What is ‘better title to Holder in due course’?

The difference between the rights of ‘Holder’ and ‘Holder in due course’ is that the holder in due course gets a better title than the person from whom he acquired the title as he holds the instrument free from any defect of title of prior parties. For example, a stolen cheque was negotiated by the thief to a transferee and the transferee satisfies the conditions of the holder in due course. Here the holder (thief) does not have the right to claim from the maker or drawer whereas the holder in due course, who satisfies all the conditions to be a holder in due course, acquires a good title. The holder in the course is empowered with the right to recover the money not only from the thief but also from all prior parties like maker or drawer and any other prior endorsers.

Example 1: A payee (holder) was authorized by the drawer of the inchoate cheque to fill in the certain amount for payment. But the payee/holder fills in, excess amount than the drawer has actually authorized him to fill in and negotiates it to another person (holder in due course). In this case, the holder has filled the amount in excess of consideration amount; as such he cannot have legal recourse against the drawer. Mr.Gulabani, the holder in due course has the right to receive the full amount. He can sue both the drawer and payee to recover dues from them.

Example 2:

Mr.Panjwani issues a crossed cheque in favour of Mr.Khubchandani, which does not bear the words ‘not negotiable’ or ‘Account Payee’ therein. One Mr.Nowani steals it from the office of Mr.Khubchandani and endorses it to Mr.Gulabani who receives it for value in good faith without having  idea that the cheque is stolen by Mr.Nowani from Mr.Khubchandani’s office. In this case, Mr.Gulabani who satisfies all the conditions to be a holder in due course acquires a good title. The holder in course Mr.Gulabani is also empowered with the right to recover the money not only from the thief Mr.Nowani but also from all prior parties like Mr.Panjwani and Mr.Khubchandani.

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CLICK here to know ‘10 parties’ to a negotiable instrument viz. maker/drawer, drawee, payee, holder, holder in due course, endorser, endorsee, endorsement, drawee in the case of need, Acceptor for honour.