Alan L Tyree

Personal liability on business cheques

Alan L Tyree¹

1 Background

Cheques drawn by a company or by a firm must be signed by an agent. If the cheque is dishonoured, it then becomes attractive to attempt to sue the agent. The Cheques Act 1986 contains sections relating to the liability of an agent, but these sections can appear contradictory at first glance.

Section 31 of the Act provides

"(1) Subject to this section and section 75, a person is not liable as the drawer or an indorser of a cheque unless the person signs the cheque as the drawer or an indorser, as the case may be.

(2) Where a person signs a cheque in the person's business name or trade name or in a name other than the person's own name, the person is liable on the cheque as if the person had signed it in the person's own name."

Section 33 of the Act deals with signature by an agent:

"(1) Where:

(a) a person (in this subsection referred to as the signer) signs a cheque for or on behalf of a principal or in a representative capacity;

(b) the signer adds words to the signature indicating that the signer signs for or on behalf of a principal or in a representative capacity; and

(c) the person for or on whose behalf the signer signs the cheque is named, or otherwise indicated with reasonable certainty, in the cheque;

the signer is not personally liable on the cheque."

Section 75, on the other hand, provides

"(1) Where a person signs a cheque, otherwise than as the drawer or an indorser, intending to become liable on the cheque, the provisions of this Act [with some exceptions] apply, mutatis mutandis, to the person as if the person were an indorser and the person's signature were an indorsement.

(2) A person who signs a cheque shall, for the purposes of subsection (1):

(a) as regards a holder in due course - be conclusively presumed to have signed the cheque intending to become liable on the cheque; or

(b) as regards a holder who is not a holder in due course - be presumed, unless the contrary is proved, to have signed the cheque intending to become liable on the cheque;

unless it is apparent, on the face of the cheque, that the person did not sign the cheque intending to become liable on the cheque."

The main problem arises when a corporate agent signs the cheque, but he or she does not add words as suggested by s 33(2). Section 33 does not apply, but does the person necessarily then fall within the terms of s 75? In other words, if the requirements of s 33(b) are not met, is there then a presumption that the person who signs is personally liable to the holder?

2 Valamios v Demarco

In Valamios v Demarco [2005] NSWCA 98, the appellant had signed a number of cheques drawn in favour of the respondent. The cheques were, as is common, pre-printed forms. The name printed on the cheques was “E&C Valamiou t/as V&P Produce” and the account was held by the bank in that name. The signature of the appellant appeared on the printed line provided for the signature of the authorised signatory of the account. The appellant was a partner in the firm and was authorised to draw the cheques in question.

The cheques were drawn in favour of a trade creditor for the purpose of paying for produce. Some 16 cheques with a total value of over $200,000 were dishonoured on presentment.

In the District Court, the plaintiff argued that the defendant had drawn the cheque or, alternatively, having signed it was liable on dishonour since the requirements of s 33(1)(b) had not been complied with. In other words, the pleadings took the view that meeting the requirements of s 33(1)(b) is necessary for an agent to avoid a presumption of personal liability when signing a cheque on behalf of the principal.

The District Court seemed to agree, holding that the defendant had not complied with s 33 and that he had not shown that “it is clear on the face of the cheque that he did not sign the cheque with the intention to become liable.” (at para 56).

The Court also relied upon notices of dishonour that were sent by the drawee bank. These showed the defendant's name and that he was an account holder of the account in question.

The defence relied on Bondina Ltd v Rollaway Shower Blinds Ltd [1986] 1 All ER 564 and Commonwealth Bank of Australia v Muirhead [1997] 1 Qd R 567, discussed below, but the primary judge found that they were not “helpful on the facts of this case”.

3 Bondina

The facts in Bondina were about as close to the facts of Valamios as it is possible to imagine. Cheques were issued in favour of the plaintiff's to pay for goods supplied. The cheques were pre-printed forms which contained the name and account number of the company. The cheques were signed by two directors with no qualifying words to indicate that they were not assuming personal liability.

