The Consequence Of A Bounced Cheque Due: Beware!
by Karen Ng Gek Suan, Partner of Karen, Mak & Partners
Picture this scenario: You owe a supplier/contractor monies that may be due. However, cash flow is an issue for you at the moment. To fend them off, you issue post-dated cheques of an arbitrary lump sum. “That will buy me perhaps a few more months”, you suppose.
Brilliant? Not so. Especially if your cash flow is not forthcoming, and the cheque you had issued becomes dishonoured due to insufficient funds. If that happens, apart from paying the penalty for a dishonoured cheque, you would also face the legal repercussions for the same.
In this connection, Section 73(1) of Bills of Exchange Act 1949 defines a “cheque” as “a bill of exchange drawn on a banker payable on demand”.
A “bill of exchange” is defined under Section 3(1) of Bills of Exchange Act 1949 as “an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person, or to bearer.”
In other words, a cheque is a document that orders a bank to pay a specific amount of money from a person’s account to the person in whose name the cheque has been issued.
Section 43(2) of the Bills of Exchange Act 1949 expressly confers a cause of action against the drawer of a cheque when a cheque is dishonoured. Such cause of action is premised on the dishonoured cheque accrued to the plaintiff by virtue of his capacity as a holder.
This liability of the drawer of a dishonoured cheque is provided under Section 55(1) of the Bills of Exchange Act 1949 which further provides that a cause of action is conferred on the holder of a dishonoured cheque to recover the face value of the cheque – that is to say, the amount stated on the cheque that was promised to the holder.
In this connection, Section 47 of Bills of Exchange Act 1949 provides a statutory cause of action for one to sue the drawer of the cheque without having to prove further:-
“(1) A bill is dishonoured by non-payment—
(a) when it is duly presented for payment and payment is refused or cannot be obtained; or
(b) when presentment is excused and the bill is overdue and unpaid.
(2) Subject to this Act, when a bill is dishonoured by non-payment, an immediate right of recourse against the drawer and indorses accrues to the holder.
This means that there is no need for the drawer (issuer) of a cheque to prove why and how the money is due to him or her. This is trite law.
In the recent case of Yee Teck Fah v. Lee Chee Meng [2020] 1 LNS 847, the plaintiff (payee of cheque whose name the cheque was made in favour of) sued the defendant (drawer/issuer of the cheque) when the cheque of RM17.8 million was dishonoured. Evidence showed that the plaintiff had banked in the cheque but was informed by the bank that the cheque was dishonoured due to “Payment Stopped”. The plaintiff issued a notice of dishonour and sued the defendant for the amount of the dishonoured cheque. The Court held that once a cheque is dishonoured, the holder of the cheque will have a cause of action against the drawer (issuer) of the cheque by virtue of Section 43(2).
The Court further held that there is no triable issue and granted summary judgment for the dishonoured cheque amount. This was on the basis that cheques must be treated as cash as it is a promise to pay. Once it is issued, the holder holds it for value and is entitled to treat it as good value to discharge any debt or sums owing between parties.
To put this into context in the scenario presented above, there is no need for the supplier/contractor to prove their debt by showing any invoices, delivery notes, etc or goods delivered. All he needs to show is a cheque of X amount is drawn in his favour; that the cheque had been dishonoured; to which he had provided a notice of dishonor. On that basis alone, he will succeed in obtaining a summary judgment against you.
Further, a claim on the dishonoured cheque is an independent cause of action distinct from the original underlying contract. The cheque constitutes a separate contract and creates obligations for the drawer and rights for the payee/holder that are autonomous from any underlying transaction (Nova (Jersey) Knit Ltd v. Kammgarn Spinnerei GmbH [1977] 2 All ER 463).
By the foregoing, it does not matter if there is no contractual relationship between the payee (cheque made in favour of) and the drawer/issuer of the cheque. By virtue of the cheque issued to the payee being dishonoured, the payee has a statutory cause of action against the drawer/issuer and would be able to enter a summary judgment against the drawer.
The above is definitely food for thought on the practice in payments for goods and supplies. It pays to think twice of the legal consequences before issuing cheques (post dated or otherwise) to third parties, be they be friendly loans or to aid another’s cash flow.
Disclaimer: This article is general information only and should not be relied upon as legal advice.