An Enigma for Practicing Bankers

Dec 04 - Dec 10, 2006

The practice of writing cheques as 'pay cash' is thriving day by day in almost all the South Asian countries, particularly in Indo-Pak Sub-continent. Although drawn, irregularly, they have somehow gained ground, and are normally treated as bearer instrument.

2. Problem arises when cheques are written to read, "pay cash or order". Such instances, though rare, create unmanageable chaos between the collecting and the paying bankers. The entire brunt of this malpractice is borne by the branches; senior executives at controlling offices remaining indifferent.

3. Status of such cheques in the eyes of law as borne by the case law and, implications of their payment shall be discussed at a later stage. Let us first look into the simple meanings of the expression "pay cash or bearer". Anybody who has even the basic knowledge of English language shall come out with only two possible interpretations of this sentence, i.e. either 'cash' is a person like 'bearer', having specific identity, or 'bearer' is a commodity like 'cash'. Obviously, none of the two carries any sense.

4. The thing does not end here. The expression quoted above yet does not make a complete sentence. The complete sentence that is written on a cheque reads: "pay cash or bearer rupees so many, thousand only". Does this convey any meaningful message? Obviously, NOT. Unfortunately, even the highly qualified people have failed to take note of this vague and faulty expression. They have, in their own wisdom, presumed its meaning analogous to "pay to the bearer rupees so many thousand in cash".

5. Yet another underlying misconception is that cash can be paid on the counter of the bank only if the cheque is written to read 'pay cash'. The editor-in-charge of business pages of one of the. largest national Dailies was also found suffering from this misconception; what to tell of a common man with extremely poor academic-cum-technical background? In fact, any open cheque, i.e. a cheque that does not bear crossing, if otherwise in order, can be paid in cash on the counter of the drawee bank. If it is a bearer cheque it can be paid to any body who presents it. Alternatively, if it is an order cheque, the named payee or the endorsee shall have to establish his identity before payment is made to him in cash at the counter. To pay in cash or otherwise is never a part of the directive given on the cheque.

6. Let us now vouch for the status of such cheques in the light of the relevant laws and in the wake of the Cash Law on this premise.

7. The judgment in North and South Insurance Corporation Ltd. v. The National Provincial Bank Ltd. (1936 - 1. K. B. 328) has categorically excluded such cheques from the category of bills of exchange. This tends to deprive bankers of the statutory protection available to them in respect of collection and payment of cheques.

8. While addressing the question whether or not cheques drawn payable to impersonal payees, such as, 'house-keeping or order', 'wages or order' or 'cash' or, 'order', should be required to be endorsed. Branson, J. held that having regard to Ss. 3 and 73 of the English Bills of Exchange Act, 1882, such instruments were not cheques at all, but mere mandates to pay to the bearers thereof.

9. As regards the words 'or order', it was held that an impersonal payee, such as, 'cash', for example, could not endorse, since it was not specified person. The words 'or order' must therefore be ignored, and the document be treated as a "good direction to pay to the bearer".

10. The reason by which His Lordship arrived at the aforesaid conclusion was that a cheque, as defined in Section 73 of the English Bills of Exchange Act, 1882 was a bill of exchange drawn on a banker payable on demand, and that a bill of exchange as defined by Section 3 ibid was a directive to pay to or to the order of a specified person or to bearer. A document containing a directive to 'pay cash' was not payable to a specified person and was therefore not a cheque within the meanings of the term as laid down in the Act.

11. Consequently, the most preferable course of action for the paying bankers would be to return such cheques with the reason "irregularly drawn". In case payment is desired to be made, it is advisable to obtain a duly stamped receipt, even if the presentation is made by the drawer of the cheque himself.

12. Position in India and Pakistan is analogous to that in U.K. Under Negotiable Instruments Act, 1881, as also adapted in Pakistan, the payee must be a 'certain' person, as against 'specified' person under English Law, and a cheque must indicate that certain person to whom money is directed to be paid. Cash not being a certain person, the instruments payable to 'cash', do not meet the requirements of law. This deprives all the parties to a cheque of the privileges and protection associated with a negotiable instrument. Thus, for example, its holder, under any circumstances, cannot have a better title than the title of the person from whom he derived his own title, nor can he pass on to the endorsee a better title than he himself has. It should be a matter of great concern both for the collecting and the paying bankers, and also for the payees and the indorsees. Unfortunately, however, bankers are not taking it quite seriously.

