1. The Palai Central Bank Limited (in liquidation) stopped business on the evening of the 8th August 1960 on the appointment of a provisional Liquidator. Before that, the various offices of the bank had, in the ordinary course, issued demand drafts, most of them on other offices of the bank, but a few on other banka with whom it had agency arrangements. These applications are by the holders of such drafts who were unable to present them and obtain payment before the bank closed down and who therefore submitted proofs to the liquidator claiming payment in full on the ground that the bank was only an agency employed by them for the transmission of money from one place to another and payable at the other end to their nominee or his order. Therefore, their relationship with the bank was not that of an ordinary debtor and creditor, but something more; and the bank held the money paid by them for obtaining the draft in a fiduciary capacity. The liquidator however held that the relationship was that of an ordinary debtor and creditor and nothing more, and, denying the applicants the preferential payment they claimed, ranked them with the ordinary creditors. Hence these application Under Section 460(6) of the Companies Act read with Rule 164 of the Companies (Court) Rules by way of appeal from the decision of the liquidator.

2. A demand draft is an order to pay money drawn by one office of a bank upon an other office of the same bank or upon an office I of a different bank for a sum of money payable to order on demand. (See Section 85A of tael Negotiable Instruments Act. In the latter case, namely, where the order is on another bank, in is really a cheque but is nevertheless ordinarily called a draft). And the drafts in these cases, two of which have been marked as Exts. C5 and C6 by way of illustration, conform to this definition. When a draft is issued on another bank it is undoubtedly an bill of exchange as ??? by Section 5 of the Negotiable Instruments Act. Even if it be drawn upon another office of the same bank, I should think it is a bill of exchange whether with Rankin, C.J and with whom the four other Judges constituting the Special Bench agreed (in Demand Drafts of the Imperial Bank of India. In re, ILR 56 Cal 233 : (AIR 1928 Cal 566) (SB)) we hold that, unlike as in the English law which requires that the order must be addressed by one person to another, the “certain person” of Section 5 of the Negotiable Instruments Act may be the same person as the maker, or whether preferring the view that a man does not issue an order to himself but only makes a promise (in which case such a draft may well be regarded as a promissory note but for the complication of stamp duty), we consider that Section 85-A of the Negotiable Instruments Act contemplates a fiction by which one office of a bank is for this purpose to be regarded as a different person from another office of the same bank. However that might be, there is no denying that a demand draft is nothing more or less than a negotiable instrument governed by the provisions of the Negotiable Instruments Act; and on the face of it, the obligations it eremites are nothing more than ordinary debts. The question is whether there is nothing more to the transaction which is technically called the purchase of a draft than what appears on the face of the draft, whether the draft embodies the whole of the contract between the parties, or whether usage, in other words the established banking practice, implies something more so that the contract is really one for the carriage of money from one place to another. It is urged on behalf of the applicants that there is this something more.

3. A large number of cases (In the matter of, New Bank of India Ltd. Amritsar, AIR 1949 EP 373; In re Noakhali Union Bank Ltd., 54 Cal WN 744; Suganchand and Co. v. Brahmayya and Co., AIR 1951 Mad 910 (2); Traders' Bank Ltd. v. Kalyan Singh, AIR 1953 Punj 194; Birbohum Central Co-operative Bank Ltd. v. Pioneer Bank Ltd., (S) AIR 1956 Cal 615; In re Girish Bank Ltd., AIR 1959 Cal 762 and Gulzarilal Devi Dayaj v. Punjab and Kashmir Bank Ltd. Delhi, AIR 1960 Punj 281 (to mention only a few of those directly in point) have been cited at the bar. But, so far as I can see, all of them with one exception to which I shall presently refer, from AIR 1949 EP 373 which may be regarded as the most favourable to the applicants down to AIR 1960 Punj 281 which may be regarded as the least favourable, lay down the same principles, the differences lying only in the application of these principles to the particular facts.

4. I think the principles may best be summarised in the words of Chakravartti, C.J in (S) AIR 1956 Cal 615:

“It is well-settled that a banker's draft is a bill of exchange and as such it is a negotiable instrument. That such is the nature of a banker's draft would appear from the definition of a Bill of Exchange and a Negotiable Instrument, as contained in the Negotiable Instruments Act. A Banker's draft issued by one branch of a bank to another is especially dealt with in S. 85-A. It is there provided that 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. The issue of a draft is regarded in banking practice as a matter of purchase and ordinarily the relationship between the holder of a Demand Draft and the bank issuing it is that of debtor and creditor. The holder of the draft is a creditor and his remedy is on the draft.

