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Tuesday, 19 May 1970

Mr HUGHES (Berowra) (AttorneyGeneral) - I move:

That the Bill bc now read a second time. This Bill is designed to amend the provisions of the Bills of Exchange Act relating to cheques and bank drafts. The main purpose of the Bill is to do away with the necessity for indorsements on order cheques and bank drafts that are paid into the account of the payee. It will benefit the public and relieve bankers of much of the unproductive work at present involved in examining indorsements. The Bill will effect other incidental improvements in the law relating to cheques. Before proceeding to deal with the substance of the Bill, I should explain that it will be an interim measure pending the introduction of a comprehensive Cheques Bill to codify the civil law relating to cheques, of which the GovernorGeneral made mention in opening the last Parliament. There will be no incompatibility between the interim measure and the comprehensive measure as the provisions proposed in the Bill are among those the Government has in mind to include in the comprehensive Cheques Bill I. have mentioned.

I should tell honourable members that difficulties have been encountered in the preparation of the comprehensive Bill and it was not possible to introduce it in the last Parliament. Indeed, its preparation is still not complete. The essential difficulty lies in translating into the second half of the twentieth century a code that was devised in the second half of the nineteenth century -our Bills of Exchange Act 1909-1958 is still essentially the British Act of 1882 - and, furthermore, a code that is primarily concerned with the elaborate ritual of the nineteenth century merchant doing business with bills of exchange rather than with the modern business use of cheques. Today, the cheque is used as a means of payment in vast numbers of everyday transactions of a non-commercial character as well, of course, as in ordinary commercial activities. Such a comprehensive review has not yet been attempted in any of the countries of the British Commonwealth; their legislation is still based on the British Act of 1882.

The Government has had the benefit of the report of the committee that it appointed to review the Bills of Exchange Act. Honourable members will recall that that committee was chaired by Mr Justice Manning of the Supreme Court of New South Wales and that its report was presented to Parliament on 12th October 1965. The committee recommended that a new Act be passed dealing comprehensively with cheques. The comprehensive Cheques Bill I have mentioned will be broadly along the. lines recommended by the committee. It is clear, however, that some of the recommendations made by the Manning Committee will require modification to take account of fundamental changes that are now taking place in banking procedures, particularly in the use of computers. Discussions are at present proceeding with bankers about the extent to which a modern code should take into account changes that have occurred or that are in prospect. For example, at least one of the trading banks is now redesigning its operations to provide for the storage of cheques at a central processing centre. The old reality - basic to the present Act - of physical presentment of a cheque at the branch on which it is drawn will be gone.

I have said enough about these difficulties. Work is proceeding to overcome them but it is clear that it will be some little time before I shall be able to bring in a comprehensive Bill. It is therefore, in my view, desirable to give effect now in a short Bill to a reform recommended by the Manning Committee - doing away with the unnecessary indorsement of cheques. This is a reform that has been widely sought within the community and 1 consider it to be the most important of the reforms recommended by the Manning Committee. 1 believe that its implementation will be of real benefit to members of the public, to the commercial community and to bankers. The Bill will give effect lo a policy broadly similar to that of the United Kingdom Cheques Act 1957 but modified to take into account views expressed by the Manning Committee.

I turn now to consider the main purpose of the Bill which is, as 1 have said, to do away with unnecessary indorsement of cheques. It may assist honourable members if 1 give some figures that bear upon this matter. Estimates 1 have been able to obtain indicate that over 800 million cheques are issued annually in Australia and that about one-quarter or approximately 200 million arc order cheques. Cheques drawn on the Reserve Bank are invariably payable to order; these include cheques for social service payments, repatriation payments and income tax refunds. The Department of Social Services alone. I understand, issues some 2 million cheques each fortnight. In addition, cheques drawn by State governments and by companies are usually payable to order. At present, all these cheques have to be indorsed by the payees and examined by bankers.

