Summary
- Under the Cheques Act 1986 (Cth), a drawer is only liable on a cheque once it is presented for payment, but remains liable for a dishonoured cheque regardless of whether they are aware of the dishonour, and must compensate the holder for the amount owed plus applicable interest.
- A cheque must be presented within a reasonable time (typically 15 months) to maintain the drawer’s liability, with courts assessing reasonableness based on industry standards, the cheque’s nature and value, and whether delays were caused by the holder’s own conduct.
- Despite the widespread adoption of electronic fund transfers and card payments, cheques remain in use across government and business contexts, making it important for businesses to understand their legal obligations when issuing or accepting them.
- This article is a guide to cheque liability for businesses and individuals in Australia, explaining drawer obligations and the legal consequences of dishonoured or stale cheques under the Cheques Act 1986 (Cth).
- LegalVision is a commercial law firm that specialises in advising clients on commercial transactions and payment obligations.
Tips for Businesses
Present cheques promptly upon receipt to avoid stale cheque complications. Verify all cheque details carefully before acceptance, including date, amount, payee name, and signature. If issuing cheques, ensure sufficient funds are available to avoid dishonour liability and associated compensation obligations.
Plastic card transactions and electronic transfers have made cheques increasingly obsolete, but cheques remain legally relevant for businesses and individuals who still issue or receive them. Understanding a drawer’s liability under the Cheques Act 1986 (Cth) is essential for anyone who handles them. The question is then, what is the drawer’s liability when issuing a cheque, and in what circumstances can they refuse to honour it? This article examines when a drawer becomes liable upon issuing a cheque and in what circumstances they can refuse to honour it.
Liability of a Drawer Upon the Issue of a Cheque
Under sections 58 and 71(a) of the Cheques Act 1986 (Cth), a drawer of a cheque is not liable unless and until it is presented for payment. However, a cheque once presented for payment must be paid. Similarly, sections 70 and 71(b) of the Act set out that a drawer of a dishonoured cheque continues to be liable, regardless of whether or not he or she is aware of this fact.
In such circumstances, the drawer will be required to compensate the holder for:
- the sum ordered to be paid under the cheque; and
- any interest that has become payable on the cheque.
The Consequence of Delaying in Presenting a Cheque for Payment
The general liability of a drawer is not absolute. A drawer will not be liable unless the cheque has been presented for payment within a ‘reasonable time’. What amounts to a reasonable time is determined on a case-by-case basis.
Under section 60(3) of the Act, the below factors determine what is a reasonable period:
- it is reasonable to expect that cheques will be presented for payment promptly;
- industries such as trade and finance typically accept cheques;
- the nature of the cheque, including the date of issue and the cheque’s value;
- whether any circumstances beyond the holder’s control caused delay; and
- whether the holder’s default, misconduct or negligence caused the delay.
This factsheet provides an overview of the key legal components and considerations for loan arrangements between a company and its shareholders or directors.
Key Takeaways
Cheques remain in use despite the rise of instant digital transactions. Under the Cheques Act 1986 (Cth), a drawer is only liable when a cheque is presented for payment. If a cheque is dishonoured, the drawer must compensate the holder for the amount and any applicable interest.
A cheque must be presented within a “reasonable time,” typically 15 months, or it may become stale. Factors such as industry standards and delays beyond the holder’s control influence this timeframe. Businesses and individuals should verify cheque details carefully and be aware of potential fees, risks, and legal obligations when handling cheques
Glossary
- Drawer: The person or entity who writes and signs the cheque.
- Drawee: The bank on which the cheque is drawn (usually the drawer’s bank).
- Payee: The person or entity to whom the cheque is payable.
- Stale cheque: A cheque that has not been presented for payment within a reasonable time (usually 15 months from the date of issue).
- Dishonoured cheque: A cheque that the bank refuses to pay, usually due to insufficient funds.
- EFT: Electronic Funds Transfer, a digital method of transferring money between accounts.
- Presenter: The person or entity presenting the cheque for payment.
Frequently Asked Questions
In Australia, cheques are typically valid for 15 months from the date of issue. After this period, they may be considered ‘stale’ and may not be honoured by banks.
First, contact the drawer to request payment. If unsuccessful, you may need to send a formal demand letter or consider legal action, depending on the amount involved.
Yes, you can request a stop payment from your bank, but this must be done before the cheque has been presented and processed.
Yes, many banks charge fees for issuing cheque books, stopping payments, and in some cases, for processing cheques. Check with your bank for specific fee information.
Verify that the date, amount (in words and figures), payee name, and signature are all present and correct. Also, check that the cheque isn’t post-dated or stale.
While not illegal, post-dated cheques carry risks. Banks may process them before the date shown, potentially leading to complications if funds aren’t available.
A personal cheque is drawn on an individual’s account, while a bank cheque is issued by the bank itself, providing more security as it is guaranteed by the bank.
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