Banks remit funds from one place to another through the network of their branches. The main instrument for remittance of funds are bank drafts, mail transfer, telegraphic transfer and traveller’s cheques. Here, we will focus are attention on features and operational aspects of bank draft.
Definition of bank draft. :
A bank draft is an unconditional order issued by one branch of a bank on its another branch to pay a certain sum of money to the named person or order on demand.
Hence a bank draft is always payable on demand it is also known as demand draft (D.D)
According to section 85 (A) of the N.I.A, 1881 a bank draft is “an order to pay money drawn by one office of the bank upon other office of the same bank for a sum of money payable to order on demand”
(i) It is drawn by one office of a bank upon some other office of the same bank
(ii) It is payable on demand
(iii) Its payment is to be made to the person whose name is mentioned therein or according to his order. In other words, it cannot be made payable to the bearer.
Legal status of a bank draft :
Legal status of bank draft is controversial because it has not been specifically mentioned as a negotiable instrument in section 13 of N.I.A, 1881. But different court of law has declared a bank draft as a bill of exchange because it has all the attributes of it i.e., it is an instrument in writing, containing an unconditional order to pay, signed by the drawer etc. On the other hand section 85 (A) and section 131 (A) has of N.I.A., 1881 recognized the bank draft negotiable instrument It is to be mentioned that section 85(A) of NIA, 1881 provides protection to a banker against forged or unauthorized endorsement of bank drafts and section 131 (A) of N.I.A, 1881 gives protection to collecting banker in respect of crossed drafts.
05. Cheque vs. Bank Draft.:
A bank draft resembles a cheque in some aspects such as a draft can be crossed like a cheque, the statutory protection as extended to cheques has been extended to draft etc. But a bank draft is different from a cheque in several aspects. The points of difference are as follows :
a) As a rule, a cheque is given only to customers while a draft is given to non-customers also.
b) The drawer and the drawee of a cheque must be two distinct parties, whereas, a bank itself is the drawer and the drawee of a draft.
c) A cheque can be made/drawn payable to order or bearer but the draft cannot be made payable of a bearer.
d) The drawer of a cheque can countermand its payment but a banker (as drawer of the draft) can not countermand the payment of a draft (unless it’s loss or theft has been reported).
e) It is not obligatory for a banker to honour a cheque unless the drawee has sufficient funds and the cheque is otherwise in order. There is no such question in case of a draft since it is the banker’s unconditional obligation to pay for which he has already received the equivalent amount.
f) A cheque can be used for making local payments on the contrary a draft can not be used for this purpose.
Issue of bank draft :
The person intending to remit the funds through a bank draft has to deposit the money to be remitted together with the commission which the banker charges for its services. The amount of commission depends on the amount to be remitted. On receipt of the required amounts along with duly filled in prescribed form, the banker issues a draft and hand over it to the purchaser.
Payment of bank draft :
If the draft is not crossed, the payee can draw the amount in cash upon presentation of the same to the drawee branch with satisfactory evidence of his identity or can draw the money by depositing it to his account there or any other banker. The draft being payable to certain particular person or order the banker must satisfy himself as to the title of the person presenting it for receiving the payment. The banker is discharged from liability only by payment in due course.
Dishonour of bank draft :
Normally a banker cannot refuse to make the payment of a draft as it is his own obligation to pay unless the presented draft is a forged one or there is doubt as to the identity of the person presenting it for payment. He cannot also refuse to make the payment of a draft on the plea of non-receipt of the relative advice from the issuing office
Stopping payment of bank draft :
The issuing branch, normally cannot countermand the payment of a draft because by issuing a draft he takes upon himself a commitment in favour of a third party (i.e. the payee) to pay a certain sum of money. At the same time the issuing banker should not comply with the “stop payment” order of the purchaser of a draft. Although the draft was issued at the request of the purchaser of the draft, but once a draft is issued and delivered to the payee the parchaser does not remain a party to the instrument and he can not countermand its payment. The Lahore Hight Court held in the case of Malik Barket Ali vs. Imperial Bank of India that the purchaser of the draft had no right to countermand the payment of a draft after it had been delivered to the payee. When the draft is delivered passed on to the payee, he aequiers a right in the instrument which the banker can not set aside by the “stop payment” order of the purchaser. If the payee endorses such a draft in favour of a third party i.e. a holder in due course, such a third party also acquires a right enforceable against the banker.
Loss of draft :
If the issuing branch is reported about loss, theft or damage of any draft it must promptly inform the matter to the drawee branch and request to stop payment of such draft. Being reported by the issuing branch, the drawee branch will note it to guard itself against the fraudulent encasement of the lost draft. This is essential so that the banker is not held responsible for making payment otherwise than in due course. Upon presenting of such a lost draft the banker should not pay it unless he is wholly sure of the bonafide of the payee or without the collecting banker’s confirmation, as the case may be.
Issue of duplicate draft :
When a draft is lost or destroyed, the purchaser is entitled to get a duplicate one from the issuing bank. But the purchaser is required to apply to that effect, the issuing banker is needed to ascertain its geniuses and obtain the drawee banks confirmation regarding its non-payment. A duplicate draft can only be issued if the lost or destroyed one is still unpaid by the drawee branch. The purchaser is further required to exceute a duly stamped indemnity bond in favour of the banker. The payee is also required to sign the indennity bond if the said draft is reached to his hands. While issuing the duplicate draft, it is to be boldly marked as duplicate showing the date and number of the original one. The drawee branch is also be advised to this effect.
Cancellation of draft :
Sometimes the purchaser may return the draft to the issuing bank with a request to cancel it and refund him the amount of the draft. In such a case, the banker must make sure that the request is from the genuine purchaser, that the draft was issued by him and is not a fake one and that he has not already issued a duplicate thereof. The advise regarding cancellation of the draft should be sent to the drawee branch. The drawee branch should also make a necessary note regarding cancellation of the draft in its records.If the purchaser himself is the payee and the draft has not been endorsed, cancellation thereof does not present any difficulty. Where the payee of the draft is a third party, whether it has been endorsed or not, its cancellation should be done only for a purchaser of good means and standing. The point here is that the payee or the endorsee may bring an action against the banker if his interest is adversely affected owing to the banker’s having paid the draft by cancellation.