Q.A draws a cheque for ₹20,000 in favour of B. B endorses it in blank and hands it to C. C then writes 'Pay D only' above B's signature and delivers the cheque to D. D presents the cheque and receives payment. Trace the negotiation of this cheque step by step, and identify who is the Holder in Due Course, giving reasons.

This traces exactly how a blank endorsement can be converted into a full/restrictive one, and how each step qualifies (or does not qualify) as negotiation.

Walk through each transfer and classify its mode before concluding on D's status.

Step 1 — A draws the cheque in favour of B. This is the original issue of the cheque, not itself a 'negotiation' in the technical sense — B becomes the first holder as the named payee.

Step 2 — B endorses in blank and hands it to C. A blank endorsement (Section 16) is B signing without naming any endorsee. This converts the cheque into a BEARER instrument. B's subsequent handing-over to C therefore completes a valid negotiation by mere delivery (Section 47) — C becomes the new holder purely by virtue of that delivery, since the cheque was, at that moment, bearer-effect.

Step 3 — C writes 'Pay D only' above B's signature. Section 49 permits a holder who receives an instrument by blank endorsement to convert it into a full (or, as here, a RESTRICTIVE) endorsement, by writing a direction above the endorser's signature, without needing the original endorser's fresh signature. 'Pay D only' is a restrictive endorsement — it directs payment specifically to D and, by using the word 'only', indicates the endorsement is not meant to permit D to negotiate the instrument further to anyone else in D's own right (D can still receive payment, but the restrictive wording signals no further negotiation is intended).

Step 4 — C delivers the cheque to D. Because the instrument is now (following C's addition) effectively an order instrument naming D, this delivery — together with the endorsement already inscribed — completes a valid negotiation by endorsement and delivery (Section 48). D becomes the holder.

Step 5 — Identifying the Holder in Due Course. D is the Holder in Due Course, PROVIDED D satisfies Section 9's four conditions: D took the cheque for consideration, before it became overdue/stale, in good faith, and without notice of any defect in title (nothing in the facts suggests C's or B's title was defective in any way — this was an ordinary, valid chain of transfers). D then presented the cheque and received payment, which is the final, successful conclusion of the negotiation chain.

A common error is treating A's original issue of the cheque to B as itself a 'negotiation' — the first issue of an instrument to its payee is not a negotiation in the technical Section 14 sense; negotiation begins only from the FIRST transfer onward (B's transfer to C).