Dishonour of Demand Draft & Banker's Cheque: Section 138 Inapplicability, Stop Payment Limits & Legal Remedies
Strategic Executive Summary
- A Demand Draft (DD) or Banker's Cheque (Pay Order) is drawn by a bank upon itself or another branch under Section 85A NI Act, making the bank the drawer and the customer merely the purchaser.
- Section 138 of the Negotiable Instruments Act does NOT apply to the purchaser of a Demand Draft because the purchaser is not the drawer of the instrument.
- Section 138 cannot be filed against the issuing bank because the bank does not owe any pre-existing 'legally enforceable debt or liability' to the payee under the Explanation to Section 138.
- A purchaser has no legal right to stop payment of a Demand Draft once delivered to the payee; banks can stop payment only on grounds of patent fraud, loss prior to delivery, or court injunction.
- The primary civil remedy for wrongful dishonour is an Order XXXVII CPC Summary Suit against the bank for the full amount plus 18% commercial interest, or a Consumer Commission complaint for deficiency of service.
- If a purchaser fraudulently issues stop-payment instructions after obtaining goods or property, criminal prosecution lies under Section 318(4) BNS (cheating) rather than Section 138 NI Act.
In the realm of Indian banking and commercial transactions, Demand Drafts (DDs) and Banker's Cheques (Pay Orders) have universally been treated as equivalent to liquid cash. Because the purchaser deposits full consideration upfront before the bank issues the instrument, beneficiaries routinely assume that payment cannot be stopped under any circumstances. However, when an issuing bank unexpectedly returns a Demand Draft unpaid—whether due to a purchaser's stop-payment request, signature discrepancies, or administrative freezing—litigants and counsel face profound procedural confusion. Does Section 138 of the Negotiable Instruments Act apply? Can the issuing bank or the purchaser be sent to jail? Drawing upon binding Supreme Court authorities, Section 85A of the NI Act, Order XXXVII of the CPC, and Bharatiya Nyaya Sanhita (BNS) provisions, this comprehensive guide delivers the definitive trial manual on the law of Demand Draft dishonour and immediate legal remedies.
1. Statutory Nature: Demand Draft vs Banker's Cheque vs Ordinary Cheque Under NI Act
In Indian commercial and property transactions across Delhi NCR—from high-stakes real estate closings at the Sub-Registrar offices in Mehrauli, Kashmere Gate, and Kapashera to corporate tenders and court-ordered security deposits at the Delhi High Court—the Demand Draft (DD) and Banker's Cheque (Pay Order) have long been revered as "as good as cash." Litigants, corporate creditors, and property sellers customarily assume that once a Demand Draft or Banker's Cheque is handed over, payment is absolute, irrevocable, and guaranteed by the issuing banking institution.
However, when an issuing bank abruptly refuses payment, freezes the draft, or returns a Banker's Cheque unpaid under an endorsement such as "Payment Stopped by Purchaser", "Advice Not Received", or "Draft Reported Lost / Fraudulent", commercial parties face immediate crisis. The fundamental threshold legal query arises: Does the dishonour of a Demand Draft or Banker's Cheque attract criminal prosecution under Section 138 of the Negotiable Instruments Act, 1881?
