The difference Between a "HOLDER" and a "HOLDER IN DUE COURSE:" The Law & Practice in Uganda
The position of a holder is very important in the law of banking
in the operation of bills of exchange because it is they that these instruments
are issued to by a drawer. It is from a holder that we get the type “holder in
due course” but both are embodied in the Bill of Exchange Act.[1] This paper will look into how one becomes a holder in due
course, the rights and privileges that accrue from this position and then I
will give the differing provisions from the English law to that of Uganda’s
law.
Definitions
A bill of exchange is
an unconditional order in writing, addressed by one person to another, signed
by the person giving it, requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum certain in money to or
to the order of a specified person or to bearer[2].
According to Section 1(i) Bills of Exchange Act[3] , “a holder means
the payee or endorsee of a bill or note who is in possession of it, or the
bearer of a bill or note.”
A holder in due course is
defined under S.28 Bills of Exchange Act[4] as “a
holder who has taken a bill, complete and regular on the face of it, under the
following conditions namely, that he or she became the holder of it
before it was overdue, and without notice that it had been previously dishonoured,
if that was the fact and that he or she took the bill in good faith and
for value, and that at the time the bill was negotiated to him or her he or she
had no notice of any defect in the title of the person who negotiated it.”
The difference between a holder and a
holder in due course lies in the requirements and rights and liabilities, and
then the payee holder can never be a holder in due course. The requirements
that we draw from the definition of a holder in due course include; that a holder
in due course must be a holder a negotiable instrument that was taken: for
value, in good faith, without notice that it is overdue, dishonoured, or
encumbered in any way, and, bearing no apparent evidence of forgery,
alterations, or irregularity.
Requirements of a holder in due course
A holder in due course
must be a holder[5]
Every holder of a bill is presumed to be
a holder due course[6],
until fraud or illegality is admitted or proved in the acceptance, issue or
negotiation of the bill.[7] The
presumption is rebuttable by a party alleging that the holder, in question is
not a holder in due course presenting evidence to prove that the requirements
of a holder in due course have not been satisfied. Vaughan Williams L.J in Talbot
v Jan Bons[8] made
a quotation that set out the law in England on cases coming under section 30(1)
(equivalent to section 29(1) cap 68) Bills of exchange Act. Where he said that:
“ the presumption in such a
case is that the instrument was given for good consideration” and goes
on to say that “if the defendant intends to set up the defence that
value has not been given, or that the instrument was originally obtained by
fraud the burden of proving that lies on him”
However, if in an action on a bill, it
is admitted or proved that the acceptance, issue or subsequent negotiation of
the bill is affected with fraud, duress, fear, force or illegality, the burden
of proof is shifted. This means that the holder of the bill will not be
regarded as a holder in due course unless he proves that he was not a party to
fraud, illegality or duress and that he obtained the bill for valuable
consideration, in good faith without notice of defects to the bill. It is for
this reason that in Hassanali Issa & Co. V Jeraj Produce Store[9], Duffus
J.A observed that“if a duress, force or illegality was proved as having
affected the bill judgement would have been entered for the defendants.”
Holder in due course for value and in good faith
The presumption of good faith and value is that; every
party whose signature appears on a bill is prima facie deemed to have become a
party to it for value.[10] Then
every holder of a bill is prima facie deemed to be a holder in due course; but
if in an action on a bill it is admitted or proved that the acceptance, issue
or subsequent negotiation of the bill is affected with fraud, duress, or force and
fear or illegality, the burden of proof is shifted, until the holder proves
that, subsequent to the alleged fraud or illegality, value has in good faith
been given for the bill.[11]
The general rule is provided under s 28(3) of the Bill of
Exchange Act[12] which
provides that A holder (whether for value or not) who derives his or her title
to a bill through a holder in due course, and who is not himself or herself a
party to any fraud or illegality affecting it, has all the rights of that
holder in due course as regards the acceptor and all parties to the bill prior
to that holder.
To Holden[13],
‘the rule applies where a cheque affected by some fraud or illegality is
negotiated to a person who has no knowledge of such irregularity and who
becomes a holder in due course. Although the transferee has knowledge of the
irregularity and has not given value for the cheque, he has all the rights of
the original holder in due course as regards all parties prior to the holder.’
A holder in due course without notice
To acquire the status of a holder in due course, a holder
must take the instrument without notice. This is in accordance with the
Bill of Exchange Act[14] which
states that, “A holder in due course is a holder who has taken a bill,
complete and regular on the face of it, under the following conditions that he
or she became the holder of it before it was overdue, and without notice that
it had been previously dishonored, if that was the fact.”
