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Presumptions as to Indorsement
o Time (Sec.45, NIL ) - Every negotiation deemed prima facie effected before
instrument was overdue, except where indorsement bears date after maturity of
the instrument.
o Place (Sec.46, NIL ) - Every indorsement is presumed prima facie made at place
where instrument is dated
o - deemed prima facie to be payable to the bank or corporation of which he is
such officer; may be negotiated by either the indorsement (1) of the bank or
corporation or (2) of the officer.

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Continuation of Negotiable Character

An NI, although overdue, retains its negotiability unless it has been paid or
restrictively indorsed to prevent further negotiation (Sec. 47, NIL )

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Indorsement of bearer instrument

• Where an instrument payable to bearer is indorsed specially, it may
nevertheless be further negotiated by delivery
• Person indorsing specially liable as indorser to only such holders as make title
through his indorsement

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Who is a holder?
"Holder" means the payee or indorsee of a bill or note who is in possession of it or the bearer
thereof (Section 190).

Requisites:
a) He must be the payee or indorsee of a bill or note, and
b) He must be in possession of it or the bearer thereof.

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Classes of holders
1. Holders simply (Section 51);
2. Holders for value (Section 26);
3. Holders in due course (Sections 52, 57).

Ordinary holder or mere holder is a person who qualifies as a holder but

does not meet all the conditions to qualify as a holder in due course

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Rights of holder in general

1. He may sue on the instrument in his name; and
2. He may receive payment and payment to him in due course discharges the
instrument.

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Payment in due course

Requisites
1. Payment must be made at or after the date of maturity.
2. Payment must be to the holder.
3. Payment must be made by the debtor in good faith and without notice that his
title is defective.

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What constitutes a HOLDER IN DUE COURSE

A holder in due course is a holder who has taken the instrument under the
following conditions:

1. That it is complete and regular upon its face;

2. That he became the holder of it before it was overdue, and without notice that
it had been previously dishonored, if such was the fact;
3. That he took it in good faith and for value;
4. That at the time it was negotiated to him he had no notice of any infirmity in
the instrument or defect in the title of the person negotiating it. (Section 52)

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Rights of holder in due course or

not in due course
A holder who is not a holder in due course has all the rights of the latter except
that the instrument is subject to every available defense as if it were non-
negotiable.

On the other hand, a holder in due course, is afforded most-favored status under
the law. He takes the instrument free of many defenses that exist between the
original parties .

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Instrument complete and regular upon its face

When an instrument is incomplete
An instrument is incomplete when it is wanting in any material particular or
particular proper to be inserted in a negotiable instrument without which the same
will not be complete.

The instrument must be regular upon its face. To render the instrument irregular,
the alteration, tampering or erasure must be visible or apparent on the face of the
instrument.

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Holder before instrument is overdue

• An instrument is overdue after the date of maturity.

• Negotiation of an instrument past due date carries a strong indication that it has
been dishonored.

• But one taking the instrument on the date of maturity is not overdue; the principal
still has the whole day to pay the same.

• An overdue instrument is still negotiable although it is subject to defenses existing at

the time of transfer.

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Holder in good faith

• The words “in good faith” refers only to the good faith of the indorsee or
transferee and not to the seller of the paper.

• Bad faith means that he must have knowledge of the facts which render it
dishonest for him to take a particular piece of negotiable paper

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Value may be any consideration sufficient to support a simple contract. It is not

necessary that it is adequate.

Purchase of an instrument at a discount does not prevent one from being a

bona fide holder.

Love and affection does not constitute value.

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Holder without notice of infirmity in instrument or

defect of title
• In order to constitute notice, the holder must have actual or chargeable
knowledge of the infirmity or defect or must have acted in bad faith. The absence
of knowledge and lack of bad faith is the essential basis that renders one a holder
in due course.
• Knowledge of agent acting within scope of his authority is constructive
knowledge of the principal; and principal can no longer be a holder in due course.
Notice to partner is notice to partnership.

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Examples of infirmity in the instrument

• Section 13 – insertion of a wrong date.
• Section 14 – filling up blanks not in accordance with the authority given.
• Section 15 – incomplete and undelivered instrument.
• Section 16 – lack of valid and intentional delivery.
• Section 21 – breach of warranty.
• Section 23 – forgery.
• Section 124 – alteration.

Defects in the title of the person negotiating it – refer to Section 55.

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Notice of Defective Title

In order to constitute notice of defect, the holder must have actual not merely
constructive knowledge of the defect, or must have acted in bad faith. Anything
short of actual knowledge or bad faith will not constitute notice. Mere suspicion by
the holder and the existence of a suspicious circumstance are not sufficient to
constitute bad faith. But if the holder had actual knowledge of the suspicious
circumstances (knowledge of the exact fraud of the nature of the fraud is not
necessary) plus the means of readily informing himself of the facts and he willfully
abstained from making inquiries, his intentional ignorance may amount to bad faith
(de Ocampo v. Gatchalian).

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When person NOT deemed holder in due course

Where course an instrument payable on demand is negotiated an
unreasonable length of time after its issue, the holder is not deemed a
holder in due course. (Section 53)

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What constitutes a reasonable length of time

The law provide that “regard is to be had to the nature of the instrument,
the usage of trade or business (if any) with respect to such instruments,
and the facts of the particular case” (Section 193).

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Effect of notice before full payment

No amount has yet been paid. – He is relieved from obligation to
make payment but if he pays after notice of defect, he is not entitled to
the same protection as a holder in due course.

An amount has been paid. – He is considered as a holder in due

course only to the extent of the amount paid before notice of defect.

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When title of a person defective

1. In the acquisition
1. obtained by fraud, duress, force and fear or other unlawful means;
2. obtained for an illegal consideration.

2. In the negotiation
1. negotiates in breach of faith;
2. negotiates under such circumstance as to amount to fraud.

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To constitute notice of defect or infirmity, the holder must have actual

knowledge either:

a. Of the defect or infirmity;

b. Or of facts that his action in taking the instrument amounts to bad faith.

Actual knowledge is required and not mere suspicion, surmise or fear.

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(1) He may sue on the instrument in his own name (Section 51);
(2) He may receive payment and if the payment is in due course, the instrument is
discharged;
(3) He holds the instrument free from any defect of title of prior parties;
(4) He holds the instrument free from defenses available to prior parties among
themselves; and
(5) He may enforce payment of the instrument for the full amount thereof against all
parties liable thereon

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Real defenses available

against a holder in due course
• The defenses referred to in Section 57 that cannot be set up against a holder in due
course are the so-called “personal defenses” or equities, as distinguished from
absolute or real defenses.

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Holder in due course by subrogation

One who derives his title from a holder in due course and who is not himself a party to
any fraud or illegality affecting the instrument. Possession of a check after
presentment and dishonor or payment, is utterly inconsequential. It does not make
the possessor a holder for value within the meaning of the law; it gives rise to no
liability on the part of the maker, drawer or indorsers (Stelco Marketing v. CA).

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