In order that a person can be called a holder in due course, he must show :
i. that he is the drawer of the negotiable instrument.
ii. that he has obtained it without consideration.
iii. that he has obtained it before the maturity of the negotiable instrument.
iv. that he has obtained the negotiable instrument in good faith.
Codes :
Holder in Due Course Requirements
To be recognized as a holder in due course of a negotiable instrument, specific legal conditions must be met. This status provides certain protections and rights to the holder.
Statement Analysis for Holder Status
- Statement i: This condition is incorrect. The drawer is the party who initially creates the instrument (like writing a cheque). A holder in due course is typically someone who receives the instrument later, not necessarily the original drawer.
- Statement ii: This condition is incorrect. Generally, a holder in due course acquires the instrument for value or consideration. Obtaining it 'without consideration' often implies it was a gift or obtained improperly, which disqualifies the holder status.
- Statement iii: This condition is correct. A key requirement is that the instrument must be acquired before its maturity date. This means the holder takes the instrument while it is still legally payable.
- Statement iv: This condition is correct. The holder must obtain the instrument in good faith. This implies honesty in fact and the absence of any knowledge (notice) of defects in the instrument or the title of the person who transferred it.
Summary of Correct Conditions
The essential criteria for being a holder in due course are acquiring the negotiable instrument before maturity and doing so in good faith.
Therefore, statements iii and iv accurately describe the necessary conditions.
Important Questions from Negotiable instrument Act, 1881
- Which of the following is not true in the context of a promissory note?
- Which of the following is not a negotiable instrument?
- Given below are two statements, one labelled as Assertion (A) and the other labelled as Reason (R). Read the statements and choose the correct answer using the code given below.
Assertion (A) : A 'negotiable instrument' means a promissory note, bill of exchange or cheque payable either to order or to bearer.
Reason (R) : Because it is said so under Section 13 of the Negotiable Instruments Act, 1881. - Read Assertion (A) and Reason (R) and answer using code below :
Assertion (A) : Where a bill is unintentionally cancelled by the holder or his agent and the cancellation is not apparent thereon, the bill is discharged.
Reason (R) : Above principle is laid down in Section 82 of the Negotiable Instruments Act.
Code : - Which one of the following statements is true ?