13. No doubt, the word "certain" is very wide in its import, and a person will be, sufficiently certain if he cannot be mistaken for another person of the same name, though in the cheque he may have been misnamed. Yet, fictitious persons or impersonal expressions don't fall within the purview of this term.

14. Persons in the eyes of law are not necessarily human beings. The legal person may be a body corporate constituted by law with power to contract, such as a joint stock company, which is a legal entity, which has its own common seat, and which can sue and can be sued in its own name. Other examples are local bodies, trading enterprises, clubs and societies, and other various types of trading and non-trading organizations.

15. Moreover, the term 'certain person' does not necessarily mean that the personal name of the payee should be given on the cheque. He may be designated as the holder of an office. Persons addressed by titles or by family or pen names etc., if capable of maintaining their identity by such titles etc. are also tantamount to 'certain' persons.

16. Notwithstanding such a wide scope of the term 'certain person', fictitious persons or imaginary characters, such as, Shaikh Chilly, Omar Ayyar, Sherlock Holmes, Tarzan, Harry Potter, and so on, or impersonal names as cash, wages, imprest etc. do not fall within the folds of 'certain persons'. Case Law is crystal clear on this premise.

17. There is yet another case, namely, Cole v. Milsome (195 1), 1 All. ER 311 wherein it has been laid down in unequivocal terms that such documents cannot be treated as cheques, as they do not satisfy the legal requirements of a cheque.

18. Notwithstanding such clear-cut rulings given at the appropriate levels of judiciary, and regardless of the relevant law of the land, cheques are being freely made payable to 'cash', and are being collected and paid by banks as a routine.

19. Although case law is quite clear as regards payment of cheques payable 'to cash or order', so that the words 'or order' are required to be ignored, and the instrument be treated as payable to bearer, yet instances are not uncommon when there is a sharp difference of opinion between the collecting and the paying bankers on this count.

20. Recently, a query was referred to this writer. The cheque was drawn payable "to cash or order", and was crossed 'Account Payee'. The paying bank was insisting to have a discharge by the collecting bank, while the latter was not inclined to give any on the plea that there was no account in its books by that description to justify a discharge. The collecting banker owes an answer to the question that if he did not have any such account then for whom he was collecting the cheque and by doing that will he be eligible for the statutory protection available to the collecting bank under S. 131 of the Negotiable Instruments Act? Truly speaking, it was the height of indolence on the part of the collecting bank to have accepted such cheque for collection.

21. In this situation it becomes obligatory on the part of the practicing bankers to help their customers write their cheques within the ambit of law, without frustrating their interest in the current practice.

22. There are three possible solutions to this dilemma: (i) to straightaway refuse handling of such instruments on the plea 'irregularly draw' or (ii) to treat all such instruments as bearer instruments, ignoring any other indications or finally (iii) to alter the composition of the cheque leafs as per the specimen provided hereunder in Fig. 2.

23. Obviously, in the wake of the severe competition, bankers cannot afford refusing handling of such cheques. It is already too late. Things have gone too far. At this stage, bankers cannot resist this mode of writing cheques without annoying their clients

24. A consensus between the collecting and the paying bankers to treat such 'order' cheques and cheques with 'account payee' crossing as bearer is almost impracticable to achieve. The reason is the poor knowledge of banking laws at grassroots level and lack of meaningful guidance from the controlling offices. Moreover, the risk of deprivation of statutory protection in case of conversion or wrongful payment remains hanging a sword of Damocles.

25. Thus, the only practicable option left is to alter the notation of cheque leafs as prescribed below in Fig. 2, in contrast to the existing version shown in Fig. 1.


Pay-------------------------or bearer
Rupees------------------- Rs


Pay Rupees-------------------------
to---------------------------- or bearer

26. A bird's eye view of the two formats would reveal the following facts.

•Contents of the two formats are identical, except that in the proposed format order of notations is changed, and the word 'to' is added to the contents.

•The changed version fully meets the requirements of law.

•Clients will follow the direction automatically without noticing any change. For example, after the words 'Rupees', they shall be constrained to write--.the amount, and after the word 'to', they will have to write nothing but the name of the payee. They will never reconcile with the silly expression, such as, pay rupees so many to cash."

•If still some cheques are written in a disorderly manner i.e., in a manner that does not conform to the notation of the cheque, and presented for collection or for payment, the same may be returned with the reason "irregularly drawn". Such instances, if any, would be few and far between, and shall not pose any problem for the bank

•After the existing stock of chequebooks is exhausted, new chequebooks may be printed according to the proposed format and supplied to the branches without any formal notification.