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CA Foundation · Business Laws · The Negotiable Instruments Act, 1881

Mohan, a holder in due course, holds a promissory note made by Lalit. Lalit proves that the original payee, Naresh, got the note from him by fraud. Mohan took it for value, in good faith, before maturity, and knew nothing of the fraud. Mohan sues Lalit. Which statement is correct?

Mohan succeeds. A holder in due course takes the instrument free from defects in the title of earlier parties and from their defences, so Lalit's fraud defence works only against Naresh, not against Mohan.

  1. AMohan fails, as fraud makes the note void against everyone
  2. BMohan succeeds, as a holder in due course gets a good title free from defects of earlier partiesCorrect
  3. CMohan succeeds only for half the amount
  4. DMohan fails unless Naresh is also made a party

Explanation

A holder in due course takes the instrument free from defects in the title of prior parties, including fraud, and from defences available against them. Lalit's defence of fraud is good only against Naresh. Option A wrongly lets the fraud defeat Mohan.

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