HOLDER IN DUE COURSE AND RIGHTS AND PRIVIELEGES

PROVIDED TO HOLDER IN DUE COURSE UNDER

NEGOTIABLE INSTRUMENTS ACT (INDIA)

:- Vinay Kumar Solanki

(Roll No. 953)

Room No. 209, Aamir Ali Halls of Residence

National Law University, Jodhpur (Raj.)
India
Phone: +91 9413142332
E-mail: vinaykumarsolanki.nluj@gmail.com

ABSTRACT:

Present paper basically throws light upon the different aspects of the concept of Holder in

Due course and also provides the Comparative Analysis of the Bills of Exchange Act

(U.K.) and the Negotiable Instruments Act (India). The author has tried to enumerate the

various anomalies which the Negotiable Instruments Act contains and which should be

removed as per the Bills of Exchange Act. Even the Law Commission of India has said in
th
its 11 Report that it would be better if India adopts the concept of Holder and Holder in

Due Course as it exists in U.K. since any divergence from the Bills of Exchange Act

would lead to various legal hazards. At the same time this paper talks about the rights and

privileges of the Holder in Due Course with many Indian as well as Foreign Judgments as

in the Negotiable Instruments Act and the Bills of Exchange Act.

Electronic copy available at: http://ssrn.com/abstract=2250222

 HOLDER IN DUE COURSE AND RIGHTS AND PRIVIELEGES

PROVIDED TO HOLDER IN DUE COURSE UNDER

NEGOTIABLE INSTRUMENTS ACT (INDIA)

HOLDER IN DUE COURSE

The phrase ‘Holder in Due Course’ shortens considerable the cumbrous English

equivalent ‘bona fide holder for value without notice.’ Sec. 9 of the Negotiable

Instruments Act imposes a more stringent condition on a Holder in Due Course as

compared to one under Section 29 (1) (b) of the Bills of Exchange Act, 1882. HE must

not only have acquired the bill, note or cheque for valid consideration but should have

acquired the instrument without having sufficient cause to believe that any defect existed

in the title of the person from whom he received the instrument.

Section 9 of the Negotiable Instrument deals with the concept of Holder In Due Course. It

is essential that a person who claims to be a holder in due course must show that he

acquired the instrument for valuable and lawful consideration, but Court can’t look into

such lawful and valuable consideration. 1 However, where the bona fides of the

transaction is impeached, the extent of the consideration given is a factor that the court

will consider in determining the question of bona fides.2

Consideration shall be something which not only party regards but the law can regard as

having some value. 3 It can be either positive in that, it requires doing of something or

1
Muthu Karuppa v Habib, AIR 1955 Mad. 43
2
Jones v Gordon, (1877) 2 App. Cas. 616, cited from Supra Note 23 at 61

3
Supra Note 1 at 144

Electronic copy available at: http://ssrn.com/abstract=2250222

negative in that, it requires forbearance. 4 Inadequacy of consideration must be

distinguished from the absence or failure of a part of the consideration in which case, the

instrument is not valid to that extent between parties in immediate relationship. It is also

necessary that the consideration should be lawful under s 2(d), of the Indian Contract Act

1872; past consideration is a good consideration and will support a negotiable instrument.

An antecedent debt or liability is sufficient to constitute a valuable consideration for a

negotiable instrument.5 It was formerly thought that an antecedent debt or liability was

not a sufficient consideration for a bill payable on demand but this Doctrine was

overruled in Currie v. Misa6 in England. But the antecedent debt or liability must be one

due from the maker or negotiator of the instrument and not from a third party. It is only a

person who comes into possession of an instrument after having paid consideration for it

and being a bona fide transferee that can be holder in due course within the meaning of

Sec. 9. Section 9 implies and contemplates that there must be a negotiation or a transfer

to the holder in due course by someone who has the authority to transfer the negotiable

instrument. The transfer and the negotiation must be of an inchoate instrument, which is

not a negotiable instrument under the Act. From the point of view of the proviso to the

section, it may also be said that in the case of inchoate document, it would be difficult to

hold that the possessor of it is a bona fide transferee or in possession of the negotiable

instrument.

