Q.P, a wholesaler, sells goods on credit to Q, and Q accepts a bill of exchange drawn on him by P for ₹50,000, payable three months hence. Before the bill matures, P endorses and discounts it with R, a bank, for ₹48,500. On the due date, R presents the bill to Q, but Q dishonours it, claiming the goods supplied by P were defective and he is entitled to withhold payment. Advise R on his rights, with reference to the Holder in Due Course rule.

This tests whether a defence good against the original parties (P and Q) also defeats a Holder in Due Course further down the chain — it generally does not.

Step 1 — Is R a Holder in Due Course? R took the bill by ENDORSEMENT AND DELIVERY from P (a valid negotiation under Section 48), gave real consideration (discounting it for ₹48,500 — a routine and recognised form of giving value for a time bill), and did so BEFORE the bill matured. Nothing in the facts suggests R had any notice of a dispute between P and Q over the goods at the time R discounted the bill. R therefore satisfies all four Section 9 conditions and is a Holder in Due Course.

Step 2 — Does Q's defence (defective goods) defeat R's claim? Q's complaint about defective goods is a matter of the underlying CONTRACT OF SALE between P and Q — it is what is called a defence 'good only as between the immediate parties' (P and Q), not a defect that runs with the instrument itself against a subsequent Holder in Due Course. The Act's whole purpose in protecting a Holder in Due Course is precisely to insulate a good-faith taker for value from disputes of this kind, which they had no way of knowing about and no involvement in.

Step 3 — What can Q do instead? Q must pay R the full ₹50,000 as demanded (Q cannot set up the goods dispute as a defence against R). Q's remedy for the defective goods lies entirely against P, in a SEPARATE action or counter-claim under the Sale of Goods Act — Q having paid R can then pursue P for damages/compensation for the defective goods. …

Students sometimes wrongly conclude that a dishonoured bill simply cannot be enforced by anyone — the KEY POINT this scenario tests is that dishonour by the acceptor does not extinguish the Holder in Due Course's right to recove …