BANKING LAW UNIT 17 DISHONOUR OF A CHEQUE

(i) Wrongful Dishonour of a Cheque

A bank as mentioned earlier may wrongfully dishonour a cheque for a variety of reasons
all normally associated with poor administration.
Examples include:
(a) Account closed
(b) Insufficient funds
(c) Cheque stopped
Where the bank wrongfully dishonors a cheque, it can incur liability in breach of contract
and/or libel.

(ii) Liability for Wrongful Dishonour of a Cheque

(a) Libel
Libel is a form of defamation by lowering the plaintiff’s status in the eyes of right thinking
members of society or causing the plaintiff to be shunned and avoided. It is based on
the reason stated on the cheque for the dishonour. The phrase ‘Refer to Drawer’ or R/D
is the most common defamatory answer on a cheque. It is defamatory as it is generally
understood that the drawer has no money in their account hence being lowered in the
estimation of others.
Hence banks using the phrase must be ready to justify the answer by showing that they
were under no obligation to pay the cheque.

Jayson v Midland Bank Limited (1968)

Jayson was a garment manufacturer and retailer. They issued two cheques which the
bank returned marked with the answer, “Refer to Drawer’ as paying them would have
resulted into exceeding the overdraft limit.
Held
That whilst the phrase itself is defamatory, there was no libel as the bank had justified
the dishonour of the cheques.

It should be noted that the stated reason for a dishonour of a cheque conveys in many
people’s minds that the drawer has no money on his account or he acted in bad faith or
as a fraud. However, only an untrue answer on a dishonoured cheque may be libelous
even though the cheque deserved to be dishonoured.

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Kpohraror v Woolwich Building Society [1996] 4 All ER 119, CA
The claimant was a self-employed importer and exporter of goods. He held an account
with the defendant building society. The claimant bought goods for ₤4550 from a
supplier to be shipped to Nigeria. The claimant paid by cheque which was wrongfully
dishonoured. A day later, the Defendant’s noticed the error and corrected it. The
claimant brought an action in breach of contract and claimed damages for loss of
business reputation.

Held
That, in modern social conditions, it is not only tradesmen for whom the dishonour of a
cheque might be obviously injurious. The credit rating of individuals is as important for
their personal transactions including mortgages and hire purchase and banking
facilities. The customer suffered some injury to his credit and reputation when his
cheque was wrongfully dishonoured. Awarded general damages.

Other answers that the courts have found to be capable of being libelous include:
(i) Not sufficient or N/S
(ii) Present again or represent
But the bank should be able to justify the answer on a dishonoured cheque in the case
of ‘Refer to Drawer’, as meaning that, ‘we are not paying refer to the drawer for the
reason why’.

(b) Breach of Contract

The bank’s failure to honour a cheque drawn by the customer when the account has
sufficient funds or an overdraft facility shall be in breach of contract.

(iii) Wrongful Debit of an Account

The bank is liable to its customer for the wrongful debit of the customer’s account in the
following situations:
(a) Where there is customer’s countermand
(b) Post-dated cheques
(c) Breach of mandate- where the bank does not adhere to the terms of the
mandate.
(d) Material Alteration – where the bank pays a cheque that has been materially
altered without the customer’s consent.

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(e) Forged Customer signature – this is so even if he forgery is undetectable.

Brown v Westminster Bank (1964)

The bank had on several occasions drawn the attention of Brown, an old lady to the
number of cheques drawn on her account and payable to her servant. Brown
maintained that the cheques and signatures were genuine. Subsequently, the matter
was discussed with her son who held her Power of Attorney. The result was a claim
against the bank in respect of 329 allegedly forged cheques.

Held
Brown was estopped from denying the genuineness of the cheques by virtue of her
representations to the bank. The action failed.

(iv) Recovery of Money Paid by Mistake

A bank which pays a cheque drawn or purported to be drawn by a customer without
mandate is paying without mandate and cannot debit the customer’s account.

Barclays Bank Ltd v WJ Simms, Son & Cooke (Southern) Ltd [1980] 1 QB 677

However, the bank could recover money paid by mistake by claiming as follows:
(a) Recovery of money paid under a mistake of fact – in restitution.
Barclays Bank Plc v WJ Simms, Son & Cooke (1980)
(b) Tracing in equity where the bank can claim an equitable proprietary interest in
the money in the hands of the recipient.
(c) By pleading subrogation that the payment was made for the benefit of the
customer in payment of his debts under the Liggett Principle.

Barclays Bank Limited v Simms, Son & Cooke (1979)

Held
That the bank was entitled to repayment from the receiver.

Also, a payment made by mistake can also be recovered from the collecting bank as
long as the funds are still in its hands and have not been withdrawn by the payee.

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(v) Limitations on Bankers Duty to Honour Customer’s Instructions
The bank’s mandate to effect a customer’s instructions to make payment from his
current account will be limited by:

(a) Inadequate credit balance

Office of Fair Trading v Abbey National PLc (2008) ENHC 875

(b) Where the bank becomes aware of the bankruptcy of the customer.

(c) When the customer’s bank account is closed.

(d) Cheques should be presented only during named banking hours or shortly after
closing time.
Bank of Scotland v Seitz(1990) SLT 584, 590
Baines v National Provincial Bank Ltd (1927) 32 Comm
(e) Cheques which are stale are out of date, that is cheques presented after a lapse
of more than six months from the date of issue.
Comm. Of Inland Revenue v Thomas Cook (NZ) Ltd (2003) 2 NZLR
Held
That “there is a term implied by custom and usage that banks are not bound to
pay a cheque presented of which takes place more than six months after its date”

(f) Cheques which are undated although not being invalid are not paid due to
custom and practice -Bill of Exchange Act 1882, s3(4)a
-Aspinalls Club Ltd v Al-Zayat (2007) EW HC 362
-Griffiths v Dalton Dalton (1940)2 KB 264

(g) The customer’s payment instructions are ambiguous. Eg where the cheque is not
properly drawn or is stale.

London Joint Stock Bank Ltd v MacMillan [1918] AC 777

(h) The bank has reasonable grounds for believing that there is a serious or real
possibility that a payment instruction has been given without proper authority.
Barclays Bank Plc v Quincy Care Ltd [1992] 4 All ER

(i) Where payment would render the bank liable in breach of contract.

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(j) Where the bank knows or suspects that the account contains proceeds of crime.
The bank is under a duty to report its suspicion in such circumstances to law
enforcement agencies.

Squirrell Ltd v National Westminster Bank Plc [2005] EWHC 664

Squirrell was a company whose business involved the buying and selling of mobile
phones. It had an account with the National Westminster Bank. The bank froze
Squirrell's account on 15 March 2005. It did not say why it had done so and, in addition,
would not discuss its reasons with Squirrell. NatWest stated that it wished to comply
with Squirrell's instructions but was required to freeze the account by reason of s328(1)
of the Proceeds of Crime Act (POCA) 2002. Further, it could not give Squirrell an
explanation because of the anti-tipping off provisions of the Act.
The company applied to the court for an order unfreezing the account citing a lack of
notice and sought the bank's reasons for what it had done.

Held
That since the bank had a suspicion relevant under s328 of POCA 2002, it was obliged
to freeze the account and wait for seven working days, or, if a relevant authority served
notice of refusal, to wait for an additional 31 calendar days for developments. During
that time the bank was not allowed to make a disclosure to Squirrell that could affect
any enquiries Customs might make. The bank could not be ordered to operate the
account normally because that would be to ask the bank to commit a criminal offence.

K Ltd v National Westminster Bank Plc [2006] EWCA

The appellant company (K) appealed against the refusal of its application for an interim
injunction requiring the respondent bank to comply with payment instructions given by
K. K had entered into transactions to purchase a consignment of mobile phones and to
sell the same phones to a Swiss company. The Swiss purchaser had paid the agreed
sale price into K’s account with the Defendant bank from an account in the Netherlands
Antilles and on the same day K instructed the Defendant to pay the purchase price to
the seller. The Defendant declined to make the payment on the ground that to do so
would mean that it would become concerned in an arrangement that it suspected would
facilitate the use of criminal property by K within s 328 of the Proceeds of Crime Act
2002. In order to avoid committing a criminal offence, the bank made an authorised

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disclosure to Customs to obtain the appropriate consent. K applied for an interim
injunction requiring the bank to comply with its instructions.

Held
That Parliament had laid down a statutory scheme to prevent money laundering and
once the bank stated that it suspected money in K’s account was criminal property was
an end of the matter. There could be no breach of contract for the bank to refuse to
honour its mandate. Appeal Dismissed.

(k) Where a third party obtains a garnishee order or a mareva injunction (freezing
order).
Camdex International Ltd v Bank of Zambia (No 2) [1997] 1 All ER 728, CA. (VULTURE
FUNDS)
A freezing injunction was granted that caught a large quantity of banknotes for issue in
Zambia. However, it was varied to allow the release of the banknotes to prevent serious
damage being inflicted on the general population of the country.

However, courts are reluctant to grant a freezing injunction against a bank as this would
affect its ability to pay its creditors.

(l) Where the bank becomes aware of the winding up of a company by the court in
which case any disposition of the company assets made after commencement of the
winding up order is void. Note that a winding up order terminates the bank’s authority to
pay against it’s customer’s payment instructions from the time the order is made.

National Westminster Bank Plc v Halesowen Presswork & Assemblies Ltd [1972] AC
785

Halesowen Assembly & Pressworks Ltd was a small company and maintained an
account with National Westminster Bank which was overdrawn by £11,339. The bank
was concerned and held a meeting with the company at which an agreement was
reached whereby the bank account would be frozen and a new account ("No. 2
account") opened for company business to be conducted and which needed to be kept
in credit. The company deposited to account 2 a cheque for £8,611 but later the same
day passed a voluntary winding resolution. The bank claimed to be entitled to set off the

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£8,611 against the company's indebtedness overdrawn account. The liquidator did not
accept that the bank was entitled to set-off in this manner and brought an action against
the bank.

Held
That the operation of the insolvency set-off rules was automatic and mandatory upon
the commencement of winding-up.

Cheque deposits and Telephone Enquiry by Collecting Bank

Where the payee deposits a cheque, the collecting bank may make a telephone enquiry
as to the fate of the cheque in two situations:
(a) The collecting bank still has the cheque and the customer wants to withdraw
against uncleared effects. If the paying bank confirms the cheque is in order and
will be paid when presented, then it is bound to pay the cheque when presented
even if the customer subsequently countermanded payment. However, the
paying bank will not have the authority to debit the customer’s account.
(b) The paying bank has received the cheque and the collecting bank then makes an
enquiry as to its fate. Where the paying bank replied in the affirmative that the
cheque is being paid, a countermand will not be effective as it will be too late to
stop payment. The paying bank should refuse the countermand order.

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