Alan L Tyree

How not to write a cheque

Alan L Tyree*

January 2, 2010

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


Foods Bis Ltd v Riley and National Australia Bank Ltd [2007] QDC 201 (29 August 2007) shows the importance of drawing cheques carefully. It also raises issues concerning the conversion of bearer cheques to order cheques and to the existence of liens on cheques.

1 Facts

1.1 Dramatis Personae

1.2 Background

AE convinced RG that he was able to purchase luxury cars in New South Wales which RG could on sell in Queensland for a profit. There were a number of contracts which appeared to be shams whereby AE purported to acquire and dispose of cars. The Court considered that RG was “led into a trap” by these sham transactions. The trap was the final transaction which led to the present case.

In the final transaction, RG gave AE a cheque for $185,000. The cheque was deposited with NAB by SR. The manager, JH, sought an urgent clearance of the cheque by way of a bank warrant from the drawee bank. The proceeds of the cheque were applied to set off an overdraft amount of $184,901.49.

Before this transaction, a number of cheques deposited by SR with NAB had been dishonoured. The situation was serious enough that the collections officer had advised that the police be involved, but JH did not act on that advice. JH made no independent inquiry into the relationship between SR and SR Autos.

1.3 The cheque

The cheque was made payable to “SR Autos or bearer” for the sum of $185,000. The cheque was drawn by RG, crossed with two transverse parallel lines and the words “account payee only” written between the lines.

The cheque was handed to AE who, apparently, passed the cheque on to SR. SR presented the cheque for collection by the NAB for the account of SR. The manager requested SR to indorse the cheque since there was no account with the name of “SR Autos”. SR wrote on the back of the cheque “Pay SR” and “signed” it “SR Autos”. JH obtained a warrant from the drawee bank in the name of “SR Autos”, and the warrant was indorsed in a similar fashion.

2 Section 95

Section 95 of the Cheques Act 1986 is unusual in that it provides a certain sector of the community with a defence to conversion. The defence is available only to a “financial institution” which is collecting a cheque for a customer. The financial institution must show that it performed the collection “in good faith and without negligence”.

“Negligence” is not the tort, and the burden of proof is on the collecting bank to establish the defence. At the very least, it is generally necessary for the bank to show that it made inquiries to clarify any suspicious circumstances. The test was formulated by Lord Dunedin in Commissioner of Taxation v English Scottish and Australian Bank Ltd [1920] AC 683 at 688 and is well known:

…the test of negligence is whether the transaction of paying in any given cheque [coupled with the circumstances antecedent and present] was so out of the ordinary course that it ought to have aroused doubts in the bankers’ mind, and caused them to make inquiry.

There were a number of factors in the Food Bis case which indicated that inquiries should have been made:

  1. The cheque was collected without serious inquiry for an account other than that of the payee;
  2. The presentation of an endorsed cheque in the name of a business as payee that JH had never heard of;
  3. The request by the collection officer that the police be called in;
  4. The fact that several cheques deposited by SR had been dishonoured, and withdrawals followed shortly after when they were honoured; these cheques were related to the sham transactions;
  5. The lack of evidence including documents relating to the business or other accounts or how it operated or from where;
  6. The failure by JH to make other inquiries as to where the business SR Autos operated and why it did not have a business account;
  7. The failure of JH to check the Third Party Register to see if similar cheques had been presented and banked in SR’s account;
  8. No attempt by JH to determine if the second plaintiffs were customers;
  9. No communication by JH with the drawee bank that he held a cheque with SR Autos as payee and SR wanted it paid into his account.

The Court held that these factors ought to have put JH on inquiry and that insufficient inquiries had been made. JH asked SR about the relationship between SR and “SR Autos”, but made no independent inquiry.

The bank also argued that there was no negligence since the cheque was payable “to bearer” and that they had, in fact, collected for the bearer. It was argued that no further inquiry was needed.

