Privileges granted to a ‘holder in due course’ under the Negotiable Instruments are given below:
1. He gets a better title than that of the transferor:
ADVERTISEMENTS:
One who is a ‘holder’ only gets no better title than that of his transferor but a holder in due course is in a privileged position in that he gets a better title than that of the transferor and the defenses on the part of a person liable that the instrument has been lost, or has been obtained by means of an offence or fraud or for an unlawful consideration cannot be pleaded against a holder in due course (Sec. 58).
For example, if P obtains an instrument payable to bearer by theft or fraud, or for an unlawful consideration, he cannot sue on it. But if P transfers the instrument (being a bearer one) to R under circumstances (for value in good faith) which make R a holder in due course, R can sue on the instrument.
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The party liable to pay can take, as against P, the defence of theft or fraud, but as against R he will not be allowed to take such a defence.
Further, not only the holder in due course himself gets a good title free from all defects but also serves as a channel to protect all subsequent holders. Once an instrument passes through the hands of a holder in due course it is purged of all defects. Section 53 states that “a holder of a negotiable instrument who derives title from a holder in due course has the rights thereon of that holder in due course.”
ADVERTISEMENTS:
Thus, anybody who takes a negotiable instrument from a holder in due course can recover the amount from all prior parties, although he had knowledge of the prior defects e.g., no consideration was paid by some of the prior parties or some one of them was a thief.
It is important to note that a forged instrument, even if it passes through the hands of a holder in due course, cannot be cured of its defect because there is no defect of title but there is complete absence of title.
2. Privilege in case of inchoate stamped instruments (Sec. 20):
In the case of inchoate stamped instrument, if the holder or original payee fills more amount than that was authorised, he cannot enforce the instrument for the whole amount (only actual authorised amount can be recovered).
ADVERTISEMENTS:
If such an instrument is transferred to a holder in due course, he can claim the whole of the amount so entered provided that the amount is covered by the stamp affixed thereon. Thus, the defence that the amount filled by the holder was in excess of the authority given cannot be taken against a holder is due course.
3. Liability of prior parties:
All prior parties to a negotiable instrument (i.e., its maker or drawer, acceptor and intervening indorsers) continue to remain liable to a holder in due course both jointly and severally (i.e., he can hold any or all prior parties liable) until the instrument is duly satisfied (Sec. 36). Whereas, only preceding party is liable to a succeeding party, if the succeeding party is only a holder.
4. Privilege in case of Fictitious bills (Sec. 42):
When a bill of exchange is drawn in a fictitious name and is made payable to the drawer’s order (i.e., where both drawer and payee of a bill are fictitious persons), the bill is said to be a fictitious bill. Such a bill is not a good bill and cannot be enforced at law.
But the acceptor of such a bill is liable to a holder in due course provided the latter can show that the first indorsement on the bill and the signature of the supposed drawer are in the same handwriting.
5. Privilege when an instrument delivered conditionally is negotiated:
When a negotiable instrument is endorsed or delivered conditionally or for a special purpose only, e.g., as collateral security or for safe custody, and not with the idea of transferring absolutely property therein, the property in the instrument does not pass to the indorsee, and he is merely a bailee with limited title and power of negotiating it.
This, however, does not affect the rights of a holder in due course, i.e., if such an instrument is negotiated to a holder in due course, the parties liable on the instrument cannot escape liability (Sections 46 and 47).
For example, if I give a cheque to a shopkeeper with the condition that he should not encash the cheque till he supplies me the goods, anybody encashing the cheque prior to fulfilling the condition is liable to return the money except the holder in due course.
6. Estoppel against denying original validity of instrument (Sec. 120):
The plea of original invalidity of the instrument; e.g., that no consideration actually passed between the maker and the payee of a promissory note; cannot be put forth against the holder in due course by the drawer of a bill of exchange or cheque or by the maker of a promissory note or by an acceptor of a bill for the honour of the drawer.
However, the aforestated parties are not precluded from challenging the validity of the instrument on the ground that at the time of making the instrument he was a minor or his signature had been forged or the instrument is otherwise void ab-initio, e.g., where a promissory note is made ‘payable to bearer’ it is void and illegal as per the Reserve Bank of India Act.
7. Estoppel against denying capacity of payee to indorse:
“No maker of a note and no acceptor of a bill payable to order shall, in a suit thereon by a holder in due course, be permitted to deny the payee’s capacity, at the date of the note or the bill to indorse the same” (Sec. 121).
Thus, a holder in due course can claim payment in his own name despite the payee’s incapacity to indorse the instrument. As per Section 51, only a ‘holder’ or a person in lawful possession of the instrument is competent to indorse. Accordingly, a person who got the instrument for a gambling debt or for unlawful consideration cannot negotiate the same.
However, the holder in due course enjoys a privilege in this regard and he gets a good title even if he holds a negotiable instrument endorsed by a person who got the instrument for unlawful consideration because Section 121 provides that as against a holder in due course, no maker of a note and no acceptor of a bill payable to order shall be permitted to deny the payee’s capacity to indorse the same.