Notice of a defective instrument is given whenever the holder
has actual knowledge of a defect; or has received notice of the defect from
bank identifying serial number of stolen checks; or has reason to know that a
defect exists, given all of the facts and circumstances known at the time.
The bill must be
complete and regular on the face of it
An incomplete bill is either undated,
does not state an amount or lacks a required signature for example an
endorsement. A bill which merely lacks an acceptance is not incomplete.[15] Once
any essential element of form is lacking, the transferee cannot be a holder in
due course.[16]
However, Section 2(4) of
the Bill of Exchange Act provides that a cheque is not invalid by
reason that it is not dated. And section 11 gives the holder
power to fill in the date. Lord Denning in Arab Bank
Ltd V Ross[17]observed
that though a cheque without a date is not invalid, it is not complete and
regular for purposes of Section 28 because regularity is different
thing from validity. A cheque is regular on the face of it whenever it is such
as not to give rise to any doubt that it is the endorsement of the payee. Lord
Denning further observed that as when an endorsement will give rise to doubt is
a practical question which is a rule, better answered by a banker than a
lawyer. Bankers have to consider the regularity of endorsement every week, and
every day of week, and every hour of every day; whereas the judges sitting in
the court have not had to consider it for the last twenty years.
Shelter principle
Acquiring the holder in due course status in the shelter
principle[18]which
states that;
‘A person who does not qualify as a holder in due course can, nonetheless,
acquire the rights and privileges of a holder in due course if he or she
derives his or her title to the instrument through a holder in due course.’ To
qualify as a holder in due course under the shelter principle, the following
rules apply: The holder does not have to qualify in his or her own right. The
holder must acquire the instrument from a holder in due course or be able to
trace his or her title back to a holder in due course. The holder must not have
been a party to a fraud or illegality affecting the instrument. The holder
cannot have notice of a defense or claim against the payment of the instrument.
Rights and privileges
of a holder in due course.
A holder of a bill has
the right to sue on the bill in his or her own name[19].To discharge a bill there must be
payment to the holder in due course, which must be by or on behalf of the
drawee or accepter.[20]In
case of failure to obtain payment on the bill, the holder in due course has the
right to enforce payment from all prior parties to the bill.
A holder in due
course takes the bill free from equities, he can defeat any defences arising
from defects in title, or from the dealing between prior parties to the bill. As
provided for in s 37(b) Bills of Exchange Act[21],
the holder of a bill where he is a holder in due course , holds the bill free
from any defect of title of prior parties as well as from mere personal
defences available to prior parties among themselves and may enforce payment
against all parties liable on the bill. It goes without say that a holder in
due course can enforce payment notwithstanding defences available to prior
parties among themselves and despite defects in the title of any prior party.
Where the discounter is a holder in due course, he can enforce the bill of
exchange against a drawee who has accepted it in the mistaken belief that a
forged bill of lading attached was genuine[22].
This was derived from Guaranty Trust Co. of NewYork V Hannay & Co.[23] where
it was held that the plaintiffs did not, by presenting the bill of exchange for
acceptance, warrant or represent the bill of lading to be genuine, and that the
defendants were not entitled to recover back the money paid to the plaintiffs.
Section
37(c)(i)&(ii), provides that a holder of a bill
whose title is defective and he or she negotiates the bill to a holder in due
course, that holder obtains a good and complete title there to and payment
thereon discharges the drawee from liability under the instrument. However a
banker marking a cheque with a reason for dishonour clearly prevents subsequent
parties from becoming holders in due course.
Under S.28(3)[24], a
holder in due course can pass a good title with all his rights to a holder,
whether for value or not, who is not himself a party to any fraud or illegality
affecting it. The rule applies where a cheque affected by some fraud or
illegality is negotiated to a person who has no knowledge of such irregularity
and who becomes a holder in due course. He then negotiates the cheque to
someone who has knowledge of the fraud or illegality but not himself a party
thereto.
Scrutton LJ stated in Slingsby
And Ors V District Bank Limited[25] that
a holder in due course might not be affected by an alteration not apparent.
According to S.63(1) Bills of Exchange Act[26],where
a bill is materially altered but the alteration is not apparent, and the
bill is in the hands of a holder in due course, such a holder may avail himself
of the bill as if it had not been altered and may enforce payment of it
according to its original tenor. Material alteration may be in the form of
alteration of the date, the sum payable, the time of payment, the place of
payment and where a bill has been accepted generally, the addition of a place
of payment without the acceptor’s consent[27].