5. But although a draft may ordinarily be nothing more or nothing less than a bill of exchange and although, taken, by itself it may not create any relationship except that of debtor and creditor, it is open to a person who caused a Demand Draft to be issued to establish that, in fact, there was a contract between the bank and himself for transmission of the money and the issue at one end of a draft, payable at the other end, was only chosen as a convenient and expeditious method of remitting the amount covered. When a person requires money to be remitted from one place to another and desires the remittance to be made through a bank, the bank may for due consideration put through a transaction of that kind and send to its branch at the place where the money is desired to be remitted, telegraphic instructions or a letter of advice, but it may also instead of issuing such instructions or sending such a letter, issue a draft on the branch at the place where the money is sought to be remitted and make it payable to a nominee of the person who pays the money or to his order.

6. The contract in such a case is essentially a contract of carriage, the subject matter to be carried being money, and where such a contract is proved, it may reasonably be contended that although a Demand Draft was issued by the bank, the consideration for the draft was paid for the specific purpose of the transmission of the money to the place where the draft was made payable. Provided a contract of that kind and so understood by both parties, is made out it is possible to say that a person paying money to a bank under such a contract and on such terms is not in the position of an ordinary creditor, but is rather in the position of a trustor who entrusts the bank with money to be applied to a specific purpose, viz., the purpose of its being carried to the other end and paid out there to the trustor himself or a nominee of his or to his order.”

7. The one exception is State v. J.C Gamon Ltd. (1952) Ker LT 521 : (AIR 1953 Trav-Co 45). There the question arose only in an incidental way and has been considered at pages 526 and 527 (of Ker LT): at pp. 49-50 of AIR of the report. The decision seems to proceed on the footing that the money paid for the purchase of a draft is money paid for transmission, that the bank stands in the relationship of an agent to the purchaser and hence acts in a fiduciary capacity, and that consequently if the bank fails the holder of the draft would be entitled to get the whole amount covered by the draft from the liquidator.

8. All the cases except the last mentioned case proceed on the assumption that, according to the established banking practice, the contract involved in the purchase of a draft is what appears on the face of the instrument and nothing more, in other words, that the terms of the contract are fully embodied in the draft; that the custom of the trade does not imply a contact for the carriage of money from one place to another, and that therefore the relationship create is that of an ordinary debtor and creditor. But all of them recognise the possibility of a special contract for the carriage of the money, the only written evidence whereof is the draft. In such a case the draft would not embody the terms of the contract, and whether the special contract be express or implied, Sections 91 and 92 of the Evidence Act would be no bar to its proof.

9. It is the case of the applicants that the assumption on which the decisions proceed is based on what obtained in England, (in England, it would appear that even payment to a bank with the express instruction to remit the money to a particular place for a particular purpose 13 regarded as creating no trust or agency and; as nothing more than a deposit with a promise to pay at the other end — see In re Barned's Banking Co. Ltd. Massey's case, (1870) 39 LJ (NS) Ch 635 and Scott on Trusts, Second Edition Vol. IV para 532 — but the decisions already referred to by me show that the Indian Law is) different and that where there is a contract to transmit money there is an agency or trust — see also In re, Travancore National and Quilon Bank Ltd. AIR 1940 Mad 139), that it is not true of the Indian Practice, and that according to the Indian banking practice the sole purpose for which a person purchases a draft and the bank accepts his money is for the transmission of the money to some other place so that, whatever the draft itself might say a special contract; for the carriage of the money as contemplated by the decisions is necessarily implied in the transaction by reason of the established usage of the trade.

10. Reference is made in this connection to the saving in Section I of the Indian Contract Act, to the discussion on “Conventional Custom” at page 236 of Salmond on Jurisprudence (11th Edition) and on “Implied Terms” at page 121 of Volume 8 of Halsbury (3rd Edition). But it is hardly necessary to cite authority for the purpose of showing that a contract can be implied by the usage of a trade and that even when a contract is reduced to writing such usage can by implication annex incidents and terms not expressly mentioned in the writing, proof of such terms being permissible under proviso 5 to Section 92 of the Evidence Act.

11. The statement of affairs submitted by the General Manager of the Bank, an experienced officer of the State Bank of India, under Section 454 of the Companies Act shows that the amounts due on unpaid drafts among preferential payments placing them on the same looting as monies collected by the bank on bills and other documents as a mere agent, (sic) This lends considerable support to the case of the applicants, for although the statement is of course of no value as a statement of the law, it indicates that as a question of fact, according to the practice followed by this particular bank it holds the money paid to it by the purchaser of a draft more or less as an agent. I have also examined two witnesses to ascertain the genera banking practice in this country as also the practice of this particular bank.

