The cheque is the most familiar negotiable instrument. It is a bill of exchange with a bank as drawee, payable on demand, and the law gives it special treatment because it moves so much money and because it can be stolen, altered or forged. A single mark across its face, two parallel lines, changes who can be paid and how safely.
Examiners ask what a cheque is, how the different types and crossings work, and what happens when a cheque is altered, forged, stopped or dishonoured.
This topic covers the definition of a cheque, its parties, the differences between a cheque and other bills, the types of cheque (bearer, order, crossed and open), the types of crossing and the effect of each narration, material alteration, forged cheques, promissory notes and how they differ from bills, the holder, countermand of payment, and the offence of issuing a dud cheque.
In 30 seconds
A cheque is a bill of exchange drawn on a banker and payable on demand (section 73). The parties are the drawer, the drawee (the bank) and the payee. No acceptance is needed. A bearer cheque (payable to bearer or “cash”, or endorsed in blank) passes by delivery. An order cheque (payable to a named person) needs endorsement and delivery.
A crossed cheque must be paid into an account, not cashed over the counter. A general crossing is two parallel lines, with or without “& Co” or “Not Negotiable”. A special crossing names a banker. “Not Negotiable” means the holder gets no better title than his transferor (section 83). “Account Payee Only” is a directive to the collecting banker.
A material alteration discharges all parties except those who authorised it or endorsed afterwards. A forged drawer’s signature is wholly inoperative, so the bank cannot debit the customer. A bank must obey a valid countermand. Issuing a cheque on insufficient funds is an offence under the Dishonoured Cheques (Offences) Act.
What a cheque is
Section 73 of the Bills of Exchange Act 2004 defines a cheque as “a bill of exchange drawn on a banker payable on demand”.
Put in full, it is an unconditional order in writing addressed by one person (the drawer) to a banker (the drawee), signed by the drawer, requiring the banker to pay on demand a sum certain in money to or to the order of a specified person, or to bearer. A cheque therefore:
- carries a positive order;
- is directed to a bank;
- is for a liquidated sum payable on demand;
- states the amount, which must be a sum certain;
- is drawn by a person who has a current account with the bank, in expectation that there is enough money in it; and
- is signed by the person giving the order.
Parties
- The drawer: draws and signs the cheque, giving the order to the bank.
- The drawee: the bank, ordered to pay, and liable to pay the face value on presentment.
- The payee: the person who receives the proceeds.
A cheque and other bills of exchange
| Point | Cheque | Other bills |
|---|---|---|
| Acceptance | None required. The banker must honour it if it appears in order, is received in the ordinary course, and the drawer has sufficient funds or an authorised overdraft | The drawee must accept to be liable |
| If dishonoured | The banker has no obligation as drawee, since he has not accepted. But he may be liable to the customer, and the holder, if he wrongfully dishonours it | The acceptor is liable |
| Crossing | Only cheques can be crossed | Cannot be crossed |
| Drawee | Only a banker | Any person |
| Forged endorsement | A banker is protected under the Act | The drawee is not so protected |
| Collecting banker | The Act protects a collecting banker, subject to conditions | No such protection |
| Use | Commonly in domestic trade | Commonly in international trade |
Types of cheque
There are four basic types: bearer, order, crossed and open (uncrossed).
| Type | Meaning | How it is transferred |
|---|---|---|
| Bearer cheque | Drawn and made payable to bearer, or endorsed in blank, and not addressed to any named person. A cheque payable to “cash” is payable to an unnamed person, so it is a bearer cheque | By mere delivery, with no endorsement. In practice banks still ask for an endorsement as evidence that the bearer received the money |
| Order cheque | Drawn payable to a named person or his nominee, or endorsed payable to a named person or his nominee | Endorsed by the payee on the back, and delivered, before it is transferred or paid |
| Crossed cheque | Bears across its face two parallel transverse lines, with or without words | Cannot be cashed over the counter. Must be paid into a bank account |
| Open cheque | Bears no crossing and no words such as “and company” or “not negotiable” | May be cashed over the counter |
In May 2019 the examiners applied this to two cheques: one marked “Pay Cash”, a bearer cheque transferable by mere delivery, and one marked “Pay Tom”, an order cheque because it is payable to a named person, transferable by endorsement and delivery. March/July 2020 asked for bearer and order cheques (4 marks each).
Crossing
Under section 78(1), a cheque is crossed when it bears across its face the words “and company”, or an abbreviation, between two parallel transverse lines, with or without the words “not negotiable”. A crossed cheque cannot be cashed over the counter. It must be paid into a bank account for the proceeds to be collected for the credit of that account.