To answer this question with courtroom precision, one must dissect the distinct statutory definitions embodied in the Negotiable Instruments Act, 1881 (NI Act):
| Instrument Type | Governing Statutory Section | Drawer vs Drawee Relationship | Underlying Liability & Nature |
|---|---|---|---|
| Ordinary Cheque | Section 6 NI Act: A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. | The customer/account holder is the Drawer. The bank is the Drawee. The beneficiary is the Payee. | Drawn against customer's account balance or overdraft limit. Subject to stop payment and dishonour for funds insufficient. |
| Demand Draft (DD) | Section 85A NI Act: An order to pay money drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand. | The issuing branch of the bank is the Drawer. The drawee branch of the same bank is the Drawee. The customer is merely the Purchaser. | Pre-funded cash instrument. The purchaser pays full consideration upfront plus bank commission. Bank undertakes unconditional primary liability. |
| Banker's Cheque / Pay Order | Section 6 read with Section 85A: An instrument issued by a bank undertaking to pay a specified sum locally within the same clearing zone/city. | Drawn by the bank on itself (or its local clearing branch). The customer is the Purchaser / Remitter. | Identical in legal efficacy to a Demand Draft, but intended for local clearing within the jurisdiction of the issuing centre. |
The Supreme Court authoritatively analyzed the legal character of a Demand Draft, establishing that a demand draft is a bill of exchange drawn by a bank upon itself (or another branch of the same bank). By issuing the draft, the bank undertakes an unconditional liability to pay the amount specified therein to the payee or to their order upon presentation:
"A demand draft is a bill of exchange drawn by a bank upon itself or its agent, and it is payable on demand. The purchaser of the draft, after handing it over to the payee, ceases to have any control over the money represented by it. The bank holds the money in trust for the payee, and its obligation to pay is absolute and independent of any dispute between the purchaser and the payee."
2. Can Section 138 NI Act Be Invoked for Dishonour of a Demand Draft or Pay Order?
This is one of the most frequently misunderstood areas of banking litigation in the Magisterial courts of Tis Hazari, Saket, Patiala House, and Rohini. Creditors whose Demand Drafts or Banker's Cheques have been returned unpaid frequently instruct counsel to serve a statutory 15-day demand notice under Section 138(b) NI Act against both the purchaser and the issuing bank. Such complaints routinely collapse at the threshold of pre-summoning scrutiny under Section 223 of the Bharatiya Nagarik Suraksha Sanhita, 2023 (BNSS) (formerly Section 200 CrPC).
Section 138 of the NI Act explicitly creates penal liability exclusively against "such person" who is the DRAWER of the cheque drawn on an account maintained by him with a banker:
- No Criminal Prosecution Against the Purchaser: The purchaser of a Demand Draft or Banker's Cheque is not the drawer of the instrument. The drawer is the issuing banking company acting through its authorized branch manager or officer. Therefore, an accused purchaser cannot be prosecuted under Section 138 NI Act for the dishonour of a Demand Draft, because they never drew the instrument on their own account.
- No Criminal Prosecution Against the Issuing Bank: Can the payee then prosecute the issuing Bank under Section 138? The answer is an unequivocal NO. Under the Explanation to Section 138, the cheque must be issued for the discharge, in whole or in part, of "any debt or other liability". The bank does not owe any pre-existing commercial debt or liability to the payee. The bank's obligation arises purely out of contract and banking regulation. Furthermore, a bank cannot be imputed with criminal mens rea for stopping payment under bona fide regulatory or fraud-prevention directives.
The Delhi High Court and Punjab & Haryana High Court have repeatedly quashed Section 138 summoning orders issued against banks and draft purchasers:
In State Bank of India v. Amar Nath, the court held that a bank issuing a draft does so as a commercial trustee of funds, and its failure to honour the draft due to administrative discrepancies, signature variations, or internal instructions does not constitute a criminal offence under Section 138. The remedy of the aggrieved holder lies exclusively in the civil courts or consumer dispute redressal commissions.
Similarly, in Punjab National Bank v. Surendra Prasad Sinha (1993) Supp 1 SCC 499, the Supreme Court severely deprecated the practice of roping in bank officials in criminal proceedings where the dispute is essentially of a civil nature, holding that initiating criminal process against banking officials without statutory ingredients is an abuse of judicial process.
3. Can a Bank Stop Payment of a Demand Draft at the Purchaser's Request?
A recurring commercial scenario in Delhi NCR involves a purchaser who buys a Demand Draft for purchasing property or machinery, delivers it to the seller, and subsequently enters into a commercial dispute (e.g., alleging non-delivery of goods or defective title). The purchaser rushes to the issuing bank branch, submits an urgent letter, and instructs the bank: "Stop payment of Demand Draft No. 12345 immediately!"