The Section talks about the effective possession of an instrument. The section says that

the holder must have become the possessor of the instrument before the amount

4
Chidambram v Ranga, AIR 1966 SC 193
5
Indian Bank v K. Nataraja (1994) 79 Comp Cas 674.
6
(1875) 10 Ex 153.
mentioned in it became payable. Therefore, a person who takes a bill or note on the day

on which it becomes payable cannot claim the rights of a holder in due course, because

he takes it after it becomes payable, as the bill or note can be discharged by payment at

any time on that day. There is some difficulty in applying the words ‘before the amount

mentioned in it became payable to cheques and demand bills since they are payable

immediately. The words ‘before it was overdue’ appearing in Sec. 29(1) of the BE Act

are preferable.

In Gopalan v Lakshminarasamma7 it was held that a demand promissory note is not

payable until demand is made. Where an endorsee of a promissory note payable on

demand is not aware that the promissory note has been discharged or that any demand

was made, he must be deemed to be a holder in due course even if as a matter of fact, the

endorsement was made after the discharge. 8 And the rights of such a holder are co-

extensive only with those of the immediate transferor.

Under English Law the defendant may have a counterclaim for unliquidated damages

arising out of the same transaction is no defense against an action on a bill of exchange.

There can be a holder in due course of a post-dated cheque. 9

It has been held in various decisions of Hon’ble Supreme Court and various High Courts

that in such cases the rule of limitation has no application Where a note payable on

demand is negotiated it is not deemed to be overdue by reason that it appeared that a

reasonable time for presenting it for payment has elapsed since its issue. 10 The question

arises as to when did the amount mentioned in the promissory note become payable? And

the Hon’ble Court answered it as the promissory note became payable from the moment

7
AIR 1940 Mad 631.
8
Profulla Kumar v Harichandra, AIR 1956 Ori. 85.
9
Montechhi v Shimco (U.K.) Ltd., (1980) 1 Lloyd’s Rep. 50 cited from Supra Note 23 at 63.
10
Shaha & Co. v Bengal National Bank Ltd., 47 Cal. 861 cited from Supra Note 1 at 152.
of execution.11 No demand is necessary before bringing an action upon a note payable on

demand, because its payment is a duty which attaches the moment the loan is given and

the note is made. To put the matter differently, the creditor cannot extend the period of

limitation by omission to make a demand and time runs against him from the date of the

note, on the principle that the cause of action arises instantly on the loan and the contract

on the note is in a state of being broken perpetually. Clearly, these principles have no

application to a case under section 9 of the Act. The true rule applicable is that where a

note payable on demand is negotiated, it is not deemed to be overdue for the purpose of

affecting the holder with defects of title of which he had no notice by reason that it

appears that a reasonable time for preventing it for payment has elapsed since its issue. If

a promissory note payable on demand is after a certain time to be treated as overdue

although payment has not been demanded it is no longer a negotiable instrument. But a

promissory note payable on demand is intended to be a continuing security; it is quite

unlike the case of a cheque which is intended to be presented speedily. 12

11
Brojindra Kishore v Hindustan Co-operative Insurance Society, 44 Cal. 978.
12
Brooks v Mitchell (1841) 9 M&W 15 . Same view was held in plethora of decisions starting from Brough
v White, (1837) 2 N and W 461; Glasscock v Balls (1894) 24 QBD 13; Norton v Ella;, Rowe v Young.
DEFECTIVE TITLE:

What is the sufficient cause as to the defective title? Under English law, the only question

to be considered is whether the holder took the instrument in good faith and, once it is

proved that he did so, he is entitled to all the rights of a holder in due course

notwithstanding that he was careless, that he made no enquiry, and that he was informed

of facts which would have led a reasonable man to make further inquiry, provided,

however, that he had no notice of any defect in the transferor’s title.

Under sec. 90 of the BE Act it is not necessary that a holder should have actual

knowledge of what the particular wrong was, and if he, suspecting that there is something

wrong, avoids inquiry, lest he should come to know of any defect in the title, he cannot

be deemed to be acting honestly. It has been held in the case of Raphael v Bank of

England13 that it is immaterial whether at the time of taking the instrument, he was

negligent or not.