It is surprising to see this tired old argument being recycled in 2007. In House Property Co of London Ltd v London County and Westminster Bank (1915) 84 LJKB 1846 a bank collected a cheque drawn ”Pay X or bearer” and crossed ”account payee”. Rowlatt J found that collection without inquiry of such a cheque for the account of a third party disentitled the bank from reliance on the statutory defence. The argument for the bank, dismissed as ‘shallow’ by the court, was that as the cheque was made payable to ‘bearer’ they had complied with the instruction to collect for the payee.

3 Bank as holder

A bank, like anyone else, may defeat a claim of conversion by showing that it is entitled to possession of the cheque. In order to do that, it must establish title, that is, that it is a holder in due course. It must show that the cheque was negotiated to it so as to make it a holder, and that it took in good faith, for value and without notice of any defect in title: s 50(1).

3.1 Bearer or order?

Since the bank was not an indorsee, the only way that it could establish that it was a holder was to show that the cheque was a bearer cheque.

The Court held that the cheque was a bearer cheque, relying on Miller Associates (Australia) Pty Ltd v Bennington Pty Ltd [1975] 2 NSWLR 506 and quoting from a textbook. The exact textbook is probably (1), but it is unclear since the citation in footnote refers to “Edwards & Tucker op. cit p 58”, but there is no other reference.

In Bennington, Sheppard J held that a bill drawn payable to “X or bearer” could not be converted to an order bill. He acknowledged that there was no direct authority, but noted that the same conclusion was reached by a “text book of high repute”, (3).

Other “text books of high repute” have not agreed. (2) (at 311) say that the Bennington decision “is questionable.” They go on to argue that the decision should not be followed. (5) express the view that there “is some doubt about the correctness” of the case (at para 8.2620). The arguments are canvassed in (4). None of the arguments in these texts were addressed in Foods Bis.

Bennington and the arguments mentioned above are directed to the Bills of Exchange Act 1909. Section 13(3) provides:

A bill is payable to bearer which is expressed to be so payable, or on which the only or last indorsement is an indorsement in blank.

Section 13(3) provides the basis for the arguments in Bennington. The UK equivalent is actually quoted in Holden as the reason for his conclusion that the cheque remains a bearer cheque.

The definition of bearer cheque in the Cheques Act is quite different. A cheque is payable to bearer if it is not payable to order: s 22.

An order cheque is defined in Section 21 (emphasis added):

A cheque is payable to order if the cheque is expressed, whether originally or by indorsement, to require the drawee institution to pay the sum ordered to be paid by the cheque to or to the order of:

(a) a person specified in the cheque as payee or indorsee; or

(b) 2 or more persons specified in the cheque, jointly or in the alternative, as payee or indorsee.

Therefore, in order follow Bennington it must be argued that the “indorsement” on the bearer cheque is not really an indorsement, a conclusion which makes no sense on the simple words of the Cheques Act. The entire basis of the Bennington argument is undermined. It is certainly arguable on ordinary statutory interpretation grounds that Bennington does not apply to cheques which are governed by the Cheques Act 1986.

In short, while the plain words of the Bills of Exchange Act lend support to the Bennington conclusion, the plain words of the Cheques Act lend support to the opposite conclusion.

It is a pity that such an important issue, and one which was so fundamental to the outcome of the present case, was not more completely explored.

3.2 Good faith

For the purposes of the Cheques Act 1986, a thing is done in good faith if it is done honestly, whether or not it is done negligently: s 3(2).

This is obviously a subjective test, but the common law has put an objective gloss on it: a thing cannot be done honestly if there is a wilful closing of the eyes. The courts have drawn a distinction between a person who is “honestly blundering and careless” and one who harbours a secret suspicion and refrains from asking questions for fear of the answers the questions might elicit: see Jones v Gordon (1877) 2 App Cas 616.

The court certainly had the option of finding that JH had wilfully closed his eyes in relation to the circumstances surrounding the taking of the cheque. The reasons given by the court for denying relief under s 95 all point to circumstances which would raise doubts in the mind of a reasonable bank manager.

