Question

What makes a Holder in Due Course magical as compared to an ordinary holder?

How does one qualify as a HDC??

When is a check deemed "overdue"?

What is the shelter principle?

Answer 1

What makes a Holder in Due Course magical as compared to an ordinary holder?

Solution:

While talking about negotiable instruments such as cheques, bills of exchange and promissory note, we came across the terms holder and holder in due course, quite commonly. Holder refers to a person; we mean the payee of the negotiable instrument, who is in possession of it. He/She is someone who is entitled to receive or recover the amount due on the instrument from the parties thereto.

On the other hand, the holder in due course i.e. HDC implies a person who obtains the instrument bonafide for consideration before maturity, without any knowledge of defect in the title of the person transferring the instrument.

The main point is that HDC is a person who has obtained the instrument in good faith and since he has obtained the instrument in good faith it makes a HDC magical as compared to an ordinary holder.

How does one qualify as a HDC??

To qualify as a HDC, the holder of instrument must meet the following requirements:

Value: the holder must pay some consideration to obtain the instrument.

Good Faith: The holder must receive the instrument in good faith, meaning that holder should not have any malifide intention and while obtaining instrument he was unaware of any defect of instrument.

When is a check deemed "overdue"?

A Cheque is never deemed overdue.

What is the shelter principle?

The shelter principle refers to the principle that a party which does not and cannot qualify as a holder in due course (HDC) with regard to a given negotiable instrument can actually still obtain those rights and privileges if that party obtained the instrument through an HDC.

Example: A HDC may gift a negotiable instrument to transfree, in this case the transfree did not provide any consideration so he can not qualify as HDC, but shelter rule will allow him to receive all the right of transferor i.e. HDC.