The Indian law is stricter and requires a higher degree of diligence from the person who

claims to be a holder in due course than in England. Under Indian Law, Privy Council

has held that the defective title of the transferor would not attach to the transferee merely

because of the latter’s negligence. Even the legislature seems to have intended to make

due care and caution on the part of the holder, a test of his bona fides and that mere good

faith on his part would not suffice. Accordingly, it seems negligence on the part of a

holder at the time of taking a negotiable instrument, would disentitle him to the rights of

a holder in due course. Under the Indian law, it is not enough to show that the holder

13
(1885) 17 CB 161.
acquired the instrument honestly, if in fact, he was negligent or careless. The Negotiable

Instruments Act follows the English rule laid down by Lord Tenterden in Gill v Cubitt14

according to which due care and caution were made the tests of bona fides. The stricter

rule of Indian law makes it difficult for dishonest transferors to part with negotiable

instruments, and honest transferors will not suffer from it, as they have no real difficulty

in persuading the transferees to take the instrument as their title is good, but the law

should be framed not only for the purpose of putting difficulties in the way of dishonest

brokers, but also to protect people who acting honestly take such instruments for value;

for otherwise, the rapidity with which the commercial business is transacted will be

seriously impeded and the very object of negotiable instruments will be defeated.

14
(1824) 3 B&C 466 cited from Ibid.
NOTICE OF DEFECTS:

If, at the time when the holder acquires his title as such, he has sufficient notice that a

defect exists in the title of his transferor, he is not a holder in due course. Notice means

knowledge of the facts or a suspicion that something is wrong combined with a willful

disregard of the means of knowledge. Notice of defects may be either actual or

constructive. Proof of such notice may be given by evidence that the transferee received

actual notice, or that he was made aware of facts from which knowledge of such defect

may reasonably be inferred.15 Notice and knowledge mean not merely express notice but

also knowledge or the means of knowledge to which the party willfully shuts his eyes and

a suspicion in the mind of party and means of knowledge in his power willfully

disregarded. Notice affecting the holder in taking a negotiable instrument must exist at

the time when he acquires the paper for then it is that his relation to the bill is fixed, and

subsequent notice will not affect his right to sue upon it. If a note is retransferred to a

former holder in due course, he is not deprived of his original rights, although on the

second occasion he takes with knowledge of defects or after maturity. However, where a

former holder has participated in the fraud or illegality affecting the instrument or is not

originally a holder in due course, he cannot by the repurchase of the note from such a

holder acquire his immunities, but the note is subject to the same equities if it had never

been in the hands of an innocent holder, and a re-transfer by him after maturity to a

former holder in due course does not reinvest the transferee with that status. Actual

knowledge of defects or of equities precludes a transferee from attaining the position of a

holder in due course although he paid the full value for the instrument.

15
Muthis Chetty v. Kasivasi Somasundara, (1911) 10 MLT 79 cited from Supra note 23 at 67.
RIGHTS AND PRIVILEGES OF HOLDER IN DUE COURSE

PRIVILEGE AGAINST INCHOATE STAMPED INSTRUMENTS [S. 20]:

The logical order of operations with regard to a bill is, no doubt, that the bill should be first riled

up, then it should be signed by the drawer, then it should be accepted, then it should be

negotiated, and then it should be indorsed by the persons who become successively holders; but

it is common knowledge that parties very often vary, in a most substantial manner, the logical

order of those proceedings, and Section 20 is intended to deal with those cases. In order,

however, to bring this section into operation the following conditions must be fulfilled. In the

first place, it is of the very essence of this liability that the defendant should have signed the

blank instrument and voluntarily parted with it with the intention that it should be filled up and is

used as such.

When the holder exceeds the authority in filling up the blank, he can of course no benefit from it

and American decisions go to the length of holding that his act is an utter nullity and no

advantage can accrue to him even to the extent of the authority given to him. 16 Under the proviso

to the section, the holder in such a case is entitled to recover the sum which was originally

intended to be paid. “As to a bona fide holder, the question as to the effect of the acceptance or

indorsement having been written on a blank piece of paper can be of no importance unless he can

be fastened with notice of the imperfection; he can be fastened with the notice of that

imperfection. If the holder has a notice of the imperfection, he can be in no better situation that

the person who took it in blank as to any right against the acceptor or endorser who gave it in

