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Difference between Holder and Holder in Due Course

Difference between holder and holder-in-Due-course

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Usage of cheques, bills of exchange, promissory notes commonly known as negotiable instruments have become very common nowadays. With the increase in usage of these systems, there has been an increase in frauds and other unacceptable methods. To keep a check on all these and save the innocent people from such activities we need laws. The Act that deals with such kinds of negotiable instruments are known as THE NEGOTIABLE INSTRUMENTS ACT 1881. Holder and Holder in Due Course are the key elements of the Act.

Background

This Act is traced back to 1866 when the 3rd Indian Law Commission drafted this Act. However, due to objections raised by the mercantile committee because of its deviation from English Law, it could not be adopted. In 1877 the bill was redrafted. Further, it was reviewed by a select committee. In spite of the efforts, the bill failed to succeed. After three successive failures, the fourth draft was presented and accepted in the council which then turned into law in 1881 becoming the 26th Act of the year 1881. As the name suggests this Act purely talks about cheques, bills of exchange, promissory notes. It talks about drawee, drawer, drawee in case of need, acceptor, acceptor of honour, payee, holder, the holder in due course, payment in due course, inland instrument, foreign instrument, negotiable instruments etc. This Negotiable Instrument Act briefs us about the liabilities of different people involved in the transaction. 

Who is a Holder?

A person who has obtained the negotiable instrument legally through a third party by delivery or endorsement is known as a holder. He is usually the payee of a negotiable instrument. He is entitled to claim the amount due on the negotiable instruments through the parties liable. The party that is transferring this negotiable instrument should be capable of doing it in the eyes of law. 

  1. If the instrument is obtained by the holder through false endorsement then the previous endorser is considered to be the owner. 
  2. In case of a bearer cheque, the person in whose name it is made or payee is only the holder of that cheque.
  3. If it is damaged or lost the last endorsee is considered as the holder of the cheque. The reasoning is that a thief cannot be a holder. 
  4. If the instrument is lost, the holder has a right to obtain a duplicate from the drawer. 
  5. Post the death of payee or endorsee, the legal heir is considered to be the holder not the holder in course. 
  6. A holder has a right to cross the cheque. 11

Who is a holder in due course?

Holder in due course obtains the negotiable instrument in good faith for the consideration prior it becomes due for payment. Holder in Due Course refers to the person who is in possession of the value before it becomes overdue when it is payable to the bearer. When it is payable to order, HDC is the person who is the endorsee or payee of the instrument before it matures.22

What are the Differences between Holder and Holder in due course?

Following are the differences:

  1. Possession:

A holder may or may not be in possession of the instrument but, the holder in due course is always in possession of the instrument. This is the primary difference between these two.

  1. Entitlement:

The holder is entitled to the possession of the instrument in his own name. Holder in due course has obtained it in good faith for some consideration. 

  1. Consideration:

Consideration is not necessary in case of a holder but, in case of a holder in due course consideration is vital. 

  1. Title:

If the prior parties are fraudulent and don’t have a legal title to deliver or endorse the instrument to the holder, the holder also has no right to the same. However, a holder in due course is free from the fraudulent prior parties and has a better title than the transferer. 3

  1. Right to sue: 

A holder does not have a right to sue all the prior parties related to the transaction. However, the holder in due course has a complete right to sue all the prior parties.

  1. Good Faith:

The holder may or may not obtain the instrument in good faith but, the holder in due course always obtains the instrument in good faith. 

  1. Privileges:

Privileges of a holder are very minimal whereas privileges given to the holder in the course are much more. 

  1. Maturity of the instrument:

Maturity of the instrument can also be used to differentiate between holder and holder in due course. A person can be a holder before or after the maturity of the instrument; however, a holder in due course is valid only until the maturity of the instrument. 

Conclusion

The Act that deals with such kinds of negotiable instruments is known as THE NEGOTIABLE INSTRUMENTS ACT 1881. This Act is traced back to 1866 when the 3rd Indian Law Commission drafted this Act. However, due to objections raised by the mercantile committee because of its deviation from English Law, it could not be adopted. After three successive failures, the fourth draft was presented and accepted in the council which then turned into law in 1881 becoming the 26th Act of the year 1881. A person who has obtained the negotiable instrument legally through a third party by delivery or endorsement is known as a holder. He is usually the payee of a negotiable instrument. Holder in due course obtains the negotiable instrument in good faith for the consideration prior it becomes due for payment. Holder in Due Course refers to the person who is in possession of the value before it becomes overdue, when it is payable to the bearer. These two can be differentiated on the basis of their possession, entitlement, consideration, title, right to sue, good faith, privileges, the maturity of the instrument. Holder in due course holds a better title than a holder. He has a right to sue all the prior parties involved in the transactions. Holder in due course obtains the instrument in good faith through consideration. On the contrary, a holder is entitled to the instrument. 

Endnotes

  1. Difference between holder and holder due course, GKTODAY, (22 Nov, 2015), https://www.gktoday.in/gk/difference-between-holder-and-holder-in-due-course/
  2. Surbhi S, Difference between Holder and Holder in due course, KEYDIFFERENCES, ( 14 Oct, 2017), https://keydifferences.com/difference-between-holder-and-holder-in-due-course.html#Definition
  3. Difference between holder and holder in due course, ACCOUNTLEARNING, (May 21, 2020), https://accountlearning.com/differences-between-holder-holder-in-due-course/ 
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Anusha Nookala

Student, Symbiosis Law School Hyderabad

Anusha Nookala is a student at Symbiosis Law School, Hyderabad currently pursuing BBA LLB. She is a corporate law enthusiast.  She is an effective and attentive speaker and listener, highly organized and detail-oriented individual. For any Clarifications, feedback, and suggestion, you can reach her at l.anusha@student.slsh.edu.in

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