It is safer than an open cheque: a thief who has stolen a crossed cheque cannot cash it, and has to pass it through an account, so he is easier to trace.
General crossing
Two parallel transverse lines across the face, with or without (i) “and company” or “& Co” and (ii) “not negotiable” between or near the lines. Examples: “& Co”; “& Co. Not Negotiable”; “Not Negotiable, Account Payee Only”. The paying banker may not pay over the counter, and must pay only to a collecting banker for the credit of an account of the payee.
Special crossing
The name of a banker, with or without his address, written or stamped across the face, with or without the lines, “not negotiable”, “& Co” or “account payee only”. The paying banker must pay the cheque only to the collecting banker named in the crossing or his agent.
May 2023 asked for the meaning of a special crossing (2 marks) and two narrations that may be placed on such a cheque, and the examiners accepted “Account Payee Only” and “Not Negotiable”.
What the words mean
| Words | Effect |
|---|---|
| The banker’s name in a special crossing | The cheque must pass through that bank, usually the bank that holds the payee’s account |
| “Account Payee” or “Account Payee Only” | It has no statutory authority and does not concern the paying banker, nor does it affect negotiability. It is a directive to the collecting banker to collect for the credit of the named payee’s account. A collecting banker who credits a different account is liable for negligence and must compensate the true owner (the courts recognise this) |
| “Not Negotiable” | It destroys negotiability but not transferability. No person can become a holder in due course of the cheque. Under section 83, a person who takes a crossed cheque marked “not negotiable” has not, and cannot give, a better title than the person from whom he took it |
Effect of “not negotiable” in practice
A bearer or order cheque with a genuine blank endorsement, if passed on by a thief, would give good title to a holder in due course. If the cheque is crossed “not negotiable”, the holder gets only as good a title as the thief had, which is none.
The November 2020 cheques
| Cheque | Type and effect |
|---|---|
| “Pay Ronke ₦50,000” with no crossing | An open order cheque. Ronke can cash it over the counter by presenting it, endorsed if needed |
| “Pay Andrew ₦100,000” with two parallel lines | A general crossing. It must be paid into an account, not cashed over the counter |
| “Pay Mary ₦150,000” with two parallel lines and “Congo bank” between them | A special crossing. The paying bank must pay only to Congo Bank |
| “Pay Ngozi ₦200,000” with two parallel lines and “account payee only” | A general crossing with a directive to the collecting banker to credit the payee’s account only |
Material alteration
Where a cheque is materially altered, all parties cease to be liable on it, except a party who:
- made, assented to or authorised the alteration; or
- became an endorser after the alteration.
An alteration of the date, the amount, the payee’s name or any crossing is material. Where a crossed cheque is opened so that it can be paid in cash to the payee or his known agent, or the words “or order” are altered to “bearer”, the drawer’s full signature is normally required.
Forged cheques
A forged signature of the drawer is wholly inoperative, except by the doctrine of estoppel. A bank has no mandate to pay a forged cheque, so the amount cannot be debited to the customer’s account. If the bank pays, it must re-credit the customer.
But where the payment was made in good faith, without negligence and in the ordinary course of business. The money is still in the hands of the collecting banker, the paying banker may recover it as paid by mistake.
The customer has a duty to draw cheques with care and to tell the bank promptly of a forgery, as the banking law topic explains.
Promissory notes
Section 85(1) defines a promissory note as an unconditional promise in writing, made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person or to bearer.
| Point | Promissory note | Bill of exchange |
|---|---|---|
| Parties | Two: the maker (drawer) and the payee | Three: drawer, drawee and payee |
| Acceptance | Not necessary, as there is no drawee | Needed for the drawee to be liable |
| Who pays | The maker | The drawee, and the drawer only if the drawee defaults |
| Nature | A promise to pay | An order to pay |
A bill may be treated as a promissory note where the drawer and drawee are the same person, or the drawee is fictitious or lacks capacity.
The holder
Section 2 defines a holder as the payee or endorsee of a bill or note who is in possession of it, or the bearer. A person who holds under a forgery, or who has stolen a bill payable to another’s order, is not a holder but a wrongful possessor.
Countermand of payment
Section 75 provides that the duty and authority of a banker to pay a cheque drawn on him by his customer are determined by countermand of payment. A countermand is an instruction by the customer that the bank is not to pay a cheque he has issued. The drawer may stop it before it is paid.
Subject to statutory protection, estoppel or adoption, a banker who pays against a countermand must not debit the customer.