16
Daniel, 6th Edition, para 147; Leelavathi v Durairaj (1978) 2 MLJ 459.
blank.”17 Especially it is the case when the person takes the bill in an incomplete form, for he

cannot be bona fide holder for value as he has taken a piece of blank paper and not a bill 18, and

he can take it as a bill only under the authority given to his transferor. In that case, if he does not

satisfy himself as to the extent of the authority of the person transferring the bill, he acts at his

peril. 19 But a bill cannot be said to be incomplete and irregular simply because it was not

accepted at that time it was negotiated to the holder.20 It is only a bona fide holder for value that

is protected, so that if the holder had taken the bills for betting transactions and realized the

amount, the maker is entitled to recover the amount.21 There is in that case no presumption in his

favor.22 But, as to a bona fide holder for value he is absolutely protected and he is entitled to

recover though the amount for which it was intended to be issued is materially altered 23 or even

if the instrument is fraudulently used for a purpose other than the purpose for which it was

intended. 24 To entitle a person to the rights of a holder in due course the instrument must have

been completed before it was negotiated to him.

It is to be noticed that the authority to fill up is given only to a holder of an instrument, so an

agent of the person issuing the instrument under the section does not come within the purview of

this section; his authority will be regulated by the general law applicable to such authority. 25 In

England, it was once doubted whether the protection in favor of a holder in due course applies to

17
Hatch v Searles (1854) 2 Sm &G 147.
18
Goldsmid v Hampton(1858) 5 CB (NS)94.
19
Awde v Dixon (1851) 6Ex 869.
20
National Park Bank of New York v Berggren Co. & Beven (1914) 110 Lt 907.
21
Paine v Bevan (1914)110 LT 933.
22
Hogarth v Latham & Co (1878) 3 QBD 643.
23
Garrard v Lewis (1882) 10 QBD 30.
24
Guildford Trust Ltd v Gross (1927) 136 LT 725.
25
Smith v Prosser (1907) 2 KB 735 (CA).
a person who is first holder of the instrument and in the point of the fact, to the payee, 26 that is to

say, whether can be a payee in due course. 27 But the question is settled and a payee is not a

holder in due course. It is only a person who takes an instrument which is regular and complete

on its face who can be a holder in due course. In Indian law there is no room for controversy, as

under section 9 of the Act; ‘payee’ is included in the definition of “holder in due course”.

However, it should be noted that a holder of an inchoate instrument cannot become a holder in

due course by making himself the payee. To be a holder in due course he must come into

possession of a negotiable instrument and not an inchoate instrument. The authority conferred

upon a holder of an inchoate document under this section if to complete the document and

nothing more and by exercising the authority it can be said that there is negotiation or transfer in

his favor of a negotiable instrument. 28

26
Herdman v Wheeler (1902) 1 KB 361.
27
Jone v Warring and Gillow (1926) AC 670.
28
Tarachand v Sikri Brothers AIR 1953 Bom 290.
LIABILITY OF PRIOR PARTIES (S. 36):

The holder in due course of an instrument is entitled to maintain an action thereon in his own

name against all the prior parties to the instrument. However, in the event of dishonor, the holder

is not bound to sue all the prior parties liable to him under the instrument and he may, at his

option, select the parties he wants to recover his amount from.

The expression prior party in the section means the maker or drawer, the acceptor, and all the

intervening endorsees. Every prior party continues to remain liable on the instrument to every

subsequent party, and to a holder in due course, until the instrument is duly satisfied. 29 An

instrument is deemed to be fully satisfied if the liability of all the parties is extinguished, and the

instrument is discharged by payment or satisfaction thereof by the maker or acceptor before its

maturity. An instrument is not discharged by payment by the maker or the acceptor before its

maturity. Where an acceptor of a bill pays and takes up the instrument before maturity, he can

reissue and further negotiate it, though he has no right to enforce payment on it against any

intervening party to whom he was previously liable. 30

The comparison of s 35 and s 36 would show that while s 35 subjects to liability in any contract

to the contrary, s 36 has no such qualifying phrase and a holder in due course of a bill or note

may recover the amount due on the instrument notwithstanding the existence of facts and

circumstances attacking the validity of the transaction between the prior parties even including

want of consideration.

