Differences Between A Cheque And Demand Draft

Every Business works to earn profits, and customers use multiple methods of payments for commodity purchases and pay either online or offline. Offline modes are usually explained in the negotiable instruments used to transfer a certain sum of money at a specific date to the payer, whose name is mentioned in the document. Negotiable instruments obtained their formal identity and recognition with the promulgation of the Negotiable Instruments Act 1881 in India. It shall include the Bill of Exchange, the Cheque, the Promissory Note, and the Demand Draft or other documentation that may be exchanged in return for money.

The most common form of negotiable instrument is the Cheque, which is issued against a deposit in Banks. A cheque is defined in Sec 6 of the Negotiable Instruments Act as follows:-

  1. A cheque is a bill of exchange drawn on a specified banker
  2. Payable on demand
  3. Drawn on a specified banker
  4. An electronic image of a truncated cheque is recognized under the law.” [1]

The Information Technology Act, 2002 also recognizes (a) digital signatures[2] and (b) electronic transfers[3]. Thus, a cheque is an unconditional order directing the Banker to pay a sum of money only to the order of a specific person. The Banker in which the customer keeps his/her account is called the paying bank account.

The Banker with whom the customer holds his/her account is called the paying Bank. The parties of a cheque are (a) the drawer who draws a cheque on his account; (b) Drawee shall be the Banker to whom the Cheque is issued (c) Payee shall be the receiver of the Cheque in which payable the Cheque has been charged. In addition to those parties, Endorser and Endorsee are other parties interested in payment and cheque collection.

Generally, various forms of Cheque are available as follows:

“Open cheque” is a cash payment approved across the counter of Bank.

“Bearer Cheque” is payable to anyone who is carrying and putting it for payments at the Bank counter. It can also be possible to transfer to pass it without any permission and mere delivery.

“Order cheque” is payable to a particular person, and the word “Order” will specifically mention in the Cheque. By signing his name on the back of the Cheque, the payee may pass an order by consent to another person.

“Blank cheque” means a cheque in which the drawer puts his signature and leaves all other columns blank.

“Stale cheque,” the date of issue is more than three months old.

“Post-dated cheque” bears a specific date that is yet to come and cannot be charged until the deadline of the issue.

“Ante-date cheque” contains a date earlier than the day on which it is submitted to the Bank. Such Cheque is valid for up to 3 months from the date of the check issued.

“Self-cheque” means a cheque written by the account holder as “pay self” to receive the money from the Bank.

“Mutilated cheque” referred to a cheque torn into two or more pieces or is partly torn or mutilated in any other manner. This Cheque is not valid for payment.

“Crossed Cheque” shows two parallel lines on the face of the check, with or without additional research, such as the’ account payee’ referred to Section 123 to 131 of the Negotiable Instruments Act. There may be a common crossing and a separate crossing.

On the other hand, a demand draft is a pre-paid instruments which are not defined in the act but discussed in Section 85(A) of Negotiable Instruments Act 1881 as “Where any draft, that is, 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, purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course.”[4]

The payer does not have to have an account to make the payment of the demand draft in the Bank. There are two forms of demand drafts. (1) “Sight Demand Draft” is payable when the payee submits the draft to the Bank. (2) “Time Demand Draft” is payable only after a given period, as determined by the drawer.

The person issuing the order is known as a drawer, and the person mentioned in the order is called drawee. This cannot be given as payable to bearer and is only payable on demand. Mostly, people are paying through IMPS, instead of Check and demand draft, RTGS, and NEFT system. But this draft demand still uses to pay for job applications, examinations, admissions, service, etc.

A cheque can be dishonored due to insufficient balance in the account, but the draft demand cannot be countermand. A cheque is not usually accepted in many transactions because the payee and drawer are unknown, and there will be credit risk as Cheque may bounce. While the demand draft is approved where the transfer of money is guaranteed. The draft application is valid for three months.

In summary, both (Cheque and Demand Draft) instruments are a conventional form of payment that is losing its appeal in this globalized society. To comply with transactions regularly, the Cheque has often been seen as more comfortable to hold and demands drafts still the right choice for higher value exchanges.

[1] The Negotiable instruments Act 1881, s 6

[2] The information technology Act, 2002, s 2(P)

[3] ibid, s 2(t)

[4] Supra note, s 85(A)

This article is authored by Md Raihan, student of LLM at South Asian University, New Delhi.

Also Read – E-Contract: It’s A Lot More Than The ‘I Agree Button’

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