It is estimated that over 2 million order cheques are dishonoured annually for lack of indorsement or for irregular indorsement. lt is also estimated that at least threequarters of all cheques drawn are deposited to the credit of the payee so, in the great majority of cases where cheques are returned for indorsement, no question of title to the cheque is involved. The dishonour of a cheque in these cases does not safeguard the drawer or true owner. It is a great inconvenience to the private individual and to commercial firms and also involves the banker in much unproductive work. In the United Kingdom a solution to the problem of unnecessary indorsement of cheques was attempted in the Cheques /et 1957. ft is a different solution to that proposed in this Bill and I think that I should take a moment or two to explain why I propose in this Bill a different solution.

The United Kingdom Cheques Act has had a curious history. Its starting point is the 1956 report of the Mocatta Committee on cheque indorsement. That report recommended legislation substantially along the lines now proposed. Before action was taken by the United Kingdom Government lo introduce a Bill a private member's Bill was introduced which, with minor changes, was subsequently adopted by the Government. That Bill, which is now the Cheques Act 1957, did not follow the Mocatta draft and proceeded along quite different lines. The relevant sections, sections 1 and 4, may be construed as doing away with the necessity for indorsement of all cheques whether they are cheques paid into the account of the payee or negotiated cheques, that is, cheques that have been negotiated by the payee in favour of a third party. Support is provided for that construction by the decision of the House of Lords in the case of Westminster Bank v. Zang (1966) 2 W.L.R. 110. lt is by no means clear that this result was intended by those who supported the Bill. Indeed during the debate in the House of Lords it was said, in answer lo criticism by Lord Chorley of the departures from the Mocatta Committee's recommendations, that the advice received by the bankers was that negotiated cheques would still need to be indorsed. Alternatively, it was said that bankers would in practice insist on indorsement of negotiated cheques and order cheques paid over .the counter to ensure that they and their customers were protected. It is significant that on 23rd September 1957, before the Act came into force, the Committee of London Clear' ng Bankers issued a memorandum lo the public which stated that indorsement would continue to be necessary in the case of negotiated cheques and order cheques paid over the counter. The result in the United Kingdom is, therefore, that the law does not appear to require the indorsement of any cheques but, as a result of the memorandum I have mentioned, bankers require indorsement of negotiated cheques and order cheques paid over the counter. The position is the same in New Zealand, where a Cheques Act along the lines of the United Kingdom Act has been enacted and a banking practice similar to that in the United Kingdom has been adopted.

The Manning committee, having considered all these matters and having heard submissions from all interested parties, concluded that the original recommendation of the Mocatta Committee should be followed - that is, that the necessity for indorsement should be done away with only in the case of cheques paid into the account of the payee. The Government has accepted this recommendation. The matter that was decisive in its deeision was that the examination by banks of the regularity of indorsements of negotiated cheques is a valuable protection to drawers and the true owners of cheques. I have dealt at some length with the reasons why this Bill provides a different solution from that which the United Kingdom Act provides. It will, however, provide the same practical benefits as a matter of law as are provided in the United Kingdom by a combination of law and banking practice.

In summary, the effect of the indorsement provisions of the Bill will be as follows: A customer of a banker will not need to indorse an order cheque paid into his account if he is the payee; only those cheques that have been negotiated to third parties will require indorsement. A banker paying a cheque drawn on him by a customer will only have to examine a cheque for indorsement where he pays it over the counter. A banker with whom cheques are deposited by a customer will now only have to examine the face of each cheque to ascertain whether it is to be paid into the account of the payee and, if so, he will not have to turn over the cheque to look at the back and compare the indorsement with the name of the payee. The principal provisions that give effect to the proposed alteration of the law concerning indorsement are new sections 88b and 88d contained in clause 5 of the Bill. The former deals with the responsibility of a banker paying a cheque drawn on him by a customer, commonly called a 'paying banker', and the latter deals with a banker who receives payment for - a customer, commonly called a 'collecting banker'. These provisions will also extend to bank drafts, which include what are commonly called 'bank cheques'.

