Holder in due course: Definition, Example and Related Terms
What is a Holder in due course ?
A 'Holder in due course' is a term used in the world of finance and law. It refers to a person who has received a specific type of document, known as a 'negotiable instrument', in good faith. This means they received it honestly, without any knowledge of problems or issues with the document. The document could be something like a check or a promissory note, which is a written promise to pay a certain amount of money.
Here's an interesting fact: The concept of 'Holder in due course' is designed to protect people who accept negotiable instruments without knowing that there might be a problem with them. For example, if you accept a check from someone, you are assuming that the check is good and that you will be able to cash it. If it turns out that the person who gave you the check wasn't authorized to do so, you are protected as a holder in due course as long as you had no way of knowing about the issue.
Example(s)
Scenario Description Accepting a Check John sells a bicycle to Tom and accepts a check as payment. John is a holder in due course if he had no reason to suspect any issues with the check. Receiving a Promissory Note Sarah lends money to Kate and in return, Kate gives Sarah a promissory note. If Sarah had no reason to believe that Kate might not be able to pay back the loan, Sarah is considered a holder in due course.