A holder, to be a holder in due course must not only have acquired the bill, note or cheque for a valid consideration but should have acquired the cheque without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. This condition requires that he should act in good faith and with reasonable caution. However, mere failure to prove bona fide or absence of negligence on his part would not negative his claim. But in a given case it is left to the court to decide whether the negligence on part of the holder is so gross an extraordinary as to presume that he had sufficient cause to believe that such title was defective.
Holder in due course acquiring the instrument for consideration and in good faith gets the following rights under the act:
1) Holder in due course can file a suit in his own name against the parties liable to pay. He is deemed prima facie to be holder in due course (Sec 118)
2) The holder is due course gets a good title even though the instruments were originally stamped but was an inchoate instrument (Sec 20). The person who has signed and delivered an inchoate instrument cannot plead as against the holder in due course that the instrument has not been filled in accordance with the authority given by him. However, a holder who himself completes the instrument is not a holder in due course.
3) Every prior party to the instruments is liable to a holder in due course until the instrument is duly satisfied (Sec 36).
4) Acceptor cannot plead against a holder in due course that the bill is drawn in a fictitious name (Sec 42). In Bank of England v Vagliano Bros (1891 – Ac 107) it was held that the acceptor should consider whether the bill was genuine of false before signing his acceptance in it.
5) The other parties liable to pay cannot plead that the delivery of the instrument was conditional or for a specific purposes only (Sec 46).
6) He gets a good title to the instrument even though the title of the transferor or any price party to the instrument is defective (Sec 53) He can recover the full amount unless he was a party to fraud; or if the instrument is negotiated by means of a forged endorsement.
7) Even if the negotiable instrument is made without consideration, if it get into the hands of the holder in due course, he can recover the amount on it from any of the prior parties thereto.
8) The person liable cannot plead against the holder in due course that the instrument had been lost or was obtained by means of an offence of fraud or for an unlawful consideration (sec 58).
9) The validity of the instrument as originally made or dawn cannot be denied by the maker of drawer of a negotiable instrument or by acceptor of a bill of exchange for honor of the drawer (Sec 120).
10) The maker of a note or an acceptor of a bill payable to order cannot deny the payee’s capacity to indorse the same at the date of the note or bill (sec 121).
11) Endorser is not permitted as against the holder in due course to deny the signature or capacity to contract of any prior party to the instrument (Sec 122).
It will therefore be observed that the title of the holder in due course of a negotiable instrument is free from equities and other defenses which could be pleaded against the prior parties.
Liability of prior parties to holder in due courses
Every prior party to negotiable instruments is liable thereon to a holder in due course until instrument is duly satisfied (Sec 36).
The prior parties to an instrument are maker, drawer acceptor and endorser. The instrument is duly satisfied when the parties to the instrument are discharged by payment or when the liabilities of the parties are extinguished. Till then all the prior parties to the instrument continue to remain liable to the holder in due course.
Holder deriving title from holder in due course
A holder of a negotiable instrument who derives title from a holder in due course has the rights thereon of that holder in due course. The law presumes that every holder is a holder in due course until the contrary is proved [sec 118(g)]
The instrument once reaching the hands of a holder in due course is cleansed of all defects. It becomes pure and passes also to subsequent parties as an instrument immune from any defect. However, where holder in due course himself is a party to fraud or illegality he does not acquire the rights of a holder in due course.