Conditions to be called Holder in Due Course

1. He must be a Holder: The holder of a negotiable instrument must have the right to possess the instrument in his own name and also the holder must have the right to recover or receive payment from the parties liable to pay for the negotiable instrument.

2. He must be a Holder for a Valid Consideration: The holder of a negotiable instrument must have given lawful consideration to acquire the negotiable instrument. If someone gets a cheque as a gift, he cannot become a holder in due course of that cheque. Therefore, if a person gets an instrument without consideration, he cannot enforce it as a holder in due course.

3. He must Acquire the Instrument before Maturity: The holder of a negotiable instrument must have acquired the instrument either on or before the date of maturity. In the event that the holder acquires the instrument after the date of maturity, the holder will not get a better title than that which is available with the transferor. However, an accommodation bill can be negotiated even after the date of maturity with all the benefits of the holder in due course for the transferee. In the case of an instrument payable on demand; e.g., a cheque, he must have gotten it within a reasonable period of time of its issue.

4. The Instrument should be Complete and Regular: The holder, in due course, must take the negotiable instrument complete and regular on its face. He must examine its form, contents, and material defects in the instrument, such as defects regarding the name of the drawer, date, stamp duty, etc.

5. Holder must take the Instrument in Good Faith: The holder of a negotiable instrument must take the instrument in good faith which means, acting without any negligence and honesty. But good faith, regarding the title of transferor, on the part of the holder is not sufficient. The holder must have taken the negotiable instrument without having any sufficient cause to believe that person from whom he derived his title has a defective title.

A Negotiable Instrument is a signed document that promises a particular payment to a specified person or holder of the instrument. In India, negotiable instruments are governed under the umbrella of the Negotiable Instruments Act, 1881. This is a significant law that governs all means of negotiable instruments in India. The act establishes a regulatory framework for promissory notes, bills of exchange, and cheques. The act was enacted to provide uniform legal regulations to cover all aspects of negotiable instruments in India. Several times, the act has been amended to make sure that it is in line with changing business practices and new judgments.

The Negotiable Instruments Act, 1881 does not define the term negotiable instruments. But while referring Section 13 of the act, provides only three kinds of negotiable instruments; Bills of Exchange, Promissory Notes, and Cheques, these instruments can be payable either to the order or the bearer.

Geeky Takeaways:

• A negotiated instrument is a signed document that promises a particular payment to a specified person or holder of the instrument.
• The Negotiable Instruments Act, 1881, is the governing act to provide a regulatory framework for all types of negotiable instruments.
• Section 13 of the act provides for three kinds of instruments, namely bills of exchange, promissory notes, and cheques.
• A holder is a person who has legally obtained the negotiable instrument, with his name entitled to it, in order to receive payment from the parties liable for payment.