Holder in Due Course is a legal term to describe the person who has received a negotiable instrument in good faith and is unaware of any prior claim, or that there is a defect in the title of the person who negotiated it.
For example; a third-party check is a holder in due course.
The 3rd party who gets the check is not aware of any prior issues with a check, such as it was overdue, dishonored when presented for payment, had any claims against it,
Holder in Due Course called protected holder or bona fide holder for value.
So Holder in Due Course means;
- If payment is not made on a negotiable instrument when it is due, the holder can use the court system to enforce the instrument.
- Various parties, including both signers and non-signers, may be liable for it.
- Accommodation parties (i.e., guarantors) can also be held liable.
The holder of a negotiable instrument means any person entitled in his name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.
A person is called the holder of a negotiable instrument if the following conditions are satisfied:
- He must be entitled to the possession of the instrument in his name and under a legal title.
- He must be entitled to receive or recover the amount from the parties concerned in his name.
The holder in due course is a particular kind of holder. The holder of a negotiable instrument is called the holder in due course if he satisfied the following conditions;
- The negotiable instrument must have the holder in due course. The negotiable instrument must be regular and complete in all respects.
- He obtained the instrument for valuable consideration.
- He becomes the holder of the instrument before its maturity before the amount mentioned in it becomes payable.
- He has no cause to believe that any defect existed in the title of the person from whom he derived his title.
What is Holder of Value
Where the value of a bill has at any time been given its holder is deemed to be a holder for value as regards the acceptor and all parties to the bill who become parties before such time.
The person who claims himself for value needs not himself give value. It may give the prior party.
Requirements for Holder in Due Course Status
- To qualify as an HDC, the transferee must meet the requirements established by the UCC
- The person must be the holder of a negotiable instrument that was taken:
- For value.
- In good faith.
- Without notice that it is overdue, dishonored, or encumbered in any way, and
- Bearing no apparent evidence of forgery, alterations, or irregularity.
Differences between Holder and Holder in Due Course
The definition of the terms ’’holder” and holder in due course we may derive the following points of difference between them.
The existence of consideration is not essential in the case of the holder but a holder in due course obtains the instrument after paying its full value.
The person entitled to be called holder in due course must become the possessor of the instrument before it becomes payable.
Whereas in case of holder neither actual possession nor any time limit within which it must be acquired is required.
The defect in the transferor’s title
The most important point of difference is that the holder in due course acquires an instrument without having sufficient cause to believe that any defect existed in the title of the transferor.
It means the holder in due course must obtain an instrument after taking all possible care about the transferors’ good title. This condition is not essential in the case of the holder.
A holder in due course possesses the right to sue upon the instrument in his name to recover the amount of the instrument from a liable party to pay others on.