- A countermand is given in writing signed in the customer’s usual signature, clearly and unambiguously. A telephone, telex, fax or email instruction is only a means to put the bank on notice to suspend payment until written confirmation.
- It must be served on the branch where the account is kept and must actually reach the officer who will effect the stop.
- It must describe the cheque: its number, payee, date and amount.
Who may countermand
- Joint, trustee, executor and partnership accounts: any one of the holders may, if the stop is signed according to the account mandate.
- Company account: the company secretary, in accordance with the company’s mandate.
- Private account: only the drawer. But the bank will delay payment of a cheque that the payee has reported lost or stolen, and the payee should ask the drawer to stop it.
A drawer who countermands is still liable to a holder in due course, unless the cheque is crossed “not negotiable”.
The dud cheque
In November 2014 Suzee had ₦125,000 in her current account and issued a cheque to Timmy for ₦140,000, expecting a lodgement that did not come. The bank returned the cheque unpaid for insufficient funds, and Timmy alleged an offence. The examiners’ answer was that:
- issuing a cheque on an account that does not have enough credit to cover it is an offence;
- a cheque returned unpaid for insufficient funds is called a dud cheque;
- issuing it is an offence under the Dishonoured Cheques (Offences) Act; and
- the punishment is imprisonment under that Act.
The criminal law topic adds that obtaining property or credit by a cheque later dishonoured for insufficient funds is obtaining by false pretences.
Working through the rules
May it be cashed over the counter?
| Cheque | Over the counter? |
|---|---|
| Open order cheque in favour of Ada | Yes, to Ada, on proper identification and endorsement |
| Cheque payable to “cash”, uncrossed | Yes, to the bearer |
| Cheque with two parallel lines | No. It must be paid into an account |
| Cheque specially crossed to Union Bank | No. Only to Union Bank, as collecting banker |
What does the bank do?
| Facts | Result |
|---|---|
| The customer’s signature is forged and the bank pays | The bank must re-credit the customer |
| The amount is altered from ₦20,000 to ₦200,000 and the bank pays ₦200,000 | The drawer is not liable on the altered cheque, so the bank cannot debit the altered sum and generally bears the loss |
| The customer sends a valid written stop order, and the bank pays | The bank cannot debit the customer |
| The stop order is by phone with no confirmation | The bank should suspend payment pending confirmation, but is not clearly liable if it pays after a reasonable time |
Good title or not?
| Cheque | Holder’s title if the thief endorsed it |
|---|---|
| Open bearer cheque | A holder in due course gets good title |
| Cheque crossed “not negotiable” | No better title than the thief had, which is none |
| Cheque crossed “account payee only”, credited to a stranger’s account by the collecting bank | The collecting bank is liable to the true owner for negligence |
Worked problems
Problem 1: Femi’s two cheques
Scenario. Femi issued two cheques to his friend Tom. On the first he wrote “Pay Cash”, and on the second “Pay Tom”. State the types of cheque and how Tom could transfer his rights.
- The first cheque. A bearer cheque, because it is payable to an unnamed person. Tom may transfer it by mere delivery.
- The second cheque. An order cheque, payable to a named person. Tom must endorse it and deliver it.
Problem 2: Suzee’s cheque
Scenario. Suzee’s balance was ₦125,000. She issued a cheque for ₦140,000 to Timmy, expecting a lodgement. It was returned unpaid. Explain the legal issues.
- The facts. The account had insufficient funds and no overdraft, so the bank had no duty to pay.
- The offence. Issuing a cheque on an account without enough funds, which is returned unpaid, is a dud cheque, an offence under the Dishonoured Cheques (Offences) Act, punishable by imprisonment.
- Advice. Suzee is liable to be prosecuted, and Timmy may also claim the amount of the cheque.
Problem 3: the crossed cheque and the wrong account
Scenario. A cheque for ₦500,000 payable to Obi is crossed “Account Payee Only”. A thief obtains it and pays it into his own account at Delta Bank, which collects the money. Obi sues Delta Bank. Advise.
- The rule. “Account Payee Only” is a directive to the collecting banker to collect only for the credit of the named payee.
- The application. Delta Bank credited the proceeds to an account that was not Obi’s.
- Advice. Delta Bank is liable in negligence and must compensate Obi for the amount.
Problem 4: the altered cheque
Scenario. A holder alters the payee’s name on a cheque from “Mary” to “Marie” and the amount from ₦15,000 to ₦150,000, then negotiates it to Peter. The drawer refuses to be liable. Advise.
