Question

A draft is lost, and purchaser wants to stop payment of draft

• A. The request can be accepted
• B. Bank cannot stop payment since it's a promissory note
• C. Bank can accept the request under section 10 of NI Act
• D. None of the

Answer 1

Answer:

B. Bank cannot stop payment since it's a promissory note

Legal Nature of a Demand Draft (DD)

• A Demand Draft is defined under the Negotiable Instruments Act, 1881 as a negotiable instrument.
• It is essentially a promissory note issued by one bank branch (the drawer) directing another branch or bank (the drawee) to pay a specified sum of money to a named beneficiary.
• Because a DD is a banker's cheque, it represents a debt already acknowledged by the issuing bank; therefore, the drawer (customer) cannot unilaterally instruct the bank to stop payment once the instrument has been issued.

Key Distinctions

• Cheque vs. Demand Draft: A customer can issue a 'Stop Payment' instruction for a cheque they have issued because they are the drawer. In contrast, a DD is issued by the bank itself, making the bank the drawer.
• Payment Liability: Since the bank has already received the funds (or the customer has provided the cover amount) at the time of issuing the DD, the bank is legally obligated to honor the instrument when presented by the beneficiary.

Procedures for Lost Instruments

• If a DD is lost, the purchaser cannot simply stop payment. Instead, the purchaser must:
  • Request Cancellation: Submit a formal application to the issuing branch requesting the cancellation of the lost DD.
  • Provide Indemnity: Sign an Indemnity Bond in favor of the bank. This bond ensures that if the lost instrument is found and presented, the purchaser will protect the bank against any financial loss.
  • Issuance of Duplicate: After verification and the expiration of a waiting period (if applicable), the bank may issue a duplicate DD or refund the amount to the purchaser.
• The legal protection for the bank is rooted in the fact that it is a 'Holder in Due Course' protection framework; an unconditioned payment instrument issued by a bank must be honored to maintain the credibility of the banking system.