I shall now deal with the provisions of proposed new section 88b. Section 65 of the present Act protects a banker who pays a cheque bearing a forged indorsement or an indorsement made without authority if he acts in good faith and in the ordinary course of business. Section 86 protects a banker against a common law claim for conversion in respect of a crossed cheque where he pays the cheque to another banker in good faith and without negligence. Failure to examine order cheques for indorsement would be contrary to the ordinary course of business under section 65 and would constitute evidence of negligence under section 86. Accordingly, to obtain the protection of sections 65 and 86 a paying banker must examine order cheques for indorsement. If the proposed alteration of the law concerning indorsements is made, a paying banker will not know whether a cheque has been paid into a payee's account with the collecting banker or into some other account. Proposed new section 88b will, therefore, relieve a paying banker of the responsibility for ensuring the regularity of indorsement of all order cheques paid to a collecting banker and leave that responsibility to be discharged by the collecting banker alone. A paying banker will, however, continue to be responsible for ensuring the regularity of an indorsement on an order cheque that he pays over the counter.

The purpose of new section 88d is, firstly, to do away with the necessity for a collecting banker to examine for indorsement order cheques that are paid into the account of the payee, and, secondly, to extend to uncrossed cheques the protection afforded by section 88 to a collecting banker in the case of crossed cheques. At present, under section 88 of the Act, a collecting banker who receives payment of a crossed cheque in good faith and without negligence is protected against the common law liability for conversion to which he is subject if his customer had no title or a defective title to the cheque. A banker, like anyone else who deals with property inconsistently with the rights of the true owner, is liable to the true owner in an action for conversion. To bring himself within the protection of the section, a collecting banker must examine an order cheque to verify the indorsement; to receive payment of a cheque bearing an irregular indorsement would be evidence of negligence on his part.

Under the proposed provision, a collecting banker must continue to examine negotiated order cheques to bring himself within the protection of the provision. Much of the benefit of doing away with the necessity for indorsement on order cheques paid into a payee's account would be lost if collecting bankers were to insist on indorsement where there were minor discrepancies between the name of the payee appearing on the cheque and the name of the customer's account. The proposed section 88d provides, therefore, that where the name of the payee on the cheque is so similar to the name of the customer that it would be reasonable for the collecting banker to assume that the customer is the person intended by the drawer to be the payee, the banker need not concern himself with the absence of or irregularity in indorsement. 1 It is important that the proposed change in the law relating to indorsements should be introduced without affecting the position of persons under other provisions of the Act or under the common law. The Bill contains two proposed provisions directed to that end: Proposed new section 88c, which is intended to preserve the value of paid order cheques as evident of receipt of the amount of the cheque, and proposed new section 88b, which is intended to preserve the rights that a collecting banker now has as a holder for value under section 32 in respect of indorsed order cheques. So far as evidence of receipt is concerned, the drawer of an indorsed order cheque, under the existing law, can use it after payment by his banker as evidence, although it is not conclusive evidence, of receipt by the payee of the amount of the cheque. In fact, a paid indorsed order cheque is as good evidence of the payment of money as the simple receipt of the kind sometimes printed on the back of cheques.

If the proposed change in the law concerning indorsements is effected, there is no reason why a paid unindorsed order cheque would have any less value as evidence of payment than a paid indorsed order cheque now has. Proposed new section 88c ensures that this will be so by providing that an order cheque that appears to have been paid by the banker on whom it is drawn is evidence of the receipt by the payee of the sum payable by the cheque. This provision will, I believe, be useful for auditors and others required to satisfy themselves that the payee has in fact received the amount of the cheque. This provision will extend to a bank draft. The purpose of new section 88e is to ensure that a collecting banker who at the present time has the rights of a holder for value in respect of an indorsed cheque will not be prejudiced by the proposed change in the law to do away with the necessity for indorsement on cheques payable to order that are paid into the payee's account.

The reason why a collecting banker now requires an indorsement on a cheque payable to order is to establish himself as a holder for value, thus, enabling him to sue on the cheque in his own right. In order that a collecting banker will continue to have the rights of a holder for value in respect of cheques that will not in future be indorsed because they will be collected for the payee, new section 88e provides that the banker will have the rights of a holder that he would have had if the payee had indorsed it in blank. I believe that the proposed provisions that I have just described will provide a significant measure of reform of the law relating to cheques and I commend the Bill to honourable members.

Debate (on motion by Mr Connor) adjourned.

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