- The rule. Alteration of the payee’s name or the amount is material. Where a cheque is materially altered, all parties cease to be liable, except one who made or assented to the alteration, or became an endorser after it.
- Advice. The drawer is not liable on the altered cheque. Peter, who became a party after the alteration, may claim only against those who dealt with him after the alteration, and against the person who altered it.
Questions that have been asked on this topic, and how to answer them
| Question theme | What a full answer contains |
|---|---|
| The legal issues of issuing a cheque without funds (November 2014 Q4(a), 6 marks) | Dud cheque, offence under the Dishonoured Cheques (Offences) Act, imprisonment |
| Bearer and order cheques (May 2019 Q3(b)(ii), 4 marks; March/July 2020 Q6(b), 8 marks) | Definitions, how each is transferred, and examples |
| Types of crossing, four cheques (November 2020 Q5(d)) | The table of the four cheques, and a definition of negotiable instruments |
| Special crossing and two narrations (May 2023 Q2(d), 4 marks) | A banker’s name across the face; “account payee only” and “not negotiable” |
| Wrongful refusal to pay (May 2021 Q6(a)) | Covered in the banking law topic |
| Section A items | A cheque marked “not negotiable”; the remedy for a breach of duty of care is damages, not lien |
Common mistakes in the exam
- Saying a cheque needs acceptance. It does not.
- Saying a bearer cheque needs endorsement to transfer it. It passes by delivery.
- Calling “Pay Cash” an order cheque. It is a bearer cheque.
- Saying a crossed cheque can be cashed over the counter.
- Confusing general and special crossing. A special crossing names a banker.
- Saying “not negotiable” means a cheque cannot be transferred. It can be transferred, but the holder gets no better title.
- Saying “account payee only” binds the paying banker. It is a directive to the collecting banker.
- Saying a forged cheque can be debited to the customer.
- Saying a bank may pay a countermanded cheque.
Quick revision
- Cheque (s.73): bill drawn on a banker, payable on demand. No acceptance. Bearer cheque: delivery. Order cheque: endorsement and delivery. Types: bearer, order, crossed, open.
- General crossing: two lines, with or without & Co, not negotiable. Special crossing: banker’s name. Account payee only: directive to collecting banker. Not negotiable: no better title (s.83).
- Material alteration: all parties discharged, except those who consented or endorsed afterwards. Forged drawer’s signature: inoperative. Countermand (s.75): written, to the account branch.
- Promissory note: promise, two parties, no acceptance. Dud cheque: offence under the Dishonoured Cheques (Offences) Act.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Section A style: multiple choice
Question 1. A cheque is a bill of exchange drawn on:
- A banker, payable on demand
- Any person, payable after sight
- A company
- A court
Show the answer
A. Section 73.
Question 2. A cheque marked “Pay Cash” is a:
- Bearer cheque
- Order cheque
- Crossed cheque
- Stale cheque
Show the answer
A. It is transferable by mere delivery.
Question 3. A cheque payable to a named person is transferred by:
- Endorsement and delivery
- Delivery alone
- Notice
- Registration
Show the answer
A. It is an order cheque.
Question 4. Two parallel transverse lines across a cheque are:
- A general crossing
- A special crossing
- An alteration
- A countermand
Show the answer
A. It must be paid into an account.
Question 5. A special crossing contains:
- The name of a banker
- The payee’s age
- A date
- A witness
Show the answer
A. The paying bank pays only the banker named.
Question 6. The words “not negotiable” on a cheque mean the holder:
- Gets no better title than his transferor
- Cannot transfer it
- Gets a better title
- Cannot sue
Show the answer
A. Section 83.
Question 7. “Account payee only” is a directive to the:
- Paying banker
- Collecting banker
- Drawer
- Notary
Show the answer
B. It affects neither the paying banker nor negotiability.
Question 8. After a material alteration of a cheque, parties are:
- All discharged except those who consented or endorsed afterwards
- All liable
- Only the drawee liable
- Only the payee liable
Show the answer
A. Date, amount and payee are material.
Question 9. A promissory note has how many parties?
