The holder in due course is in a privileged position. Under the law he has the following rights;
1. Defects of instruments are eliminated:
The holder in due course gets a good title to the instrument even though the title of the transferor is defective. If X obtains an instrument by fraud, he cannot get payment. But if X transfers the instrument to Y under circumstances which make Y a holder in due course, Y can sue X on the instrument and get the amount due on it. The party liable to pay can take, as against X, the defence of fraud but as against Y he will not be allowed to take such a defence.
2. Unauthorised acts of an agent may be valid:
ADVERTISEMENTS:
Negotiable instruments are sometimes handed over to agents for a particular purpose; e.g., for collection. If the agent acts beyond his authority and transfers the instrument to a person who satisfies the conditions of a holder in due course, the latter can recover the amount mentioned in the instrument. The party liable to pay cannot plead that the agent acted without authority.
3. Good title in an inchoate stamped instrument:
The holder in due course gets a good title even though the instrument was originally an inchoate stamped instrument and the transferor complete the instrument for a sum greater than what was intended by the maker.— Sec. 20
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4. Liability of prior parties to holder in due course:
Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied. — Sec. 36.
5. Holder can file a suit in his own name:
The holder in due course can file a suit, against the parties liable to pay, in his own name.
6. Acceptance of bill drawn in fictitious name:
ADVERTISEMENTS:
The acceptor of a bill exchange drawn in a fictitious name and payable according to the drawer’s order is liable to pay to the holder in due course, if there is an endorsement on the bill signed in the same hand as the drawer’s signature and purporting to be made by the drawer. The acceptor cannot plead, by way of defence, that the bill is drawn in a fictitious name.—Sec. 42.
7. Unlawful instruments:
Instrument obtained by unlawful means or for unlawful consideration is valid when the possessor or indorse of the instrument is a holder in due course.—Sec. 58.
8. Estoppel against denying original validity of instrument:
The maker of a promissory note, the drawer of a bill of exchange or cheque, and the acceptor of a bill of exchange or cheque, and the acceptor of a bill of exchange for the honour of the drawer, in a suit thereon by the holder in due course, is not permitted to deny the validity of the instrument as originally made or drawn.—Sec. 120.
But section 120 does not prevent a minor from taking the defence of minority. Also, there is no liability if the signature is forged.
9. Estoppel against denying capacity of payee to endorse:
ADVERTISEMENTS:
No maker of a promissory note and no acceptor of a bill of exchange 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 bill, to indorse the same.—Sec. 121.
10. Estoppel against denying capacity of payee to endorse:
The indorser of a negotiable instrument, in a suit thereon by a subsequent holder, is not permitted to deny the signature or the capacity to contract of any prior party to the instrument.—Sec. 122.
11. Transferee from a holder in due course:
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.—Sec. 53.