29
Radha Rukmani Ammal v Swaminacha Mudalier Sons and Co and anor (M/s)(2003)2 Bank CLR 552 (Mad).
30
Burbridge v Manners (1812) 5 Camp 184; Hubbard v Jackson (1827) 4 Bing 390.
ACCEPTOR CANNOT PLEAD AGAINST A HOLDER IN DUE COURSE THAT THE BILL IS DRAWN IN A

FICTITIOUS NAME (SEC 42):

Under the English Law, on the principle that acceptor is bound to know the signature of his

correspondent, i.e., the drawer, the acceptor is estopped from denying the signature of the

drawer, but under Indian Law there is no such estoppel against the acceptor. 31 Even in England,

this rule of estoppels does not apply to the case where a bill is drawn to the drawer’s order and

indorsed by him, in which case, the acceptor though he cannot deny the signature of the drawer,

may still question the genuineness of his signature as indorser.32 In one case a contrary view was

taken33 but Byles points out in his book on Bills of Exchange, 24 th Ed, P. 167 that “ clearly the

acceptor is not estopped disputing the validity and genuineness of the indorsement , as

distinguished from the drawer’s then capacity to indorse.”

The section reproduces the rule of English Common Law on the subject that:

[w]here a bill is drawn in the name of a fictitious person payable to the order of the drawer, the

acceptor is considered as undertaking to pay to the order of the person who signed as the drawer;

and therefore, an indorsee may bring evidence to show that the signature of the supposed drawer

of the bill and to the first indorsement are in the same handwriting. 34

When a bill is drawn payable to the order of the drawer, the drawer is also the payee of the bill.

The expression, a bill of exchange drawn in a fictitious name and payable to the order, therefore,

means that both the drawer and the payee are fictitious person. According to Lord Herschell:

31
Indian Evidence Act, Section 117.
32
Beeman v Duck (1843) 11 M & W 251; Byles, 24th Edition, page 166.
33
Tucker v Roberts (1894) 18 LJQB 169.
34
Cooper v Mayer (1820) 10 B&C 468.
“Whenever the name inserted as that of the payee is so inserted by way of pretence merely,

without any intention that payment shall only be made in conformity therewith, the payee is a

fictitious person…whether the name be that of an existing person, or of the one who has no

existence.”35

Before the Bills of Exchange Act, the law in England was that the acceptor was liable only if he

was aware of the fictitious character of the payee at the time of acceptance. 36 The law has since

been altered by the Act, by which it is provided that such bills may be treated as bills payable to

the bearer.37 Now, in England, an acceptor is not relieved from liability if the payee is fictitious,

whether the fact was known to him or not. The Indian Act does no throw any light on this point.

If the acceptor knows of the fictitious character of the payee, the case is not any worse than that

contemplated in section 41, ante. Moreover, if he accepts the instrument with such knowledge,

he perpetuates a fraud on third parties and he cannot escape liability by showing his own fraud. If

the acceptor has no such knowledge at the time of acceptance, lead to the conclusion that he is

liable. But it is to be noticed that under section 121 of this Act, it is doubtful whether the

acceptor is estopped from denying the existence of a payee.

It is observed that only a holder in due course can recover in an instrument in which the drawer

or payee is fictitious, this is so, because the law abhors the fraud, and discountenances any

instrument whereby fraud can be committed. They are never enforced, save in the hands if a

holder in due course, is entitled to recover. At any rate, under this section, the acceptor is liable

only to a holder in due course.

35
Bank of England v Vagliano Bros (1891) AC107.
36
Gibosn v Minet (1791) I H Bla 569.
37
Bills of Exchange Act, Section 7.
THE OTHER PARTIES LIABLE TO PAY CANNOT PLEAD THAT THE DELIVERY OF THE INSTRUMENT

WAS CONDITIONAL OR FOR A SPECIFIC PURPOSE ONLY (SEC 46):

Under the section, it may be shown that the instrument was delivered for some specific

purpose.38 Thus, if a holder indorses a bill to another specially for getting it discounted, and if

such other person indorses the bill in breach of trust, the indorsee, if not a holder in due course

cannot sue the original indorser, or any other prior party, as they can set up the defense of the

breach of trust of the original indorsee, and can plead that there was no delivery with intent to

pass absolute title.39 In the same way, one of two persons jointly interested in a bill indorses it to

another for collection in the joint account the latter cannot sue the former on the indorsement. 40

