Beyond the three statutory instruments (promissory note, bill of exchange, cheque), banking practice employs several instruments that are either deemed negotiable by custom (S.13(2)) or are variants of the statutory instruments. These include banker's drafts (demand drafts), dividend warrants, pay orders, and traveller's cheques.
Legal Framework
| Provision | Subject |
|---|---|
| S.13(2) NI Act | Instruments deemed negotiable by usage |
| S.85A NI Act | Drafts: protection to paying banker |
| S.131A NI Act | Protection to collecting banker for drafts |
| S.123 Companies Act 2013 | Payment of dividend (by cheque/warrant/electronic mode) |
| S.6 NI Act | Cheque (for comparison) |
| S.5 NI Act | Bill of exchange (for comparison) |
Banker's Draft (Demand Draft)
A demand draft is a negotiable instrument drawn by one branch (or office) of a bank on another branch of the same bank, directing payment of a specified sum to the named payee or order.
| Feature | Rule |
|---|---|
| Drawer | Bank (issuing branch) |
| Drawee | Bank (paying branch or head office) |
| Payee | Named person |
| Nature | Bill of exchange (S.5); NOT a cheque (bank draws on itself, not customer drawing on bank) |
| Payable | On demand |
| Countermand | Purchaser is not the drawer. Before delivery to the payee, the purchaser may cancel it and take a refund; after delivery, the purchaser cannot stop payment (Tukaram Bapuji Nikam) |
| Payment obligation | Bank's own commitment to pay; considered as good as cash |
| Transfer | Negotiable by endorsement and delivery |
| Stamping | Exempt from stamp duty (like cheques) |
Why: Since the bank is both drawer and drawee, a demand draft carries the bank's credit and is virtually as safe as cash. This is why courts, government departments, and educational institutions accept demand drafts as secure instruments.
Difference from Cheque
| Aspect | Cheque (S.6) | Demand Draft |
|---|---|---|
| Drawer | Account holder (customer) | Bank |
| Drawee | Bank of drawer | Another branch of same bank |
| Countermand | Customer can stop payment | Purchaser may cancel only before delivery to the payee; cannot stop it after delivery |
| Dishonour | Possible (insufficient funds) | Generally cannot be dishonoured (bank's own commitment) |
| Bearer form | Possible | Not issued payable to bearer (only "order") |
| Liability | Drawer liable on dishonour | Bank unconditionally liable |
Dividend Warrants
A dividend warrant is an instrument issued by a company (through its bankers) directing payment of declared dividends to shareholders.
| Feature | Rule |
|---|---|
| Issuer | Company (through its bankers) |
| Payee | Registered shareholder |
| Nature | Deemed negotiable instrument by custom (S.13(2)) |
| Statutory basis | S.123 Companies Act, 2013 |
| Payment mode | Cheque/warrant/electronic mode (as per Companies Act) |
| Validity | As per company/bank terms (typically 3 months) |
| Crossing | Usually crossed "Account Payee" |
| Transfer | Negotiable (unless A/c Payee) |
Why: Dividend warrants are treated as negotiable instruments to ensure shareholders can conveniently realise their dividends through the banking system without additional formalities.
Treatment under NI Act
The NI Act does not expressly define dividend warrants, but:
- S.85 protection extends to paying banker (S.85(2): banker paying dividend warrant in good faith)
- S.131 protection extends to collecting banker
- If crossed: crossing provisions (S.123-131) apply
Pay Orders / Banker's Cheque
A pay order (or banker's cheque) is a cheque drawn by a bank on itself, payable at the same branch.
| Feature | Rule |
|---|---|
| Difference from DD | Pay order is payable at the same branch; DD is payable at another branch |
| Nature | Order on self; not technically a "cheque" (one cannot draw on oneself for S.6) |
| Countermand | Cannot be countermanded |
| Use | Local payments where DD is unnecessary |
Traveller's Cheques
| Feature | Rule |
|---|---|
| Nature | Pre-paid instrument; purchaser pays bank in advance |
| Counter-signature | Requires second signature at time of encashment (first at purchase) |
| Validity | No expiry (unlimited validity) |
| Encashment | At any authorised branch/correspondent bank worldwide |
| Loss | Can be replaced (unlike cash) |
| Negotiability | Limited negotiability; primarily personal instrument |
| Legal status | Not expressly in NI Act; deemed negotiable by banking custom |
Illustrations
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Demand draft vs cheque (why courts prefer DDs): Court fees in many High Courts must be paid by demand draft, not cheque. Why? If you pay by cheque and your cheque bounces (insufficient funds), the court filing is invalidated wasting time for everyone. A demand draft CANNOT bounce because the bank has already received the money from you before issuing the DD. The bank is both drawer and drawee it's paying itself. Zero risk of dishonour. This is why landlords, universities, and government bodies demand DDs for important payments.
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Countermand impossibility (the frustrated buyer): You buy a car for Rs.8 lakh. You pay by demand draft. Next day, you discover the car has a faulty engine. You call your bank: "Stop that DD!" Bank says: "We can't. It's our instrument, not yours. We drew it on ourselves. We will honour it when presented." Your only remedy: sue the car dealer for damages or breach of warranty. The DD has already left your control: you're not the drawer (the bank is), and the dealer already holds it. Tukaram Bapuji Nikam v. Belgaum Bank Ltd (1975) confirms that once the draft reaches the payee, the purchaser cannot stop it.