12. C.W 1 is now the group agent of the Central Bank of India at Cochin and has years banking experience, having worked for four years as an agent of the Travancore National and Quilon Bank in several stations in the Madras State and for the remaining 22 years as an accountant and as an agent of the Central Bank of India in several branches in the Madras and Kerala States. The following is an extract or the relevant portions of his evidence:

“The purchaser of the draft pays the amount of the draft plus an exchange or commission to the issuing bank and this payment may be either in cash or from the account of the purchaser if he has an account with that bank. A draft is invariably issued on a bank in some other place and so far as I know its sole purpose is transmission of money from one place to another. There are different modes of transmission like main transfer, telegraphic transfer and the issue of demand drafts, x x x x x Since this (sending money from one place to another) is the only purpose for which people purchase demand drafts the drawer banks also know that the money is paid to them only for the purpose of transmission, the draft issued by them being more or less a token although a negotiable instrument. I am not prepared to go to the extent of saying that when a bank takes money and issues a draft it acts as an agent or a messenger for the purchaser. The essence the contract between the bank and the purchaser is that the bank will pay money to the payee of the draft at the other end.

13. It would not be correct to say that the money paid by the purchaser is a deposit with the Bank repayable at some other station. That is not how the purchaser or the Bank looks upon the transaction. Both parties look upon the transaction as a machinery for sending money from one place to another, the bank charging a commission for its service and the remitter being issued a draft as a token. The purpose, as known to both parties, behind the purchase of a draft and of mail or telegraphic transfers is the same namely the transmission of money. I think I might sum up the whole position by saying that neither party looks upon the transaction as merely putting in money into the bank to be withdrawn when required and that both look upon it as putting in money for the specific purpose of sending it to some other place, this being done by giving the purchaser a negotiable instrument in the shape of a draft which will be his authority for getting the money at the other end x x x x Drafts earn no interest and there are also the charges to be paid. The purchase of demand drafts is only a convenient mode of sending money from one place to another, x x x x

Cross-examined by applicants.

14. x x x No interest is paid by a bank on the amount of a draft issued by it because essentially the transaction is not one of deposit but one of transmission, of money from one place to another, a charge being levied for the service. I might not) go to the extent of saying that when a person purchases a draft he enters into a contract with the drawer bank for the carriage of the money to the other end] for a remuneration by way of commission; but I would say this, (that to the knowledge of both (parties) the purchase is intended for the transmission of money from one place to the other, the bank getting a enumeration for its services in the shape of the commission x x x x. The issue of a draft implies an obligation to effect an immediate transfer of the money to the drawee bank albeit by book entries, and although advice thereof is send only by post, advice is sent the same day. Cross-examined by Liquidator:

x x x When a person purchases a draft from a bank there is usually, in the absence of a special instruction or agreement no entrustment of the money as such. The bank does not regard the payment to it as an entrustment but views the transaction as a sale and purchase for the sole purpose of transmission.”

15. C.W 2 was in the service of the bank from 1943 until it was closed down in 1960. He has served as manager in many of its branches and from 1957 to 1960 he was the manager of its Madras Branch. His evidence regarding the practice of this particular bank is to the same effect.

16. I think that the evidence of C.Ws 1 and 2 shows that the essence of the transaction technically known as the purchase of draft, as understood by both the parties, is the transmission of the money paid by the purchaser and that the bank undertakes this service for a tee known as commission and issues a token in the form of a negotiable instrument. If, that be so, it is clear that the draft does not embody the terms of the contract between the parties, at any rate not the whole of it, and that it si ??? like a railway receipt or a bill of lading than, let Us say an ordinary promissory note. (Even a promissory note may be a mere token. For example the real contract may be to transmit money from place A to place B, and instead of issuing a receipt, the agent employed for the purpose might execute a promissory note in favour of his principal or his nominee promising to pay the money at place B.) It is a muniment of title to the money handed over for transmission rather than the moneys worth got in exchange for the money, and just as title to goods covered by a railway receipt or a bill of lading is passed by endorsement thereon, title to the money covered by a draft is likewise passed.

17. Some of the decisions seem to say that the negotiable character of a draft is inconsistent with the contract being one for the transmission of money, with the draft issued being only a token analogous to a receipt (see in particular 54 Cal WN 744 where it is observed at page 746 that “if the draft is negotiable it is difficult to see how there can fee an agreement that the money represented by the draft would be paid to a specified person or would be spent in a specified manner”) but I fail to see why that should be so. Money accepted for payment to a specified person or his order is none the less money accepted for being spent in a specified manner for its being payable to order. Doubtless, if the draft stood by itself its negotiability would emphasise its character as a chattel something which has been bought for the money paid and which the purchaser has taken as ills moneys worth. But yet, if as the evidence here shows the real agreement is for the transmission of money I do not follow why the token or receipt given for the money should not take the form of a negotiable instrument which the payee can at his will endorse for collection or for value (in which latter case the endorsement transfers title to the money covered by the instrument) according to his convenience. That draft is negotiable, that it can as it were be bought and sold, does not necessarily mean that the draft itself represents the value of the money, for what is bought and sold is the to the money covered by the draft. It would seem from the evidence of C.Ws 1 and 2 that the technical phrase “purchase of a draft” used in banking parlance is a misnomer and that the draft is not really something taken in exchange for the money paid, but is only a token to enable the payee named therein to draw the money at the other end.