The maker of a note may show in a suit between him and the payee that he executed the note as

collateral security for a running account and that the state of account at that time was in his

favor41, or that the promissory notes sued on was executed and delivered only as security for the

payment of future installments to a chit fund 42, or that the note was intended to as additional

security for advances made on the security of goods, in case the latter proved insufficient 43 or for

collection only44. Moreover, if the person to him the instrument was delivered conditionally or

for a special purpose, misappropriates it, the true owner can recover the amount if already

realized, from him or from any other person taking it from him with notice of the conversion. 45

38
North and South Wales Bank v Macbeth (1908) AC 137.
39
Lloyd v Howard (1850) 15 QB 995.
40
Denton v Peters (1870) LR 5 QB 475, following Sattamuthu v Abdul Kareem AIR 1933 Mad 61.
41
Sundaram v Damodaram AIR 1924 Mad 850.
42
Elappa v Sesha 1938 Mad 897.
43
Bhogi Ram v Kishori Lal AIR 1928 All 289.
44
Khir Mohammad v Taj AIR (1936) Pesh 181.
45
Mutty Loll v Launcelot Dent 5 MIA 328.
It is to be noticed that these defenses are available “as between such parties and any holder of the

instrument other than a holder in due course”. The words are ambiguous, which ambiguity has

been avoided in the English Bills of Exchange Act, section21, by using the words “as between

immediate parties and as regards a remote party, other than a holder in due course”. Having

regard to the fact that the two Acts were drafted by the same person, viz., Sir Mackenize

Chalmers, and that no difference in law could have been intended, it has been decided in

Allahabad High Court46 that the true meaning of the words is “between the maker and the payee

or the indoser and the indorsee or the indorsee and any other than a holder in due course, or as

between any of such parties and any other”. Of course, as will be seen, the holder in due course

is always protected against such defenses.

46
Bhigi Ram v Kishori Lal AIR 1928 All 289.
HE GETS A GOOD TITLE TO THE INSTRUMENT EVEN THOUGH THE TITLE OF THE TRANSFEROR

OR ANY PRICE PARTY TO THE INSTRUMENT IS DEFECTIVE (SEC 53) HE CAN RECOVER THE FULL

AMOUNT UNLESS HE WAS A PARTY TO FRAUD; OR IF THE INSTRUMENT IS NEGOTIATED BY

MEANS OF A FORGED ENDORSEMENT:

The rule laid down in the section is subject to a qualification. That qualification is especially

enacted in the Bills of Exchange Act 47 and though the Indian Act is silent on this point, the

courts in India would hold the qualification as applicable to the cases arising in India also. If the

holder who derives his title from a holder in due course is himself a party to the fraud or illegally

affecting the instrument, he cannot claim the rights thereon of a holder in due course. Courts will

not help a party to reap the advantage of his own fraud. If he were a party to any fraud or

illegality, he does not acquire the rights and privileges of a holder in due course.

A holder deriving title from a holder in due course, stands in his shoes, and can sue the acceptor,

drawer, and all prior parties whom the holder in due course himself could have sued. However, it

is not necessary that the holder with a derivative title should have been given consideration for

the instrument.48 Thus a person to whom a holder in due course has transferred a bill for

collection can maintain a suit upon the bill in his own name as he is a holder deriving title from

the holder in due course and is component to sue under the section. 49

47
Bills of Exchange Act, Section 29 clause (3); Robinson v Reynolds (1841) 2 QB 196.
48
Subrao v Sitaram (1900) Bom LR 891.
49
Ardeshir v Khushaldas (1908) 10 Bom LR 268.
THE PERSON LIABLE CANNOT PLEAD AGAINST THE HOLDER IN DUE COURSE THAT THE

INSTRUMENT HAD BEEN LOST OR WAS OBTAINED BY MEANS OF AN OFFENCE OF FRAUD OR FOR

AN UNLAWFUL CONSIDERATION (SEC 58):

The general rule is, as between immediate parties, the defendant may set up any defense which

he might have set up if the action had been brought on any simple contract. A defense may be as

such it relates to the instrument itself, in which case it is good even as against a holder in due

course. For example, absolute incapacity of the defendant to make a contract, forgery of parties

to a signature, absence of effective delivery- any of these may be pleaded as defense is

complicated by any defense against any person except in cases where such defense is

complicated by any question of estoppels. But the equity must be one attaching to the bill itself

and not to any claim arising out of the collateral matters, such as the right of set off 50, though it

seems that by agreement it may be so.51 An agreement to credit certain amounts towards a bill

can by subsequent agreement before attached to the bill so as to affect a holder not in due course.

