The ‘holder in due course’ means any person who for consideration became the possessor of a negotiable instrument if payable to bearer, or the payee or indorsee thereof if payable to order, before the amount mentioned in it became payable, and without sufficient cause to believe that any defect existed in the title of the person from whom he derived his title (Sec. 9).
Thus, in order to be called a ‘holder in due course’ a person must possess the following qualifications:
ADVERTISEMENTS:
1. He must be a ‘holder’, i.e.:
He must be entitled to the possession of the instrument in his own name under a legal title and to recover the amount thereof from the parties liable thereto.
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2. He must be a holder for valuable consideration, i.e.:
There must be some consideration to which law attaches value. The consideration, however, need not be adequate. A donee, who acquires title to the instrument by way of gift, is not a holder in due course for want of consideration, although he is a holder.
ADVERTISEMENTS:
The consideration must also be lawful. Thus, a debt incurred in gambling is not valid or lawful consideration, and a person who acquires a bill or note in consideration of such a debt is not a holder in due course.
3. He must have become the holder of the negotiable instrument before its maturity:
The holder who acquires a negotiable instrument after maturity cannot be a holder in due course. But an accommodation bill can be negotiated after maturity with all benefits of a holder in due course to the transferee (Sec. 59).
In case of instruments payable on demand, e.g., a cheque, he must have taken the instrument within a reasonable time of its issue. After the lapse of reasonable length of time the cheque becomes over due and anyone who takes an overdue cheque cannot be a holder in due course.
ADVERTISEMENTS:
4. He must take the negotiable instrument complete and regular on the face of it:
It is the duty of every person who takes a negotiable instrument to examine its form and contents thoroughly, for if it contains any material alteration which has not been confirmed by the drawer through his signature, or if it is incomplete, say, drawer’s name is not there or it is not properly stamped, he will not become a holder in due course.
5. He must have become holder in good faith:
Without having sufficient cause to believe that any defect existed in the title of the transferor. This is the most important condition to be satisfied. He must exercise great care and take all necessary precautions in finding out if the transferor’s title was defective.
Moreover, he must take the instrument without any negligence on his part. If there is something to arouse a suspicion and he takes the negotiable instrument without making proper inquiries he cannot be said to be acting in good faith and cannot be called a holder in due course.
For example, when he takes a bill which has been torn and the pieces pasted together, at least if the tears appear to show an intention to cancel it, without inquiry, he is not a holder in due course.