Types of negotiable instrument; Holder and Holder in due course

Types of Negotiable Instruments

Promissory Note: In this case, the debtor is the one who makes the instrument. And he promises unconditionally to the creditor (or the bearer of the document) a certain sum of money on a specific date.

Bills of Exchange: This is an order from the creditor to the debtor. This instrument instructs the drawee (debtor) to pay the payee a certain amount of money. The bill will be made by the drawer (creditor)

Cheque: This is just another form of a bill of exchange. Here the drawer is a bank. And such a cheque is only payable on demand. It is basically the depositor instructing the bank to pay a certain amount of money to the payee or the bearer of the cheque.

Others: There are other instruments such as government promissory notes, railway receipts, delivery orders, etc. These can be negotiable instruments by custom or practice of the trade.

Holder and Holder in due course

Various differences between holder and holder-in-due-course can be explained on the basis of the following

  • Entitlement
  • Maturity
  • Right to recover amount
  • Privileges
  • Consideration
  • Title
  • Notice of defect in the Title
  1. Entitlement: Holder is a person who is entitled for the possession of a negotiable instrument in his own name. Hence he shall receive or recover the amount due thereon. Whereas a Holder-in-due-course is a person who has obtained the instrument for consideration and in good faith and before maturity.
  2. Consideration: Consideration is not necessary to become a holder. The instrument may also be given by way of a donation or gift and thus, the donee of an instrument can also become a holder of it. However, consideration is a must to become a holder-in-due-course and thereby the donee of a negotiable instrument can be a holder but not holder-in-due-course.
  3. Maturity: A holder may acquire the instrument even after its maturity. But a holder-in-due-course must acquire the instrument before its maturity failing which he will not enjoy the rights of a holder-in-due-course.
  4. Title: A holder does not acquire a better title than that of transferor. In simple words, if the title of any of the prior party is defective, his title will not be defect free. Whereas, a holder-in-due-course derives a good title freed from all defects. His title is better than that of the transferor.
  5. Right to recover amount: A holder has a right to recover the amount due on the instrument from the transferor (i.e., just preceding party) only from whom he has obtained the instrument. Holder-in-due-course, on the other hand, can recover the amount due on the instrument from any of the prior parties till the instrument is duly discharged. Thus, all prior parties shall remain liable towards the holder-in-due-course, jointly as well as severally, till the instrument is duly discharged.
  6. Notice of defect in the Title: A holder-in-due-course is not only supposed to have acquired the instrument without any notice of the defect of the title of the person from whom he obtained it, but also there should be no cause on his part to believe that any defect sustains in the transferor’s title. But a holder is exempt from this condition. He may have notice of defect in the title but he shall not be liable for it unless he is a party to that defect, fraud, or forgery.
  7. Privileges: A holder-in-due-course enjoys certain privileges under the Negotiable instruments Act (as discussed earlier), which are not available to a holder.

Comparison Chart

BASIS FOR COMPARISON

HOLDER

HOLDER IN DUE COURSE (HDC)

Meaning A holder is a person who legally obtains the negotiable instrument, with his name entitled on it, to receive the payment from the parties liable. A holder in due course (HDC) is a person who acquires the negotiable instrument bonafide for some consideration, whose payment is still due.
Consideration Not necessary Necessary
Right to sue A holder cannot sue all prior parties. A holder in due course can sue all prior parties.
Good faith The instrument may or may not be obtained in good faith. The instrument must be obtained in good faith.
Privileges Comparatively less More
Maturity A person can become holder, before or after the maturity of the negotiable instrument. A person can become holder in due course, only before the maturity of negotiable instrument.

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