The holder in due course however has the
right in every case where a wrong date is inserted, if the bill subsequently
comes into his hands, the bill shall not be avoided thereby, but shall operate
and be payable as if the date so inserted had been the true date,[28] the
holder in due course has the privilege of inserting a date on the bill.
Another right of a holder in due course
can be found in the provisions of S.19(2) Bills of Exchange Act[29],where
an inchoate instrument which is converted into a bill, but not within a
reasonable time or in accordance with the authority given is negotiated to a
holder in due course is valid and effectual for all purposes in his hands and
he/she may enforce it as if it had been filled up within reasonable time and
strictly in accordance with the authority given.
A holder in due course
is also privileged not to be affected by dishonours. Section 35(5)
provides that where a bill which is not overdue has been dishonoured, any
person who takes it with notice of the dishonour takes it subject to any defect
of title attaching thereto at the time of dishonour, but nothing in this
subsection affects the rights of a holder in due course. Where a bill is
dishonoured by non-acceptance and notice of dishonour is not given, the rights
of a holder in due course subsequent to the omission are not to be prejudiced
by the omission.[30]Therefore it
is upon the drawee to make it visibly clear on a bill that it has been
dishonoured by non-acceptance otherwise the rights of a holder in due
course will still remain unaffected by this because of the privilege of
lack of notice of dishonour created under the provision.
In section 54(1)(b) the
holder in due course is privileged that drawer of a bill is precluded from
denying to a holder in due course the existence of the payee and his then
capacity to endorse. The
maker of a promissory note is also precluded from denying to a holder in due
course the existence of the payee and his or her then capacity to endorse[31] So when
a payee indorses a bill to a holder in due course and it is defected, he can
bring an action against the drawer but the drawer cannot deny the existence of
the payee or his capacity to endorse.
A holder in due course is also
privileged under section 55 which provides that where a person
signs a bill otherwise than as a drawer or acceptor, he thereby incurs the
liabilities of an endorser to a holder in due course. As such, this provision
serves to protect the interests of a holder in due course as well as curtailing
people who wish to hold out as drawers yet they are not.
Differences between Ugandan law and English law
The section on inchoate situations[32] in
Uganda’s Bill of Exchange Act was repealed under The Finance Act, 1970,[33] which
incorporates the Britain’s Bill of Exchange, 1881. The section repealed provides
that; ‘Where a simple signature on a blank stamped paper is delivered by the
signer in order that it may be converted into a bill, it operates as a prima
facie authority to fill it up as a complete bill for any amount the stamp will
cover, using the signature for that of the drawer, or the acceptor, or an
endorser; and, in like manner, when a bill is wanting in any material
particular, the person in possession of it has a prima facie authority to fill
up the omission in any way he or she thinks fit.’
The UK Consumer Credit Act, 1974 now
incorporates the sections on holder in due course and negotiable instruments
from Bill of Exchange Act of 1882 and these are provided under section 123 to
125 of the UK Consumer Credit Act.
The act disqualifies a holder in due course who takes a
negotiable instrument except for a cheque contrary to section 123.[34] Section
29 of the Uganda Bill Of Exchange Act was excluded by the Consumer Credit Act,
1974 section 125(1)[35] which
incorporated the holder in due course. This provides that “person who
takes a negotiable instrument in contravention of section 123(1)[36] or
(3)[37] is
not a holder in due course, and is not entitled to enforce the instrument.”
Section 29(2) of the Uganda Bill Of Exchange Act was amended by
the Consumer Credit Act, 1974 section 125(2)[38] which
incorporated the holder in due course. It is provided there under
that “Where a person
negotiates a cheque in contravention of section 123(2), his doing so constitutes
a defect in his title within the meaning of the Bills of Exchange Act 1882.”
Conclusion
The laws of Uganda[39] have
protected a holder in due course and it is nearly impossible to impeach him of
his rights to payment on a bill except for instances where fraud, duress, force
or illegality have been proved against the holder in due course which would
disqualify him automatically as a holder in due course. The rule was developed
so that negotiable instruments could be moved from bank to bank without concern
over the defenses the endorser might have in the underlying transaction.
However, I would disregard the law in holding the bonafide endorser
liable and say it ought to protect every bonafide party
involved in the passing of the negotiable instrument.
"A family which Reads together, passes together"
AHIMBISIBWE INNOCENT BENJAMIN
(Entertainment Lawyer)
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BIBLIOGRAPHY
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