- Two
- Three
- Four
- One
Show the answer
A. The maker and the payee.
Question 10. A bank that pays a validly countermanded cheque:
- May debit the customer
- Must not debit the customer
- Is protected by the Central Bank of Nigeria (CBN)
- Pays interest only
Show the answer
B. Section 75.
Section B style: written questions
Question 11 (10 marks). (a) Define a cheque. (3 marks) (b) Distinguish a cheque from other bills of exchange. (4 marks) (c) Explain bearer and order cheques. (3 marks)
Question 12 (10 marks). (a) Explain general and special crossing. (4 marks) (b) Explain the effect of “not negotiable” and “account payee only”. (6 marks)
Question 13 (20 marks). Dayo drew a cheque for ₦300,000 to Emeka, crossed “Not Negotiable”. A thief stole it, forged Emeka’s endorsement and sold it to Fola, who paid value and acted honestly. Dayo had also drawn a cheque on an account with ₦50,000 in it for ₦200,000. (a) Advise on Fola’s title. (6 marks) (b) Advise on the second cheque. (5 marks) (c) Explain how Dayo could stop the first cheque. (5 marks) (d) Distinguish a promissory note from a bill. (4 marks)
Model answers
Show the model answer to Question 11
(a) Definition. Section 73 defines a cheque as a bill of exchange drawn on a banker payable on demand. It is an unconditional order in writing from the drawer to a bank, signed by the drawer, to pay on demand a sum certain to or to the order of a specified person, or to bearer.
(b) Difference. No acceptance of a cheque is needed. If it is dishonoured the banker has no obligation as drawee, since he has not accepted, though he is liable if he wrongfully dishonours it. Only cheques can be crossed. A cheque is drawn only on a banker. A banker is protected against forged endorsement, and a collecting banker is protected, which does not apply to bills. Cheques are used in domestic trade and bills in international trade.
(c) Bearer and order cheques. A bearer cheque is payable to bearer, or endorsed in blank, such as a cheque payable to “cash”, and passes by mere delivery. An order cheque is payable to a named person or his nominee and passes by endorsement and delivery.
Show the model answer to Question 12
(a) Crossings. A general crossing is two parallel transverse lines across the face, with or without “and company” and “not negotiable”. The cheque must be paid to a collecting banker for the credit of an account.
A special crossing is the name of a banker written or stamped across the face, with or without the lines or other words. The paying banker must pay only to the collecting banker named.
(b) Words. “Not negotiable” destroys the cheque’s negotiability but not its transferability, so no one can become a holder in due course. The holder has no better title than his transferor (section 83). “Account payee only” has no statutory authority and does not concern the paying banker or affect negotiability.
It directs the collecting banker to collect for the payee’s account, and a collecting banker who credits another account is liable for negligence to the true owner.
Show the model answer to Question 13
(a) Fola’s title. A forged signature is wholly inoperative, so the forged endorsement gave the thief no title. A person holding under a forgery is a wrongful possessor, not a holder.
Fola also cannot be a holder in due course of a cheque crossed “not negotiable”, and under section 83 a person who takes such a cheque gets no better title than the person from whom he took it, which was none. Fola has no title, though he may sue the thief.
(b) The second cheque. The account held ₦50,000 and the cheque was for ₦200,000, with no overdraft. The bank has no duty to pay and may return it unpaid. Issuing a cheque on an account without enough funds is an offence, a dud cheque, under the Dishonoured Cheques (Offences) Act, punishable by imprisonment.
(c) Stopping the cheque. Dayo may countermand it by a signed written instruction, in his usual signature, served on the branch where the account is kept, describing the cheque by number, payee, date and amount. A phone or email notice puts the bank on notice to suspend payment pending written confirmation. A bank that pays after a valid countermand may not debit his account.
He remains liable to a holder in due course, unless the cheque is crossed “not negotiable”, as this one is.
(d) Promissory note and bill. A promissory note is an unconditional promise to pay, made by the maker to the payee, so it has two parties and needs no acceptance. The maker is the person who pays. A bill is an order to pay, with three parties, and the drawee pays after accepting, with the drawer liable only if the drawee defaults.
Pathfinder on cheques
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Suzee issued a cheque for ₦140,000 on a balance of ₦125,000. Explain the legal issues. Revise the dud cheque and worked problem 2.
Revise first: The dud cheque
Bearer and order cheques, and how rights are transferred. Revise the types of cheque and worked problem 1.
Revise first: Types of cheque
Four cheques: open, generally crossed, specially crossed to Congo Bank, and account payee only. Revise crossing and the table of the four cheques.
Revise first: Crossing
Special crossing and two narrations that may be placed on such a cheque. Revise special crossing.
Revise first: Crossing
Set out in the syllabus and not yet asked as standalone questions in the diets reviewed. Revise these sections.
Revise first: Material alteration
Source: ICAN Pathfinder, Corporate and Business Law. Diets covered: November Diet, 2014 to May Diet, 2024.
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