Privileges of a Holder in Due Course

1. He gets a Better Title than that of the Transferor: The Holder only gets the same title as his transferor, but a holder in due course gets a better title than that of his transferor, and he is in a privileged position. The liable parties can’t make any defense by making a plea that the instrument was lost, obtained through fraud, or that the instrument is for an unlawful consideration against a holder in due course.

2. Privilege in case of Inchoate Stamped Instruments (Section 20): In the case of an inchoate instrument, if the holder fills in more than the amount for which he was actually authorized, the holder cannot enforce the negotiable instrument for the whole of the amount. If an inchoate instrument is transferred to a person who possesses the title of the holder in due course, he can claim the whole of the amount as mentioned on the instrument and the amount as covered by the stamp.

3. Liability of Prior Parties (Section 36): All the prior parties liable to a negotiable instrument, including the maker or drawer, acceptor, and intervening endorsers of the negotiable instrument, continue to be liable to a person who has derived the title of a holder in due course, both jointly and severally, until the negotiable instrument is duly satisfied. Whereas, in the case of a holder, only the preceding party is liable to a succeeding party.

4. Privilege in the Case of Fictitious Bills (Section 42): In the case of a fictitious bill, both the drawer and payee are fictitious persons. When a negotiable instrument is drawn in a fictitious name and such an instrument is made payable to the drawer’s order, the bill is said to be a fictitious bill, such a bill is not considered good and cannot be held valid. But the acceptor of such a bill is liable to a person who has the title of the holder in due course, provided the latter can show that the first endorsement and the signature on the instrument of the supposed drawer are in the same handwriting.

5. Privilege when an Instrument Delivered Conditionally is Negotiated (Section 46 and Section 47): When any negotiable instrument is endorsed or delivered conditionally or for a special purpose only and not with the idea of transferring absolute property, the property in the instrument does not pass to the endorsee, and he is merely considered a bailee with limited title and limited power of negotiating the instrument. This, however, does not affect the rights of a person who gains the title of the holder in due course; i.e., if such an instrument is negotiated with a person with the title of the holder in due course, the parties liable for the instrument cannot escape their liability.

6. Estoppel against Denying Original Validity of Instrument (Section 120): In a case where no consideration actually passed between the maker and the payee of a negotiable instrument, it cannot be put forth against the holder in due course by the drawer of a negotiable instrument for the honor of the drawer. However, the above parties are not excluded from challenging the validity of the instrument on the grounds that, at the time of making the instrument, the party was a minor, the signature of the party had been forged, or the instrument is otherwise a void-ab-initio transaction.

7. Estoppel against Denying Capacity of Payee to Endorse (Section 121): A person having the title of the holder in due course can claim payment in his own name despite the fact of the payee’s incapacity to endorse the instrument. As established by Section 51, only the holder or a person in lawful custody of the instrument is competent to endorse it. In this case, any person who receives the negotiable instrument for any gambling debt or for an unlawful consideration cannot negotiate the negotiable instrument. Furthermore, the holder, in due course, enjoys a privilege in this case, and he gets a good title without any defect, even if he holds a negotiable instrument endorsed by a person who received the instrument for an unlawful consideration. As mentioned in Section 121, no maker of a note or acceptor of a bill payable to order shall be permitted to deny the payee’s capacity to endorse the same.

A Negotiable Instrument is a signed document that promises a particular payment to a specified person or holder of the instrument. In India, negotiable instruments are governed under the umbrella of the Negotiable Instruments Act, 1881. This is a significant law that governs all means of negotiable instruments in India. The act establishes a regulatory framework for promissory notes, bills of exchange, and cheques. The act was enacted to provide uniform legal regulations to cover all aspects of negotiable instruments in India. Several times, the act has been amended to make sure that it is in line with changing business practices and new judgments.

The Negotiable Instruments Act, 1881 does not define the term negotiable instruments. But while referring Section 13 of the act, provides only three kinds of negotiable instruments; Bills of Exchange, Promissory Notes, and Cheques, these instruments can be payable either to the order or the bearer.

Geeky Takeaways:

• A negotiated instrument is a signed document that promises a particular payment to a specified person or holder of the instrument.
• The Negotiable Instruments Act, 1881, is the governing act to provide a regulatory framework for all types of negotiable instruments.
• Section 13 of the act provides for three kinds of instruments, namely bills of exchange, promissory notes, and cheques.
• A holder is a person who has legally obtained the negotiable instrument, with his name entitled to it, in order to receive payment from the parties liable for payment.