Difference Between Holder and Holder in Due Course

Difference Between Holder and Holder in Due Course

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Jun 25, 2024 19:12 IST

A holder cannot sue prior parties whereas a holder in due course, has the right to sue prior parties for payment. A holder might or might not have obtained the instrument in good faith. Whereas, the holder in due course is required to be a bonafide possessor of a negotiable instrument. Holder and holder in due course are terminologies used in commercial law. These differ based on privileges and suing rights. In this article, we will explain the difference between holder and holder in due course. 

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In this article, we will be discussing the difference between holder and holder in due course. We will also be understanding the meaning of these entities.

Table of Contents

Distinguish Between Holder and Holder in Due Course in Banking Law

The following is a table defining the difference between holder and holder in due course based on the Negotiable Instrument Act, 1881.

Parameters Holder Holder in Due Course (HDC)
Meaning A holder is a person who has legally obtained a negotiable instrument, with name entitled on it, for receiving the payment from the parties liable. HDC is a person who acquires negotiable instrument in a good faith for consideration before it becomes due for payment and without any knowledge of the defective title of a party who transfers the instrument to him.
Consideration Not Required Required
Right to Sue A holder is not allowed to sue any prior parties. A holder in due course is allowed to sue every prior party.
Good Faith The instrument may or may not be obtained in good faith. The instrument must be obtained in good faith.
Privileges Comparatively less. More.
Maturity A person can become a holder, before or after the maturity of the negotiable instrument. A person is eligible to become a holder in due course, only prior to the maturity of the negotiable instrument.
Title Holder does not acquire a good title in case the title of any of the prior parties is defective. Holder in due course gains a good title even though there was a defect in the title of any prior parties to the instrument.

Who is a holder?

A holder is a person who legally obtains a negotiable instrument, such as a cheque, bill of exchange, or promissory note, with his/her name entitled on the instrument, to receive payment from the parties liable. The party that transfers the negotiable instrument should be legally capable. It does not include someone who finds a lost instrument payable to bearer or someone who is in the unethical possession of the negotiable instrument. A holder can become a holder, before or after the maturity of the negotiable instrument. A holder cannot sue all prior parties. The instrument may or may not be obtained in good faith by the holder.

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Advantages of being a Holder

  • Legal Possession: A holder has the legal right to possess the negotiable instrument.
  • Right to Receive Payment: A holder is entitled to receive and recover the amount due on the instrument from the parties liable.
  • Flexibility in Acquisition: A holder can become a holder either before or after the maturity of the negotiable instrument.
  • Right to Sue: A holder can enforce the instrument against the person who has signed it and the person from whom they received it.

Who is a Holder in Due Course (HDC)?

It is a person who acquires a negotiable instrument in a good faith for consideration before the instrument has become due for payment and without any knowledge of the defective title of party who transfers the instrument to him/her. A person is eligible to become an HDC only prior to the maturity of the negotiable instrument. This person is eligible to sue all prior parties. The instrument must be obtained in good faith by the HDC.

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Advantages of being an HDC

  • Good Faith Acquisition: He/she acquires the instrument in good faith and for value, indicating that they have exchanged something of value to obtain the instrument.
  • Protection Against Title Defects: Even if there is a defect in the title of any of the prior parties to the instrument, the person still obtains a good title to the instrument.
  • Right to Sue All Prior Parties: This entity can legally sue all prior parties to the instrument until the due amount is fully satisfied.
  • Acquisition Before Maturity: He/she acquires the instrument before its due date, which can be advantageous in certain financial transactions.
  • Greater Protection: The person enjoys more privileges and protections under the law compared to a regular holder.

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Key Differences between Holder and Holder in Due Course (HDC) :

Following are the key differences between holder and holder in due course:

  • The person acquires the instrument for consideration, while it is not necessary for a holder.
  • HDC is eligible to sue all prior parties to a negotiable instrument until the instrument is duly satisfied, whereas a holder of the instrument can enforce it against the person who has signed it and also against the person from whom he obtained it.
  • The person acquires the instrument before the amount mentioned in it becomes payable. But a holder may acquire the instrument even after it has become due for payment.
  • HDC gets a good title even though there was a defect in the title of any prior parties to the instrument. But a holder does not acquire a good title in case the title of any of the prior parties is defective.

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FAQs

Can a holder sue all prior parties like a holder in due course?

No, a holder can only enforce the instrument against the person who has signed it and the person from whom they received it. A holder in due course, on the other hand, can legally sue all prior parties to the instrument until the due amount is fully satisfied.

Does a holder in due course acquire a good title even if there is a defect in the title of any of the prior parties to the instrument?

Yes, one of the significant advantages of being a holder in due course is the protection against defects in the title of prior parties. Even if there is a defect in the title of any of the prior parties to the instrument, a holder in due course still obtains a good title to the instrument.

Is consideration necessary for a holder in due course?

Yes, a holder in due course acquires the instrument for value, which means they have paid something of value to obtain the instrument. This is not a requirement for a holder.

Can a holder become a holder in due course?

Yes, a holder can become a holder in due course if they meet the necessary conditions, such as acquiring the instrument in good faith, for value, and before its due date, and without any notice of a defect in the title of the person who transferred it.

About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio