Received A Dishonoured Or Bounced Cheque? Here’s What You Need To Know

When cheques are issued to you, there will always be a risk of that cheque being dishonoured by the drawer of the bill. And that is regardless of whether you are dealing with a bank or even a long-time friend.

So, is it possible for you, the payee, to still obtain the relevant payment even when a cheque has been dishonoured or bounced?

A) Legal obligations of a drawer (the person who draws a cheque)

Section 55 of the Bills of Exchange Act 1949 describes the liability of a drawer or an indorser to be as follows:

(1) The drawer of a bill by drawing it- (a) engages that on due presentment it shall be accepted and paid according to its tenor, and that if it be dishonoured, he will compensate the holder or any indorser who is compelled to pay it, provided that the requisite proceedings on dishonour be duly taken; (b) is precluded from denying to a holder in due course the existence of the payee and his then capacity to indorse.

(2) The indorser of a bill by indorsing it- (a) engages that on due presentment it shall be accepted and paid according to its tenor, and that if it be dishonoured, he will compensate the holder or a subsequent indorser who is compelled to pay it, provided that the requisite proceedings on dishonour be duly taken; (b) is precluded from denying to a holder in due course the genuineness and regularity in all respects of the drawer‟s signature and all previous indorsements; (c) is precluded from denying to his immediate or a subsequent indorsee that the bill was, at the time of his indorsement, a valid and subsisting bill, and that he had then a good title thereto.

B) Dishonoured cheque by non-payment

By virtue of section 47 of the Bills of Exchange Act 1949 (“BOE 1949“), 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.

Subject to the above, section 47(2) of the BOE 1949 states that “when a bill is dishonoured by non-payment, an immediate right of recourse against the drawer and the indorsers accrues to the holder“.

In the Hong Kong case of Getwick Engineers Ltd v Pilecon Engineering Ltd [2002] HKCU 1020, the court found that the handing over of a cheque, albeit the cheque subsequently being dishonoured, amounted to an admission of a debt in the amount of the cheque. The Singaporean Court of Appeal in the case of Tjong Very Sumito & Ors v Antig Investments Pte Ltd [2009] 4 SLR 732 referred to the decision in Getwick and proceeded to grant the plaintiff summary judgment for the amount in the dishonoured cheque. The presiding judge, Ma J, held that the dishonoured cheque was:

“… to be regarded as a clear and unequivocal admission to the defendant’s part of its liability and quantum (in that amount) under payment certificates. … In reaching this conclusion, I have borne in mind that cheques are to be regarded as cash and save in exceptional circumstances, no set off or counterclaim will be permitted. … Two of three cheques have been honoured. I see no reason why the third cheque should not be seen in the same light.“ [Emphasis added]

Closer to home, the High Court in the case of Uni Wall Architectural Product & Services Sdn Bhd v Global Upline Sdn Bhd [2011] MLJU 517 agreed with the position taken by the Singaporean and Hong Kong couts, citing an old English case of In Nova (Jersey) Knit Ltd. v. Kammugarn Spinnerei GmbH [1977] 2 All ER 463 where Lord Wilberforce said,

“When one person buys goods from another, it is often, one would think generally… important for the seller to be sure of his price: he may (as indeed the appellants here have) bought the goods from someone else whom he has to pay. He may demand payment in cash; but if the buyer cannot provide this at once, he may agree to take bills of exchange payable at future dates. These are taken as equivalent to deferred installments of cash. Unless they are to be treated as unconditionally payable instruments… which the seller can negotiate for cash, the seller might just as well give credit. And it is for this reason that English law… does not allow cross-claims, or defences except such limited defences as those based on fraud, invalidity, or failure of consideration, to be made. In my opinion, this is straightforward case of an action on bills, to which no admissible defence has been put forward”

The court was of the view that in the Uni Wall case, neither fraud nor illegality, or failure of consideration has been pleaded in the statement of defence. There are no justifications as to why the cheque was dishonoured.

The court proceeded to allow the Plaintiff’s application for summary judgment for the sum stated in the dishonoured cheque for RM1,500,000.00 together with interest and costs as prayed.

In conclusion, case laws have strongly suggested that bounced or dishonoured cheques are akin to a failure to pay in cash, and are ought to be deemed as an admission of debt due for payment in any transaction.