The Court, however, noted that JH gave his evidence in a “frank and refreshing manner” and that it was supported by documentary material. It was noted that a finding of dishonesty could have very serious consequences for a bank officer. The Court also noted that the requirement of good faith is a subjective test, and concluded that the officer might have been careless but was not dishonest in the sense of wilfully closing his eyes to the suspicious circumstances.

3.3 For value

The High Court in National Australia Bank Ltd v KDS Construction Services Pty Ltd [1987] HCA 65 said (at para 20):

It is well settled that a bank has a lien on all bills and cheques coming into its possession as a banker for the general balance of moneys due from the customer … The lien is over the chose in action and, in the case of an overdraft account, is for the extent of the overdraft … The existence of the lien is not affected by the fact the bank receives the cheque as an agent for collection, so long as the bank is not a mere agent for collection.

This is reinforced by section 38 of the Cheques Act:

A holder of a cheque who has a lien on the cheque (whether arising from contract or by operation of law) shall, to the extent of the amount for which the holder has the lien, be conclusively presumed to have taken the cheque for value.

It is not entirely clear what the High Court meant by “a mere agent for collection”. In any case, there is no reason to doubt that the bank in Food Bis had a lien over the cheque deposited for collection provided the cheque belonged to its customer.

This raises a complication that was not addressed by the Court in Foods Bis. Can the bank have a lien over a cheque which manifestly did not belong to its customer?

There is a strong argument that the bank did not have a lien over the cheque because it was not a cheque which belonged to its customer. It is true that the customer was a holder of the cheque (given the finding that the cheque was a bearer cheque), but it is clear that at the time when the cheque was handed to the bank that the drawer had an immediate right to possession: see the judgment at paras 48-55 where this was an explicit finding.

This question is not settled merely by saying that the bank was a holder of the cheque. In order to establish title, it must show that it gave value, and the only value argued was the lien over the cheque.

The argument becomes circular: the bank has right to possession as a holder in due course, it is a holder in due course since it had a lien, it had a lien because it had a right to possession.

4 Rewriting the cheque

The drawer was defeated in the Foods Bis case because the Court found that the bank was a holder in due course of the cheque. It was essential to this finding that the cheque was a bearer cheque.

The drawer could have avoided much of the pain by crossing out the “or bearer” before issuing the cheque. He probably did not realise that the cheques are printed as bearer cheques for the benefit of the bank, not the benefit of the customer.

The drawer might still have failed if the “fictional payee” argument succeeded, as indeed it might have. According to s 21, a cheque is a order cheque if it orders the sum to be paid to “a person specified in the cheque as a payee or indorsee”. In order to be specified, the person must not be a “fictitious or non-existing” person: s 19(1)(b). It is certainly arguable that “SR Autos” was a non-existing person, and if that argument succeeds, then the cheque is a bearer cheque.

Even if the cheque was a bearer cheque, the outcome could have been avoided had the drawer marked the cheque “not negotiable”, for in that case the holder (the bank) could not have obtained any better title than that of its customer from whom it took the cheque. The holder of a cheque crossed “not negotiable” is precluded from being a holder in due course: s 50(1)(a)(iii).

The lesson is clear for anyone drawing a cheque: cross out “or bearer”, cross the cheque “not negotiable” and, above all, do not deal with rogues.

The last piece of advice applies both to customers and to banks.


[1]     Robin Edwards and Greg Tucker. Understanding cheques and payment orders. Serendip Publications, Wamberal, 1988.

[2]     E P Ellinger and E Lomnicka. Modern Banking Law, 2nd ed. Oxford University Press, 1994.

[3]     J Milnes Holden. The law and practice of banking. Pitman, London, 1970.

[4]     Alan L Tyree. Converting bearer cheques to order cheques. JBFLP, 9:305 – 306, 1998.

[5]     George Weaver, C R Craigie, Gregory Burton, Prudence Weaver, Rena Sofroniou, and Alan L Tyree. The law relating to banker and customer in Australia. Thomson Lawbook Co, third edition, 2003.