The plea of fraud in the obtaining of the instrument is good only against immediate parties but

not against a holder in due course, except in cases similar to Foster v Mackinnon.52 Again, the

defense that the instrument had been negotiated in breach of an agreement to use it for a

particular purpose only cannot be pleaded against a holder in due course. In such cases, when

once it is proved that there has been a breach of faith and fraud it is on the holder to prove that he

gave value for the note in good faith. Thus, where a bill is fraudulently negotiated instead of

being discounted as agreed upon, 53 or where a partner accepts a bill in the firm’s name in fraud

50
In re Overend Gurney & Co (1868) LR 6 Eq 344; Whitehead v Walker (1842) 10 M &W 696.
51
Holmes v Kidd (1858) 28LJ Ex 112; Ramamurthi v Nukoyya AIR 1942 Mad 30.
52
(1869) LR 4 CP 704.
53
Smith v Braine (1851) 16 QB 241.
of the other partners,54 the holder is not protected, unless he proves that he was a holder of a bill

given under undue influence may be restrained from negotiating the same, if he was a person

who had notice of the fact.55

54
Hogg v Skeen (1865) 18 CB (NS) 426.
55
Edwards v Dick (1821) 4 B & ALD 212.
THE VALIDITY OF THE INSTRUMENT AS ORIGINALLY MADE OR DRAWN CANNOT BE DENIED BY

THE MAKER OF DRAWER OF A NEGOTIABLE INSTRUMENT OR BY ACCEPTOR OF A BILL OF

EXCHANGE FOR HONOR OF THE DRAWER (SEC 120):

The section precludes the maker of a note, the drawer of a bill or cheque, and the acceptor for the

honor of the drawer from denying the validity of the instrument as originally drawn. The maker

and the drawer, by their respective agreements, are directly responsible for bringing these

documents in existence, and so they should not be allowed to plead that the instrument, as

originally made or drawn by them, was not valid. Similarly, an acceptor for the honor of the

drawer is bound by all estoppels, which bind the drawer, and he is not permitted to deny the

validity of the bill as originally drawn. However, validity of the instrument is different from

proving instrument itself, in accordance with law. Though s 120 makes it clear that no maker of a

promissory note or a drawer of a bill of exchange or cheque be permitted to deny validity of

instruments are admitted to be executed. 56 Therefore, in a suit by a holder is due course on a bill

or note, the defendant is not, under the section precluded from setting up the plea that he never

drew or made the instrument and that his name on it had been forged. A person is not precluded

under the section from denying the validity if the note on the ground that he was a minor as on

the date of the note, as the specific provision in s 120 is subject to the general rule enacted in s

26.57 The ordinary acceptor of a bill is not mentioned in the section. By virtue of s 117 of the

Indian Evidence Act 1872, it is enacted that no acceptor of a bill of exchange shall be permitted

to deny that the drawer had authority to draw or indorse the bill. The acceptor of a bill may,

however, deny that the bill was really drawn by the person by whom it purports to have been

drawn.

56
Saftarasab v B Alliah (2006)2 Bank CLR 418 (Kant).
57
Chengal Roya v Nainappa (1938) 177 IC 133.
The present section is wider than the section of the Evidence Act; for the estoppel under this

section precludes the drawer and acceptor for the honor of the drawer from denying the validity

of the instrument as originally drawn. Any circumstances which will vitiate the contract between

the original parties to the bill cannot be set up by person mentioned in the section such as fraud,

want of consideration, coercion etc. He cannot deny the existence of the payee or his then

capacity to indorse,58 but it has been held that in a suit by the payee on a promissory note which

offends against the Paper Currency Act and which is therefore on the face of it illegal, the maker

is not estopped from setting up the illegality of the instrument since the payee under such a

promissory note cannot be said to be a holder in due course, 59 and before a person can be

allowed to rely on the provisions of this section, he has to show that he is a holder in due

course.60

58
Bills of Exchange Act, section 55, clause (b).
59
Pethu v Chidambara AIR 1931 Mad 533.
60
Raza Ali v Rahat Hussain AIR 1933 All 754.
THE MAKER OF A NOTE OR AN ACCEPTOR OF A BILL PAYABLE TO ORDER CANNOT DENY THE