Can the bank legally comply with the purchaser's stop-payment request?
Under established banking law, a purchaser has NO inherent right to stop payment of a Demand Draft or Banker's Cheque once it has been delivered to the payee. Unlike an ordinary cheque where the drawer exercises absolute dominion over their account balance, the issuance of a Demand Draft creates a completed assignment of funds in favour of the payee.
As held in T.P. Khaitan v. Bank of Baroda and Babu Lal v. Kangra Central Co-operative Bank, the issuing bank enters into a direct contractual relationship with the payee. If banks were permitted to stop payment of drafts at the mere whim or commercial grievance of purchasers, the entire foundation of commercial confidence in negotiable banking instruments would disintegrate.
The Only Recognized Exceptions Where Payment Can Be Stopped:
Under Reserve Bank of India (RBI) circulars and binding judicial precedents, an issuing bank may freeze or stop payment of a Demand Draft only under narrow, exceptional circumstances:
- 1. Fraud or Forgery Established at Inception: Where the purchaser demonstrates clear, unimpeachable evidence that the draft was procured by fraud, criminal coercion, or identity theft, or that the draft leaf itself is counterfeit or materially altered.
- 2. Loss / Theft Prior to Delivery to Payee: Where the purchaser retains physical custody of the draft, loses it in transit, and immediately reports the loss to the bank before it reaches the hands of any holder in due course.
- 3. Judicial Injunction / Court Attachment: Where a competent civil or criminal court, or an enforcement agency acting under statutory powers (such as under Section 106 BNSS / 102 CrPC or PMLA), issues a specific restraining order prohibiting the bank from clearing the instrument.
- 4. Insolvency or Liquidation: Where statutory liquidation proceedings intervene before negotiation and delivery are perfected.
| Factual Situation | Can Purchaser Stop Payment? | Bank's Statutory Duty | Legal Liability for Dishonour |
|---|---|---|---|
| Purchaser has commercial dispute with payee (breach of contract, defective goods) | STRICTLY NO. Bank cannot stop payment based on commercial breach between parties. | Bank must honour draft on presentation. Must advise purchaser to seek civil court injunction. | If bank wrongfully stops payment, it is liable for damages and consumer deficiency. |
| Draft lost / stolen before delivery to payee | YES. Purchaser must lodge police report / NCR and furnish indemnity bond. | Bank enters "caution" mark in CBS and issues duplicate draft after regulatory waiting period. | No liability if procedural due diligence is maintained. |
| Court of competent jurisdiction passes restraining order | YES (by operation of law). Judicial order supersedes commercial mandate. | Bank must freeze clearing and place funds in suspense account pending court directions. | Protected under judicial order immunity. |
| Payee presents draft, but purchaser alleges fraud without court order | NO. Mere allegation of fraud without police FIR or court injunction is insufficient. | Bank must release funds unless fraud is patently manifest on the face of the record. | Wrongful stoppage exposes bank to civil damages and interest. |
4. Legal Remedies for Wrongful Dishonour: Civil Summary Suit vs Consumer Commission
When an issuing bank wrongfully refuses to encash a Demand Draft or Banker's Cheque—whether due to an unlawful stop-payment request by the purchaser, internal operational negligence, or signature verification errors—the payee is not left without powerful legal teeth. While Section 138 NI Act is inapplicable, Indian law provides two rapid, highly effective remedies:
Remedy A: Summary Suit Under Order XXXVII CPC
Under Order XXXVII Rule 1(2)(a) of the Code of Civil Procedure, 1908 (CPC), summary suits are expressly maintainable upon "bills of exchange, hundies and promissory notes". A Demand Draft, being a bill of exchange under Section 85A NI Act, falls squarely within the ambit of Order 37 CPC:
- Defendant: The suit is instituted directly against the Issuing Bank and the Drawee Bank, with the purchaser joined as a proforma or necessary party.
