

However, the following individuals are not considered holders:

A thief or a person who finds an instrument is not a holder even though he currently possesses it.
A person obtaining the instrument through forgery or any other unlawful manner is not a holder.
When the instrument is for collection only, the person collecting cannot be a holder.

Holder in Due Course (HDC)

A holder in due course is defined in Section 9 of the Negotiation Instrument Act. It states that a holder in due course is any person who for consideration, becomes the possessor of a negotiable instrument without having knowledge that any defect existed in the title of the prior possessor.

Therefore, an individual can only be called a holder in due course if he becomes the possessor of a negotiable instrument before its maturity by means of valuable and legal consideration. The transaction must also be done in good faith and without any reason to believe that defect existed in the title of the previous possessor.

Example- On 3^rd August 2020, Mr. Z gave his employee Mr. P his salary cheque for Rs.1,00,000 for the month of July dated 3/8/2020. Here Mr. P will be the holder as well as the holder in due course.

Thus, an individual aiming to be a ‘holder in due course’ should satisfy the following conditions-

He must already be a holder, and of valuable and legal consideration.
He must become a holder of the negotiable instrument before the period of maturity.
An individual can become a holder of a negotiable instrument only if he has acquired it in good faith.

An individual is not considered to be a holder in due course if-

He obtains the negotiable instrument after its period of maturity.
He obtains the instrument by the way of gifts, illegal methods or for any unlawful consideration.
He does not obtain the instrument in good faith.

Key Differences

A person who has acquired the negotiable instrument by genuine ways in return for legal consideration, whose payment remains due is called holder in due course or HDC. Whereas in case of a holder, he obtains the negotiable instrument legally, with his name titled to it and is eligible to receive payment from the liable parties.
For an individual to become a holder in due course consideration is essential. But in case of a holder, the consideration is not necessary.
A holder in due course has the right to sue the previous owners whereas a holder does not have the same rights.
A holder in due course can only acquire an instrument before its maturity but a holder can acquire it after maturity as well.
A holder in due course must have acquired the instrument without having sufficient reason to believe that any defect existed in the previous possessor’s title. This condition is not essential for a holder.
A holder in due course enjoys certain privileges that are not available to a holder under the Negotiation Act, 1881.

Case law

Jagdish Chander vs Kapoor Jewel Mines Pvt Ltd-

The HC said that learning how the holder of the subject cheques comes to be a holder in due course is an aspect which cannot be judged at such an elementary stage of the transaction and is required to be considered after the evidence of the said transaction is documented. It was said: “Section 9 of the Negotiable Instruments Act, 1881 defines the ‘holder in due course’ and its import cannot be pre-judged.” [1]

The Supreme Court in Laxmin Dychem v. State of Gujarat, (2012) 13 SCC 375, held that till it is proved otherwise, the assumption shall be made that the holder of a negotiable instrument is also the holder in due course. Applying this statement to the existing scenario, the HC did not find it to be a fitting case to quash the complaint as the plea by the petitioner was required to be tested at the trial. Leading to the petition being dismissed.[2]

Conclusion

The above-mentioned points have explained it clearly that holder and holder in due course are not the same individuals. Holder refers to an individual who is the payee of the negotiable instrument, who is in possession of it. They are entitled to receive the amount due on the instrument from parties thereto. Whereas holder in due course refers to an individual who obtains the instrument bonafide before the maturity period, without any knowledge of the defect in the title of the person transferring the instrument.

[1] https://www.scconline.com/blog/post/2019/05/03/del-hc-import-of-s-9-ni-act-defining-holder-in-due-course-cannot-be-pre-judges-petition-for-quashing-cheque-dishonour-complaint-dismissed/

[2] https://indiankanoon.org/doc/112089297/

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