Holder, Holder in Due Course and Consideration: Complete Notes (Part C)

Part C deals with the persons who can enforce an instrument and the role of consideration: the holder, the holder in due course, consideration and accommodation instruments, and lost instruments. This consolidated note covers Topics 12 to 15.

12. Holder (Section 8)

A holder is a person entitled in his own name to the possession of a note, bill or cheque and to receive or recover the amount due from the parties. Entitlement, not possession, is the test: a finder, a thief and a person taking through a forged indorsement are not holders, while an agent or benamidar in whose name the instrument stands may be. If the instrument is lost or destroyed, the holder is the person entitled at that time. A holder may negotiate, present, discharge and sue, but takes subject to defects in title and to defences between the parties, and after maturity or dishonour has only his transferor's rights (Section 59).

13. Holder in Due Course

Under Section 9, a holder in due course is a person who, for consideration, became the possessor of a bearer instrument or the payee or indorsee of an order instrument, before maturity, and without sufficient cause to believe in a defect in his transferor's title. Indian law demands reasonable care, not mere good faith, and includes the payee.

• Privileges: title free of defects arising from loss, offence, fraud or unlawful consideration (Section 58); liability of all prior parties (Section 36); full recovery on inchoate instruments (Section 20); immunity from failure of consideration (Section 43); estoppels (Sections 120 and 121); and the presumption in Section 118(g), which shifts to the holder where fraud or offence is shown.
• Shelter rule (Section 53): a holder deriving title from a holder in due course has his rights.
• Limits: forgery, incapacity and unauthorised material alteration remain defences even against a holder in due course.

14. Consideration and Accommodation

• Presumption: every instrument is presumed to be for consideration (Section 118(a)), which may be past. It is rebuttable on a preponderance of probabilities (Kundan Lal Rallaram, 1961; Bharat Barrel, 1999).
• Section 43: absence or failure of consideration creates no obligation between the immediate parties, but a holder for consideration and those claiming through him recover from all prior parties. The accommodated party cannot sue the accommodation party (Exception I), and a party who failed to perform recovers only the value of what he performed (Exception II).
• Sections 44 and 45: partial absence or failure of money, or of consideration ascertainable in money without collateral inquiry, proportionally reduces what a holder in immediate relation can recover.
• Accommodation party: signs without consideration to lend credit; not liable to the accommodated party, but liable to a holder for value even with knowledge, and to a good faith holder after maturity (Section 59, proviso).

15. Lost Instruments

The holder of a bill lost before it is overdue may require the drawer to give a duplicate of the same tenor, giving security if required, and the drawer can be compelled (Section 45A). A person claiming through the finder cannot recover unless he or a prior holder was a holder in due course (Section 58): possible for bearer instruments, impossible for order instruments transferred by forged indorsement. A suit on a lost instrument succeeds on proof of loss and an indemnity (Order VII, Rule 16 CPC), with the contents proved by secondary evidence. Stop payment instructions, duplicate drafts against indemnity and bills in sets are the practical safeguards.

16. The Topics of This Part

Topic 12: holder (Section 8); Topic 13: holder in due course (Sections 9, 53, 58 and 59); Topic 14: consideration and accommodation instruments (Sections 43 to 45); Topic 15: lost instruments and duplicates (Section 45A).