Holder and holder in due course, parties to instruments, their liability and payment in due course

1. Holder (s.8)

The holder of a promissory note, bill or cheque is any person entitled in his own name to the possession of it and to receive or recover the amount due on it from the parties. Where it is lost or destroyed, the holder is the person so entitled at the time of loss.

• The payee, or an indorsee under a valid indorsement, or the bearer of a bearer instrument, is a holder.
• A finder or thief of a bearer instrument has possession but is not “entitled” to it, so is not a holder in the full sense; a person claiming under a forged indorsement of an order instrument is not a holder at all.
• An agent holding for his principal, or a beneficial owner whose name is not on the instrument, is not a holder.

2. Holder in due course (s.9)

“Holder in due course” means any person who for consideration became the possessor of a note, bill or cheque if payable to bearer, or the payee or indorsee 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.

• For consideration. A donee is a holder but not a holder in due course. The consideration must not be unlawful; it need not be adequate.
• Before maturity. A person who takes an overdue instrument takes it subject to equities (s.59). A demand instrument is overdue if held for an unreasonable time.
• In good faith. The test is “sufficient cause to believe”, which is more than mere suspicion but less than actual knowledge. Gross negligence, such as taking a large cheque at a heavy discount from a stranger, may supply the cause.
• Holder first. He must be a holder, which means the instrument must be complete and regular on its face and his title must not depend on a forged signature.

The difference: every holder in due course is a holder, but a holder becomes a holder in due course only by meeting these conditions. The holder takes the title of his transferor, with its defects, like an assignee; the holder in due course may take a better title.

3. Privileges of a holder in due course

• Title free from defects (s.58). Where an instrument has been lost, or obtained by an offence, fraud or for unlawful consideration, no possessor or indorsee claiming through the wrongdoer can recover on it, unless he or someone through whom he claims is a holder in due course.
• Prior parties liable (s.36). Every prior party is liable to a holder in due course until the instrument is duly satisfied.
• No defence of want of consideration (s.43). An instrument without consideration creates no obligation between the immediate parties, but if any party has transferred it to a holder for consideration, the holder (and anyone claiming through him) may recover from any prior party. An accommodation party is therefore liable to a holder in due course.
• Conditional delivery cannot be shown (s.46). As against a holder in due course, a party cannot show that the instrument was delivered conditionally or for a special purpose.
• Inchoate instruments (s.20). One who signs and delivers a stamped paper blank or incomplete gives prima facie authority to complete it for any amount within the stamp, and is liable to a holder in due course for the amount filled in even if it exceeds what he intended.
• Fictitious drawer (s.42). The acceptor of a bill drawn in a fictitious name and payable to the drawer's order cannot plead the fiction against a holder in due course claiming under an indorsement by the same hand as the drawer's signature.
• Estoppels (ss.120–122). The maker of a note, the drawer of a bill or cheque, and an acceptor for honour of the drawer cannot deny the original validity of the instrument (s.120); the maker or acceptor cannot deny the payee's capacity to indorse (s.121); an indorser cannot deny the signature or capacity of any prior party (s.122).
• Presumption (s.118(g)). Every holder is presumed to be a holder in due course, except where the instrument is shown to have been obtained by offence, fraud or unlawful consideration; then the burden shifts to the holder to prove he is one.
• Shelter rule (s.53). A holder who derives title from a holder in due course has the rights of that holder in due course, even if he himself gave no consideration or took with notice of an earlier defect.

4. Parties and capacity

The parties are defined in s.7: drawer (maker of a bill or cheque), drawee (the person directed to pay), drawee in case of need, acceptor, acceptor for honour, payee; to these add the maker of a note, indorser and indorsee (ss.15–16), and the holder.

• Capacity (s.26). Every person capable of contracting may bind himself by making, drawing, accepting, indorsing, delivering and negotiating an instrument. A minor may draw, indorse, deliver and negotiate so as to bind all parties except himself. A corporation can do so only where the law allows.
• Agents (ss.27, 28). A person may be bound by an agent duly authorised, but a general authority to transact business does not authorise accepting or indorsing bills. An agent who signs without indicating that he signs as agent is personally liable, except to those who induced him to sign believing only the principal would be liable.
• Legal representatives (s.29) who sign an instrument are personally liable on it unless they expressly limit their liability to the assets received.

5. Liability of parties

• Drawer (s.30): to compensate the holder on dishonour by the drawee or acceptor, provided due notice of dishonour has been given.
• Drawee of a cheque (s.31): to pay when he has sufficient funds; liable to the drawer, not to the payee.
• Maker of a note and acceptor of a bill (s.32): to pay at maturity according to the apparent tenor; on default, to compensate any party.
• Indorser (s.35): to every subsequent holder on dishonour, after notice, unless he has excluded liability (s.52, “sans recours”).
• Prior parties to a holder in due course (s.36), as above.
• Order of liability (ss.37–39). The maker of a note or cheque, the drawer of a bill until acceptance, and the acceptor are principal debtors; the others are liable as sureties for them (s.37). Each prior party is a principal in respect of each subsequent party (s.38). A holder who gives time to or compounds with the acceptor, which would discharge sureties under ss.134–135 of the Contract Act, may expressly reserve his rights against the other parties, and they are then not discharged (s.39).

6. Payment in due course (s.10)

“Payment in due course” means payment in accordance with the apparent tenor of the instrument, in good faith and without negligence, to any person in possession of it under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment.

• Payment must be made to the holder (s.78) and discharges the instrument and all parties (s.82(c)).
• A banker who pays an order cheque that purports to be indorsed by the payee, or a bearer cheque to the bearer, is discharged by payment in due course (s.85); so is one who pays an altered cheque whose alteration is not apparent (s.89). These sections are the paying banker's protection (see the note on paying and collecting bankers).
• Payment before maturity, or after notice of a stop order, or across the counter on a crossed cheque, is not payment in due course.

How this is examined

“Who is a holder in due course? Explain the privileges of a holder in due course” (June 2025); “Who is a holder? Explain the rights of a holder in due course” (February 2025); short note “Holder in due course” (August 2024). Give s.8, s.9 with each condition explained, the holder/holder in due course contrast, then the privileges with section numbers, then the forgery trap. A short note on “payment in due course” or “liability of parties” is answered from sections 5 and 6.