- Jurisdiction: The Commercial Court or Civil Court within whose territorial jurisdiction the drawee bank branch is situated (e.g., Commercial Court at Patiala House, Saket, or Tis Hazari).
- Summons for Judgment & Leave to Defend: Once summons in Form 4 Appendix B are served, the bank must enter appearance within 10 days. The payee then files a Summons for Judgment. The bank cannot defend the suit unless it satisfies the court under the test in IDBI Trusteeship Services Ltd. v. Hubtown Ltd. (2017) 1 SCC 568 that it has a substantial and bona fide defence.
- Decree for Principal Plus Interest: Because the bank has no legal defence for stopping payment on a valid draft, the court routinely refuses leave to defend and passes an immediate money decree for the draft amount along with commercial interest under Section 79/80 NI Act (customarily 18% per annum).
Remedy B: Consumer Complaint Under Consumer Protection Act, 2019
Where the payee or the purchaser is a "consumer" (not engaged in large-scale commercial reselling), a complaint for deficiency of service and unfair trade practice lies before the District Consumer Disputes Redressal Commission (DCDRC) or State Commission (SCDRC):
- Supreme Court Authority: State Bank of India v. Yash Pathak: The apex court held that wrongful refusal to encash a bank draft or unwarranted delay in issuing a duplicate draft constitutes gross deficiency in banking services, entitling the complainant to the draft amount, penal interest, and substantial compensation for mental harassment and loss of business reputation.
- Pecuniary Slabs: District Commissions entertain claims up to Rs. 50 Lakhs; State Commissions handle disputes from Rs. 50 Lakhs to Rs. 2 Crores under CPA 2019.
5. Prosecuting the Dishonest Purchaser: Section 318 BNS (Cheating) & Section 316 BNS
While an aggrieved payee cannot proceed against the purchaser under Section 138 NI Act, this does not mean the purchaser escapes criminal accountability. If the purchaser induced the payee to hand over valuable property, sign title deeds, or part with goods on the representation of delivering a Demand Draft, and simultaneously instructed the bank to freeze or cancel the draft, the purchaser is guilty of serious cognizable penal offences under the Bharatiya Nyaya Sanhita, 2023 (BNS):
- Section 318(4) BNS (Formerly Section 420 IPC - Cheating and Dishonestly Inducing Delivery of Property): Where the purchaser possessed dishonest intention at the inception of the transaction, induced delivery of property, and immediately took steps to stall the draft. Punishable with imprisonment up to 7 years and fine.
- Section 316 BNS (Formerly Section 406 IPC - Criminal Breach of Trust): Where the purchaser was entrusted with dominion over property against the promise of unconditional bank funds. Punishable with imprisonment up to 5 years.
- Section 61(2) BNS (Formerly Section 120B IPC - Criminal Conspiracy): Where the purchaser acted in collusion with bank officials or intermediaries to procure cancellation or diversion of the draft funds.
Courtroom Strategy in Delhi NCR: The complainant should file a comprehensive criminal complaint under Section 175(3) of the BNSS, 2023 (formerly Section 156(3) CrPC) before the Chief Judicial Magistrate (CJM) or Metropolitan Magistrate (MM), seeking a court-monitored police investigation and registration of an FIR, accompanied by freezing of the purchaser's bank accounts under Section 106 BNSS.
