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CSEET · Business Laws and Management · Elements of Law relating to Negotiable Instruments

A promissory note was obtained from its maker, Karan, by means of fraud. Mehta now holds it and sues Karan. Under the presumptions in the Act, which is correct?

Mehta must prove that he is a holder in due course. Although the Act normally presumes the holder is one, the proviso reverses the burden where the instrument was obtained from the maker by fraud or an offence, so the holder must establish his status.

  1. AThe court must presume Mehta is a holder in due course and Karan cannot rebut it
  2. BNo presumption of any kind applies to negotiable instruments
  3. CMehta must prove he is a holder in due course, since the instrument was obtained from the maker by fraudCorrect
  4. DKaran must prove that Mehta is not a holder in due course, even though fraud is shown

Explanation

Section 118(g) presumes that the holder is a holder in due course, but the proviso says that where the instrument was obtained from the maker or acceptor by an offence or fraud, the burden of proving he is a holder in due course lies on the holder. Here fraud on the maker is shown, so the burden shifts to Mehta. The presumption is also rebuttable generally, so the first option is wrong.

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