The Bondina case was an application to have a default judgment set aside and for leave to defend. Perhaps this is the reason that the primary judge found the case to be unhelpful. However, the English Court of Appeal considered the issue carefully, allowing the application on the grounds that it was plainly arguable that a cheque drawn on a printed form that showed the company and account details and signed by a director was a company cheque and not one on which the director intended to incur personal liability.

The reasoning of the Court of Appeal was simple: when the director signed, he adopted all of the printing and writing on the cheque. It is obvious from looking at the resulting cheque that it is a company cheque, that is, the cheque is drawn by the company and not by the director who signed.

4 Muirhead

This notion that a person who signs a negotiable instrument is “adopting” everything printed or written on the instrument was also relevant in Commonwealth Bank of Australia v Muirhead [1997] 1 Qd R 567.

A bill of exchange was indorsed by Mrs Muirhead. Above her signature was printed the words “For and behalf of GAR & SS Muirhead”. Mrs Muirhead had actual authority to sign for her husband, and the Queensland Court of Appeal held that her signature in conjunction with the printed words amount to his signature by an agent. He was therefore held liable as an indorser.

5 Court of Appeal

In the Court of Appeal, it was finally agreed that the provisions of s 33(1)(b) were sufficient but not necessary to avoid personal liability. It was further accepted that the presumption of s 75(2)(b) could apply since the appellant had not proved to the contrary that he did not intend to become personally liable.

The decision thus turned on the sole issue of whether the Appellant came within the proviso of s 75, that is, whether it is apparent, on the face of the cheques, that the appellant did not sign them intending to become liable.

The only factor which distinguishes Valamios from Bondina is that the cheque in Valamios was a partnership cheque rather than a company cheque. The Court of Appeal sensibly held that this was a distinction without a difference. Tobias JA, in delivering the judgment of the Court of Appeal said “Commercial common sense clearly requires a finding that, on the face of these cheques, it was apparent that the appellant, as the sole signatory thereon, did not intend to become personally liable thereon.”

6 Conclusion

It is hard to disagree with the Court of Appeal decision since it so obviously conforms with “commercial common sense”. It also conforms with the fact that most business cheques are drawn as simple payment instruments and there clearly is no intention that the signatory should have personal liability.

If, however, the parties do wish to have the signatory held liable on the instrument, how should it be drawn? The simple, and most common, answer is that the signatory should sign again on the back of the instrument, that is, “back” the cheque or bill of exchange.

The legal basis for this is s 75 of the Cheques Act 1986 and s 61 of the Bills of Exchange Act 1909. Roughly speaking, the person who “backs” the instrument is treated as an indorser for most purposes. Both s 75 and s 61 provides that the backer incurs the liability of an indorser to a holder in due course.

The problem is that the holder of the cheque or bill is unlikely to be a holder in due course. The holder will often be the original payee and so will not be a holder in due course since the instrument has not been negotiated: Jones (R E) Ltd v Waring & Gillow Ltd [1926] AC 670.

Section 75(2)(b) raises a rebuttable presumption that the backer intended to become liable as an indorser. The Bills of Exchange Act has no comparable provision, but the decision in Rowe & Co Pty Ltd v Pitts [1973] 2 NSWLR 159 leads to much the same result.

The solution is unsatisfactory since it almost certainly requires an extended hearing to determine the parties intentions. A better result is to draft the instrument so that the signatory becomes a genuine indorser. If S is the signatory, draw the instrument in favour of S and then have S indorse the instrument. In that way, the holder of the instrument may be a holder in due course (if the other requirements are satisfied) and, in any case, S is an indorser and there is no need to rely upon any presumptions.

1: Consultant; formerly Landerer Professor of Information Technology and Law, University of Sydney. The views expressed are my own and do not necessarily reflect the views of any other person or organisation.

This document was translated from L^AT_EX by H^EV^EA.

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Last modified: Sat Jul 15 09:47:27 EST 2006