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Dividend warrant (how shareholders get paid): Infosys declares Rs.16/share dividend. You hold 1,000 shares. Infosys doesn't hand you Rs.16,000 in cash. It instructs its banker (ICICI Bank) to issue a dividend warrant for Rs.16,000 in your name. The warrant works like a cheque you deposit it in your bank, your bank collects from ICICI, and Rs.16,000 is credited. Under S.13(2), this warrant is a negotiable instrument by mercantile custom. S.85(2) protects the paying banker. If it's crossed "Account Payee" (as most are now), it goes only into YOUR account.
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Traveller's cheque (the double-signature security): You're travelling to Europe. You buy Rs.2 lakh worth of Thomas Cook traveller's cheques. At purchase, you sign each cheque (first signature). When you want to spend €500 in Paris, you countersign the cheque in front of the hotel cashier (second signature). The cashier compares both signatures they must match. If your cheques are stolen, the thief can't use them because the thief can't reproduce your first signature. This double-authentication makes traveller's cheques safer than carrying cash and if lost, Thomas Cook replaces them (unlike cash).
Recall Check
- Why can a demand draft not be countermanded by its purchaser?
- What makes a dividend warrant a negotiable instrument despite not being defined in S.13(1)?
- What is the key distinction between a pay order and a demand draft?
Key Cases
Tukaram Bapuji Nikam v. Belgaum Bank Ltd (1975)
Citation: AIR 1976 Bombay 185 (Bombay High Court, Vimadalal and Naik JJ, decided 14 March 1975)
Issue: Whether the purchaser of a demand draft can stop its payment after it has been sent to the payee.
Rule: Between purchaser and issuing bank the relationship is debtor and creditor, so the purchaser may cancel the draft and take the money back at any time before it is delivered to the payee. Once the draft has been delivered to the payee or the payee's agent, the purchaser cannot ask the bank to stop payment on grounds such as consideration, and the bank may refuse the payee only if there is reasonable doubt about the presenter's identity or title.
Held: The purchaser posted the draft to the payee in another town. The post office was the payee's agent, so posting was delivery. The purchaser's stop-payment instruction the next day was ineffective, the bank was wrong to refuse payment, and the court decreed the draft amount in the payee's favour with interest and costs.
Ram Rattan v. Parma Nand (1946) Ram Rattan v Parma Nand 1946
Issue: Whether a hundi drawn on a bank payable on demand is a "cheque" within S.6.
Rule: S.6 requires the instrument to be drawn on a "specified banker" and payable on demand; form is secondary to substance.
Held: An instrument drawn on a bank, payable on demand, meeting all essentials of S.6 is a cheque regardless of the name given to it (hundi, order, etc.). Substance prevails over form.
Distinctions
| Aspect | Demand Draft | Pay Order | Traveller's Cheque |
|---|---|---|---|
| Payable at | Different branch | Same branch | Any authorised branch/bank |
| Drawer/Drawee | Bank on another branch | Bank on itself | Issuing bank |
| Validity | 3 months | 3 months | Unlimited |
| Countermand | Not after delivery to the payee; purchaser may cancel before delivery (Tukaram Bapuji Nikam) | No | No (replacement on loss) |
| Authentication | Single (bank's authority) | Single | Double (purchase + encashment signatures) |
| Use | Inter-city payments | Local payments | Travel/international payments |
| Form | Order only | Order only | Personal (counter-signature) |
Flashcards
What is a demand draft?
A bill of exchange drawn by one branch of a bank on another branch of the same bank, payable on demand to a named payee. Bank is both drawer and drawee.
Can the purchaser of a demand draft countermand it?
Only before it is delivered to the payee. Until then the purchaser is the bank's creditor and may cancel the draft and take a refund. Once the draft reaches the payee or the payee's agent, the purchaser (who is not the drawer) cannot stop payment, and the bank must pay unless it doubts the presenter's identity or title (Tukaram Bapuji Nikam v. Belgaum Bank Ltd, 1975).
What is a dividend warrant?
An instrument issued by a company (through its bankers) directing payment of declared dividends to shareholders. Deemed negotiable by custom under S.13(2).
How does a pay order differ from a demand draft?
A pay order is drawn by a bank on itself payable at the same branch. A demand draft is drawn on another branch of the same bank. Both cannot be countermanded.
What is the legal nature of a traveller's cheque?
A pre-paid instrument issued by a bank, authenticated by double signature (at purchase and at encashment). Deemed negotiable by banking custom. No fixed expiry.
Can S.138 (criminal liability for dishonour) apply to a demand draft?
No. S.138 applies only to "cheques" as defined in S.6 (drawn by customer on bank). A demand draft is drawn by the bank itself and will not be dishonoured for insufficiency of funds.
Exam Scenario
P purchases a demand draft from Alpha Bank for Rs.5,00,000 payable to Q and hands it to Q. Before Q presents the draft, P discovers Q has breached the underlying contract and instructs Alpha Bank to stop payment. Alpha Bank refuses, stating the draft cannot be stopped. P files suit against Alpha Bank. Advise.
A demand draft is a bill of exchange drawn by the bank, not by P. P is not the drawer and has no drawer's power to countermand. Under Tukaram Bapuji Nikam v. Belgaum Bank Ltd (1975), P could have cancelled the draft and recovered the money only while it was still undelivered. Here the draft has already reached Q, so P cannot stop payment on a ground such as Q's breach of contract, and Alpha Bank must pay Q unless it has reasonable doubt about the presenter's identity or title. If P had still held the draft, P could have returned it to Alpha Bank and asked for a refund.
P's remedy lies against Q (for breach of the underlying contract), not against Alpha Bank. P may file a civil suit against Q for damages or seek return of money. But P cannot restrain Alpha Bank from honouring its own instrument. P's suit against Alpha Bank will fail. The bank is entitled to refuse the stop-payment instruction for a demand draft.