18. The evidence of C.Ws 1 and 2 and the instructions in Ext. C4, the bank's book of instructions, show that the accounting procedure followed in the case of the issue of a draft is the same as in the case of the two other common modes of transmission of money, namely, a mail transfer or a telegraphic transfer. Although in all the three cases the money paid into the bank is treated as part of the bank's funds, an equivalent sum of money is earmarked and held by the drawee bank for payment of the draft when presented, or for payment to the person named in the mail transfer or in the telegraphic transfer as the case may be. Contemporaneously with the issue of a draft, the drawer bank credits the amount covered by the draft to the account of the drawee bank, and, on the same day sends the drawee bank advice thereof by post as soon as the advice is received, the drawee bank debits the drawer bank with the sum and credits it to a sort of suspense account called the “dralts (or bills) payable account” where it is held in readiness against the presentation of the draft. On the draft being presented and paid, a debit entry is made in the suspense account and the matter closed. As I have already said, it would thus appear that a sum of money equivalent to the money paid for the draft (less the fee or commission) is earmarked for payment of the drat on presentation, and it would follow therefrom that the relationship is not that of a mere debtor and creditor, but partakes of a fiduciary character.

19. Ext. C3 is a folder issued by the bank for the information of the general public regarding the services rendered by it. Here, as also in the book of instructions, Ext. C4 the issue of demand drafts is shown as a remittance service in the same way as telegraphic or mail transfers. The bank supplies the same printed form, for an application for a mail transfer as for a demand draft, and there can be little doubt that the bank was holding out that it would issue demand drafts for the purpose of transmitting money paid to it; to the destination desired by the payer.

20. It would thus appear that there is no difference whatsoever between a mail or telegraphic transfer on the one side and what is known as the purchase of a demand draft on the other. Both transactions involve an agreement for the transmission of money. In the case of a transfer, it can be said that the agreement is express since the application made by the payer is for the transfer of the money paid by him to some other place. (See in this connection in AIR 1940 Mad 139 where it was held that when a person, even if be a customer, pays money to a bank for transfer, the Bank receives the money as a mere agent with the result that, in winding-up, the debt is entitled to priority. This is only consistent with the principles laid down in the several decisions to which reference has already been made). In the case of the purchase of a draft the agreement to transmit the money is implied. The only difference, it would appear is that in the case of a transfer the payer is only given a receipt which is not a document of title to the money, whereas, in the case of a purchase of a draft he is given a negotiable instrument on the presentation of which alone the money is paid.

21. It should not be thought that I am confusing between the object which the parties might have in mind when entering into contract, a confusion akin to that sometimes made in criminal cases between motive and intention. Whatever might be the common object the parties had in mind of course, a unilateral object or intention is of no account whatsoever — their rights and: liabilities are governed by the terms of their contract, whether these terms be effective or not to achieve the object. But, just as motive can point to intention, so also in the case of an Implied contract, the object both parties had in mind might point to the terms of their agreement. In particular, I should think that if one man pays money to another with a view to its being applied in a particular way and the other accepts the money knowing that it is paid to him for that purpose, an agreement to apply it in particular way can reasonably be interred. In such a case, it does not matter whether, in token of having received the money, the payer is given an ordinary receipt, or a promissory note or other negotiable instrument, or no document at all.

22. In my view, these cases fall outside the general presumption that the relationship between a bank and persons dealing with it are that of an ordinary debtor and creditor. (I might add that a Purchaser of a demand draft can scarcely be called a customer of the bank in his mere capacity as purchaser, even if lie is otherwise a customer). These are cases where money was paid to the bank for the specific purpose of transmission to the place where the draft was made payable and for payment to the person named therein or his order, and the agency or trust created thereby is not discharged until the money is so paid.

23. The cases fall within the exception 111 the second paragraph of the quotation I have made from the judgment of Chakravartll, C.J, in (S) AIR 1956 Cal 615 as summarising the principles laid down by the several High Courts.

24. I allow the applications and direct that the applicants be given the priority they claimed. I make no order as to costs.

AF/D.H.Z

25. Applications allowed.