PAYEE’S CAPACITY TO INDORSE THE SAME AT THE DATE OF THE NOTE OR BILL (SEC 121):

By the very act of making a promissory note, the maker engages to pay the amount to the payee

named in the instrument, and thus acknowledges the capacity of the payee to receive the money,

and if the note be drawn payable to the order of a specified person, he admits the capacity of that

person to make the order for the payment of money. So, he cannot say in a suit by a holder in due

course that the payee was a corporation without legal exercise. The same rule applies in the case

of an acceptor to a bill of exchange. By this act of acceptance, he admits everything essential to

the validity of the existence of the negotiable instrument; and one of such essentials is the

capacity of the payee named in the instrument to receive the money to be paid by an indorsement

on the bill. 61 An acceptor is not allowed to show, when sued by a holder in due course, that the

payee was an infant,62 or that the drawers of a bill drawn payable to their own order were

infant,63 and again the maker of a note is estopped from showing that the payee of a bill was

insolvent incapable of indorsing the instrument, 64 nor can the acceptor be allowed to plead that

the payee was a married woman incapable of contracting. 65

But the case may be different if the insolvency or the insanity happened after the making of the

note or the indorsing of the bill; for in such cases, the indorsement by such a person is a mere

nullity and can confer no title on the indorsee, and acceptor is not justified in making payement

to anyone whose title is affected by it.66

61
Bills of Exchange Act, section 55, clause (2).
62
Jones v Dorah (1817) 4 Price 300.
63
Taylor v Croker (1802) 4 Esp 186.
64
Drayton v Dale (1823) 2 B & C 293.
65
Smith v Marsack (1848) 6 CB 486.
66
Alcock v Alcock (1841) 3 M & Gr 268.
ENDORSER IS NOT PERMITTED AS AGAINST THE HOLDER IN DUE COURSE TO DENY THE

SIGNATURE OR CAPACITY TO CONTRACT OF ANY PRIOR PARTY TO THE INSTRUMENT (SEC 122) :

The indorser engages that the bill or note is a valid and subsisting obligation binding on all

parties according to their position on the instrument; and he further represents to his indorsee that

he has a good and valid title to the instrument and he has a right to transfer the same.

To sustain his title to the instrument, he admits the genuineness of the prior indorsements and

represents that the signature of not only the drawer but also of the acceptor and those of the

indorser through whom he drives his title are genuine. The indorser admits not only the

genuineness of the signatures but also the capacity of all prior parties. The indorser contracts that

the original parties to the bill or note were competent to bind themselves whether as drawer,

acceptor or maker, as also that the indoser were competent to contract as indorsers and to indorse

the instrument.67 The indorsee takes the bill or note chiefly on the credit of the indorser, and the

indorser is not allowed to deny the fact that the goes to make up his title and the right of the

recovery against the persons who became parties to the instrument. So if the indorser’s title was

tainted by the forgery of an indorsement prior to his own, he is still bound on his indorsement to

his indorsee, though he is not aware of the forgery committed.68 The section does not, however

prevent the indorser from denying the validity of the instrument, for example, that the hundi was

one payable to bearer on demand as offering section 26 of the Paper Currency Act, now under

the Reserve Bank Act and hence invalid. 69

67
McGregor v Rhodes (1856) 6 E & B 266.
68
Bishen Chand v Rajendro 5 All 302.
69
Arunchalam v Narayanam 42 Mad 470 per Seshgiri Iyer, J.
The plaintiff only needs to prove that the indorsement made in his favor is true and valid and he

paid valid consideration for the same and he became the possessor of the instrument before the

amount mentioned in it became payable and that he believed that no defect existed in the title of

the assignor.

The plaintiff being holder in due course is entitled to the privilege conferred on him by the

statute. So by virtue of provisions 120 to 122 of the Negotiable Instrument Act, the dismissal of

the suit is illegal and unsuitable in law. The appellant plaintiff has satisfactorily proved the

endorsement in his favor and he became the holder in due course.