Report No. 11
45. Section 8-
"Holder".- While similarly transferring the definition of "holder", we have made substantial changes, which require a fuller explanation.
It may, however, be observed at the outset that the changes introduced do not seek to alter the law but to obviate the conflict of judicial opinions and the criticism of commentators which the existing definition has given rise to.
The expression "persons entitled in his own name to the possession of the instrument and to receive and recover the amount" is ambiguous. If the expression be literally construed, a bearer would be excluded from the definition as his name does not appear on the instrument. But if all that is meant by the expression is that he should be entitled to possession in his own name and to sue upon it though his name does not appear on it, a bearer may then be within the definition.1 As pointed out by a Full Bench of the Madras High Court2 the expression "in his own name" was introduced only for the purpose of ruling out the plea that the holder of an instrument was a benamidar for some other person. That the beneficial owner cannot claim to be a holder may now be taken as the prevailing view.3 We have adopted this view in order to put a stop to all controversy on the point, and have expressly excluded the beneficial owner from the definition of "holder".
1. Ramanadan Chettiar v. Gundu Ayyar, AIR 1928 Mad 1238 (1243).
2. Sinna Narayana v. Ramaswami, (1907) 30 Mad 88 (FB).
3. Harkishore v. Gure Mia, (1930) 58 Cal 752; Virappa v. Mahadebappa, AIR 1934 Bom 356; Bacha Prasad v. Janki, AIR 1957 Pat 380 (FB).
46. The principal source of difficulties is the use of the word "entitled". This word is of a very wide implication.
A person may be entitled to an instrument either as a payee or indorsee, or, as a bearer if the instrument is one payable to bearer. He may be entitled to it also by other modes of transfer of the interest in the instrument, such as assignment as an actionable claim, in accordance with sections 130 and 132 of the Transfer of Property Act or legal devolution. It may not be in accordance with the scheme of the Act to recognise persons other than a payee, indorsee or a bearer as holders, even though they may be entitled to the possession of the instrument and to recover the debt due under the instrument.
A person may become owner of the debt and sue for its recovery if there is an assignment of the debt or if there is legal devolution, but that does not make him a "holder" within the meaning of the Act. Of course, a single Judge of the Madras High Court1 and a Bench of the 'Calcutta High Court2 have held that an assignee is a holder within the meaning of section 8, but the contrary view, which has been consistently maintained by the Allahabad High Court,3 appears to be preferable. In these cases,3 the Allahabad High Court has made it clear that a transferee by legal devolution is entitled to recover the amount due on the instrument not because he is the 'holder' but because he, as the owner of the debt, is entitled to give a valid discharge even apart from the provisions of section 78 of the Negotiable Instruments Act.
1. Seshanchalam Naid v. Venkatachalam Chetty, (1954) 2 MLJ 471.
2. Surathcnadra v. Narayan Chandra, (1934) 61 Cal 425.
3. Parsotam v. Bankey lal, AIR 1935 All 1041; Jang Bahadur v. Chandra, AIR 1939 All 279; Ramkishore v. Ramprasad, AIR 1952 All 245 (FB).
The right of negotiation is conferred by the Act only upon a maker, drawer, payee or indorsee (vide section 51) and in the case of a bearer instrument, upon the bearer. In the case of an instrument payable to order, section 48 lays down that it is negotiable by a 'holder' by indorsement and delivery thereof. The "holder" in this context does not mean an assignee or a person who has acquired rights under the instrument by legal devolution. An assignee, not being an indorsee cannot claim any rights under the Act against prior parties and his rights are governed by the provisions of the Transfer of Property Act which lay down that the transferee takes the rights under the assignment subject to the equities to which the transferor was subject at the time of the transfer. In this connection, it must be remembered that the Transfer of Property Act expressly saves the mode of transfer by negotiation though it does not prevent the assignment of rights under a negotiable instrument qua an actionable claim.
We, therefore, think that the position should be made clear, by omitting from the definition of 'holder' the words "entitled in his own name to the possession thereof" and expressly enumerating the persons who are entitled to be a holder, as in section 2 of the Bills of Exchange Act, viz., "the payee or indorsee of an instrument who is in possession the instrument or the bearer thereof."
47. The English Act, however, defines 'bearer' as meaning "a person in possession of a bill or note which is payable to bearer". In the case of instruments payable to order, it is clear that a person cannot be a holder unless he is the payee or the indorsee thereof and the indorsement is on the instrument itself; a person whose name does not appear on the instrument as indorsee cannot claim his rights thereunder. But in the case of a bearer instrument, since negotiation is only by delivery and no indorsement is required, possession alone is material. The English definition of "bearer" does not require that possession should be a lawful possession. The possession of a finder or a thief may, therefore, be a good possession to make him a bearer and, therefore, a holder.
Under the existing provisions of our Act, such persons are excluded because of the word "entitled" in the definition of "holder". Section 58 of the Act makes it clear that such a person is not entitled to receive the amount due thereon from the maker, acceptor, or holder or from any party prior to the holder. He is, therefore, not entitled to sue and recover the money but, as it very often happens, a third party dealing with such a person may presume the latter's possession to be lawful, acquire rights under the instrument from him for consideration and thus become a "holder in due course". The rights of a third party who thus becomes a holder are protected by section 48. But suppose a person makes a payment to a finder or a thief, believing him to be the lawful holder of the instrument.
Such a payment is also protected, because under section 82(c), if an instrument is payable to bearer or has been indorsed in blank, the maker, acceptor or indorser who makes a payment in due course of the amount due thereof gets, a complete discharge. These provisions, thus, amply protect under our law a third party dealing with a person in possession of a bearer instrument but do not give that person a right to recover the amount due under it in his own right by suing upon the instrument unless his possession is lawful.
48. As stated above, the English law is different. But there is no justification, in our opinion, to clothe any person in mere possession with a right to sue and enable him to recover the amount. We, therefore, propose to adopt an altered definition of "bearer" as meaning a person who comes into possession of an instrument payable to bearer by negotiation, that is, by delivery from the lawful holder. Finders, thieves, and such other persons as are enumerated in section 58 will thus be excluded as they cannot be "holders" under our Act. The implications of the word "entitled" in the existing definition of "holder" will thus be fully covered by the changes proposed by us.
49. We have omitted the words "and to receive or recover the amount due thereon from the parties thereto" as the rights of a "holder" have been specified in a separate section proposed by us.1
1. See Section 47 of App I.
50. The language of the second paragraph of section 8 is also unsatisfactory. It has been criticised by Chalmers1 thus-
1. Negotiable Instruments in British India, 2nd Edn., p. 46.
"it is a strain upon language to describe the original owner of a lost instrument as the holder of it. Suppose a cheque payable to bearer is lost, and the person who finds it negotiates it to some other person who takes it in good faith and for value. The latter becomes the holder in due course of the instrument. There are then two holders of the same cheque in this case, according to the Act."
As Bhashyam and Adiga1 suggest, this absurdity may be avoided if we construe the word 'lost' as "lost to the world" and "not found again". We have made a verbal change to this effect and also made it clear that the holder before such loss or destruction "shall be deemed to continue to be its holder."
1. Negotiable Instruments Act, 10th End., p. 72.