Alan L Tyree

Converting Bearer Cheques to Order Cheques

Section 23(1) of the Cheques and Payment Orders Act 1986 has been repealed by the Cheques and Payment Orders (Amendments) Act 1998. Section 23(1) provided a formalised procedure for converting a bearer cheque into one payable to order. The procedure called for the holder to endorse the cheque so that the cheque was payable to the order of a person or persons and further clearly indicating on the front of the cheque that the cheque is payable to order. This would usually be done by scratching out the words "or bearer".

The repeal of the section was at the instigation of the banks, purportedly because of the difficulties in tracing the chain of title in cheques so converted. According to the explanatory memorandum, the collecting institution would be unable to check how title had been passed on. The Memorandum further states that "[s]uch a cheque is arguably one which might not attract the protective provisions of subsection 95 (2)." It is too bad that the arguments were not provided: section 95 (2) applies only to order cheques which have not been negotiated. If the converted cheque has been negotiated, then the section does not apply.

If the cheque has not been negotiated, then the responsibility of the collecting bank will depend upon the form of the indorsement. If the original cheque was in the form " Pay X or bearer" then the indorsement may be in the form of "Pay X" or in the form "Pay Y". Although the act does not explicitly say so, in the first case the cheque must be payable to X (in which case section 95 (2) would apply) and in the second case must be payable to Y (in which case section 95 (2) would not apply). There is no additional burden on the collecting bank since the reverse of any order cheque must be inspected to determine the applicability of the protective provisions.

Whatever the motivation behind repeal, there are two assumptions underpinning the repeal of section 23 (1), neither of which are necessarily true.

First, it is assumed that a bearer cheque cannot be converted by the holder into an order cheque without the statutory assistance of the Cheques and Payment Orders Act. Secondly, it is assumed that a collecting bank may collect a bearer cheque on behalf of its customer without examining the name of the payee or any endorsements. Both of these assumptions are questionable.

The first assumption derives support from Miller Associates (Australia) Pty Ltd v Bennington Pty Ltd.

In that case, Sheppard J. suggested that is not possible to change the character of a bearer instrument by indorsement; a bill drawn payable to bearer always remains so payable.

However, Ellinger regards this view as questionable. First, he notes that there is no policy reasons for prohibiting the conversion. On the contrary, section 23 (2) of the Act specifically provides a procedure for a converting one type of bearer cheque to an order cheque. Since the resulting order cheque may be converted back to a bearer cheque by means of a blank indorsement, it is clear that the Act has no fundamental policy against the conversion of one form of cheque to the other.

Ellinger also argues that section 24 of the Act supports this view. That section provides that where a "cheque is expressed, whether originally or by indorsement, to be payable to the order of the person specified in the cheque as payee or indorsee and not to or to the order of the person, the cheque is nevertheless payable to the person or to the person's order, at the person's option." There is clearly no presumption in this provision that if the cheque is originally payable to bearer, it cannot be changed to an order instrument by a special indorsement.

The second assumption behind the repeal is that the collecting bank may collect a bearer cheque on behalf of its customer without examining the name of the payee or any endorsements. This assumption confuses the different roles played by a bank when collecting a cheque and when paying a cheque.

When a bank pays a bearer cheque to the person in possession of it, the bank is following its customer's mandate. Although there are a some unusual circumstances where a paying bank must question a valid mandate, the most usual situation is that it has a complete contractual defence against its customer by so doing. Similarly, the the paying bank will usually have a statutory defence against the true owner of the cheque.

The position of the collecting bank is quite different. Section 95 of the act provides a statutory defence to the collecting bank against an action in conversion, provided that the bank has acted in good faith and without negligence. As is well-known, "without negligence" means having regard for the rights and interests of the true owner.

The fact that the cheque is a bearer cheque is relevant, but not decisive on the question of whether the bank has acted "without negligence". In Moser v Commercial Banking Corporation of Sydney a cheque was made payable to "A and B or bearer". It was collected without inquiries for the account of one of the parties only. The court held that the bank had not collected the cheque "without negligence", noting that the mere addition of the words "or bearer" is not sufficient to justify the bank disregarding the obvious interests of the other payee.

In House Property Co of London Ltd v London County and Westminster Bank 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.

The confusion arises from failing to distinguish the different roles played by a bank when collecting a cheque and when paying cheque. The confusion is particularly widespread when the collecting bank and the paying bank of the same. The best view is that the bank must satisfy both the requirements of a collecting bank and of a paying bank.

If there was any real difficulty with the operation of section 23 (1), then it might have been better to address the difficulty directly rather than repealing the section. The result of the repeal is more, not less, confusion.


[1] [1975] 2 NSWLR 506.
[2] Ellinger and Lomnicka, Modern Banking Law, 2nd edition, Clarendon press, Oxford, 1994, p. 311.
[3] (1973) 22 FLR a 123
[4] (1915) 84 LJKB 1846.
[5] Carpenters' Co v British Mutual Banking Co Ltd [1938] 1 K. B. 511