Parties to negotiable instruments

Holder (Sec 8)

The holder of a promissory note, bill of exchange or cheque means any person entitled in his own name of 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.

Therefore a person is the holder of the instrument if he:

1) is entitled in his own name to the possession of the negotiable instrument and
2) Is entitled to receive or recover the amount due thereon from the parties thereto.

In order to constitute the person a holder of the instrument it is not necessary that he should be in possession of the instrument. The word entitled used in the section suggests that he must be entitled in his own name to the possession of the instrument. The legal representative of the decreased can claim the instrument as holder by operation of law.

We have observed above that when the instrument is specially crossed, the banker may cross it further to its agent for collection. Here he endorses for collection does not become the holder of the instrument.

It will be of interest to observe that mere right to have possession of the instrument will not constitute the possessor a holder thereof. He should be also entitled to recover or receive the amount thereon. From this it follows:

1) the holder must have obtained the instrument in a lawful manner;
2) The holder must have a right to sue in his own name to recover the amount.

Until the contrary is proved, it shall be presumed that a holder is a holder in due course (Sec 118(g)]

Holder in due course (Sec 9)

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 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 he derived his tile.

A person is a holder in due course when he proves that –

Consideration: For consideration he became —

1) possessor of a promissory note, bill of exchange or cheque payable to bearer or
2) the payee or endorsee thereof when payable to order

If hundi is payable to order then, to be holder in due course it is not necessary for endorsee or payee to show that they obtained hundi for consideration. But if the hundi is payable to bearer then the person possessing the bill will be holder in due course only when he has come in possession of the hundi for consideration.

Consideration must be lawful. It should comply with the essentials of section 2(d) of the Indian contract act. It should not fall any of the provisions of section 23 of the Indian Contract Act which makes the consideration unlawful.

Before maturity: He became the holder of the instruments before the amount mentioned in it became payable. If a person becomes the holder on the day when the instrument is payable, he cannot claim to be a holder in due course as instrument is payable at any time on that day. Similarly a person who becomes the holder of he instruments after maturity he cannot be a holder in due courses and he takes it so at his peril.

Good faith

He had no cause to believe that any defect existed in the title of the person from whom he derived his title for example he became the holder of the instrument in good faith. Therefore even if he obtains the instrument from a thief, but without knowledge thereof he obtains a valid title.

It will be observed that a person is a holder only if he is legally entitled tot e possession of the instrument for value or consideration and who became the holder of the instrument before maturity and was not aware of the defect in the title of the person from whom he obtained the instruments. Therefore a person who obtains the instruments by gift or after maturity is a holder of the instrument and not a holder in due course.