6. RBI Master Directions: Duplicate Demand Drafts, Timelines & Loss Guidelines
The Reserve Bank of India has issued comprehensive regulatory master directions governing the issuance, cancellation, and re-issuance of Demand Drafts and Banker's Cheques:
| Regulatory Requirement | RBI Master Direction Mandate | Legal Protection for Beneficiary / Purchaser |
|---|---|---|
| Mandatory 14-Day Timeline for Duplicate DD | Banks must issue a duplicate Demand Draft within a maximum of 14 days from the receipt of the request. | If the bank delays beyond 14 days, it is liable to pay penal interest to the purchaser at the prevailing bank deposit rate for the delayed period. |
| Indemnity Bond Relaxation for Low-Value Drafts | For drafts up to Rs. 20,000/- (or bank-specified limits), duplicate drafts can be issued on simple undertaking without insisting on stringent third-party indemnities or court orders. | Eliminates harassment of small account holders and consumers who lose drafts in transit. |
| Validity Period of Demand Drafts | All Demand Drafts, Banker's Cheques, and Pay Orders are valid for 3 months from the date of issue (reduced from 6 months vide RBI notification). | After 3 months, the draft becomes stale and must be revalidated by the issuing bank upon application by the purchaser. |
| Prohibition of Cash Drafts Above Rs. 50,000/- | Demand drafts for Rs. 50,000/- or above can be issued only by debit to the customer's bank account or against cheque; never against cash. | Prevents money laundering and provides a traceable banking audit trail in financial crime litigation. |
| Mandatory Name of Purchaser on DD Face | RBI guidelines mandate that the name of the purchaser must be prominently printed on the face of the Demand Draft. | Prevents anonymous, benami, or untraceable instruments in commercial transactions. |
7. Cross-Examination Blueprints: Payee vs Bank & Purchaser in Court
When litigating a Demand Draft dispute before a Commercial Court in Saket, Tis Hazari, or Patiala House, cross-examination of bank officers and the purchaser requires precise tactical questioning:
- "Is it correct that when Demand Draft No. [X] was issued on [Date], your branch received the full consideration amount of Rs. 25,00,000/- in advance from the purchaser?"
Objective: Establishes that the bank held full pre-funded consideration and suffered no financial shortfall. - "Did the purchaser submit any restraining order from a competent Civil or Criminal Court prohibiting your bank from clearing the draft?"
Objective: Elicits an admission that no judicial injunction existed, proving the stoppage was purely administrative and illegal. - "Can you produce any provision of the Banking Regulation Act, 1881 or RBI Master Directions that permits a bank to stop payment of a draft on a mere private commercial complaint?"
Objective: Pins the bank down on regulatory violation, cementing the foundation for an Order 37 summary decree or consumer deficiency award. - "Is it not true that under Section 85A of the NI Act, your branch drew an unconditional order upon the drawee branch to pay the amount on demand to the named payee?"
Objective: Establishes the absolute statutory commitment of the banking entity under the law of negotiable instruments.
- "Did you hand over this Demand Draft to the Complainant at the office of the Sub-Registrar upon execution of the Agreement to Sell?"
Objective: Proves unconditional delivery of the instrument and perfection of the payee's rights. - "Within how many hours of obtaining possession of the property did you visit your bank to submit the letter requesting cancellation?"
Objective: Exposes the fraudulent sequence of events, proving dishonest intention at the inception under Section 318(4) BNS. - "Did you issue any prior written notice to the payee before instructing your bank to stall the clearing of the draft?"
Objective: Destroys the defense of bona fide dispute; highlights malicious unilateral interference.
Statutory Authorities & Legal References
- Negotiable Instruments Act, 1881 (Section 6 - Cheque, Section 85A - Drafts drawn by one branch of a bank on another, Section 138 - Dishonour of Cheque, Section 79 & 80 - Interest on Negotiable Instruments)
- Code of Civil Procedure, 1908 (Order XXXVII Rules 1, 2 & 3 - Summary Procedure on Bills of Exchange)
- Bharatiya Nyaya Sanhita, 2023 (Section 318 - Cheating, Section 316 - Criminal Breach of Trust, Section 61 - Criminal Conspiracy)
- Bharatiya Nagarik Suraksha Sanhita, 2023 (Section 175(3) - Application for Police Investigation; Section 223 - Magisterial Examination; Section 106 - Attachment of Property)
- Consumer Protection Act, 2019 (Section 2(11) - Deficiency in Service; Section 35 & 47 - Jurisdiction)
- Reserve Bank of India Master Directions on Issuance and Payment of Demand Drafts and Banker's Cheques (RBI/2011-12/476 & Master Circular on Customer Service in Banks)
- Supreme Court Authority in Canara Bank v. I.V. Rajagopal (1975) 1 SCC 73 (Legal Character and Irrevocability of Bank Drafts)
- Supreme Court Authority in Punjab National Bank v. Surendra Prasad Sinha (1993) Supp 1 SCC 499 (Abuse of Criminal Process Against Banking Institutions)
- Supreme Court Ruling in United Bank of India v. Ramdas Mahadeo Prashad (2004) 1 SCC 252 (Bank's Unconditional Undertaking on Demand Drafts)
- Supreme Court Benchmark in IDBI Trusteeship Services Ltd. v. Hubtown Ltd. (2017) 1 SCC 568 (Principles for Leave to Defend in Commercial Summary Suits)
- High Court Benchmark in State Bank of India v. Amar Nath (Inapplicability of Section 138 NI Act to Banking Institutions for Draft Refusal)
- High Court Landmark in State Bank of India v. Yash Pathak & T.P. Khaitan v. Bank of Baroda (Deficiency of Service and Sanctity of Banker's Drafts)
Disclaimer: This article is published strictly for academic and educational purposes under the Advocates Act, 1961. It does not constitute formal legal advice, solicitation, or advertisement under Rule 36 of the Bar Council of India Rules, nor does it create an advocate-client relationship. For case-specific legal counsel, readers should consult an independent advocate.
Frequently Asked Questions
Practical courtroom guidance and procedural answers curated by Senior Advocates in Delhi NCR.
Can I file a Section 138 cheque bounce case if a Demand Draft is dishonoured?
No. Section 138 NI Act applies exclusively to the drawer of a cheque drawn on their own account. In a Demand Draft, the bank is the drawer and the customer is merely the purchaser. Furthermore, a bank does not owe any pre-existing debt or liability to the payee under the Explanation to Section 138. Therefore, neither the purchaser nor the bank can be prosecuted under Section 138.
Can a purchaser legally stop payment of a Demand Draft after handing it over?
Generally, no. Under RBI guidelines and established case law, the purchaser has no legal right to stop payment of a Demand Draft once it has been delivered to the payee. The bank is legally bound to honour the draft on presentation unless there is a clear court injunction, proof of theft/loss before delivery, or manifest criminal fraud.
What is the best and fastest legal remedy if a bank wrongfully refuses to encash a Demand Draft?
The most potent remedy is filing a Summary Suit under Order XXXVII of the CPC before the competent Commercial Court. Because a Demand Draft is an admitted bill of exchange under Section 85A NI Act, the court will routinely refuse leave to defend to the bank and grant an immediate money decree with commercial interest. Alternatively, a consumer complaint for deficiency of service can be filed.
Can a purchaser be prosecuted for cheating if they cancel a Demand Draft after receiving property?
Yes. If the purchaser induced the seller to execute sale deeds or part with property on the representation of a Demand Draft, and subsequently instructed the bank to freeze or cancel the draft, they can be prosecuted for cheating under Section 318(4) of the Bharatiya Nyaya Sanhita, 2023 (BNS) (formerly Section 420 IPC), punishable with up to 7 years imprisonment.
How long is a Demand Draft valid in India, and can it be revalidated?
Under RBI directives, all Demand Drafts and Banker's Cheques are valid for 3 months from the date of issue. If not presented within 3 months, the draft becomes stale. It can be revalidated by the issuing bank upon a formal written application by the purchaser, provided the funds have not been refunded.