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Cheques (Scotland) Bill

These notes refer to the Cheques (Scotland) Bill as introduced in the House of Commons on 13th January 1999 [Bill 22] Cheques (Scotland) Bill EXPLANATORY NOTES INTRODUCTION 1.     These explanatory notes relate to the Cheques (Scotland) Bill as introduced in the House of Commons on 13 January 1999. They have been provided by the Treasury with the consent of Mr John Swinney MP, the Private Member in charge of the Bill, in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament. 2.     The notes need to be read in conjunction with the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given. BACKGROUND 3.     This Bill abolishes "the funds attached rule" in Scots law, so far as it relates to cheques. 4.     Under the funds attached rule, when a cheque is presented to a bank for payment, the sum stated in the cheque is assigned to the holder of the cheque out of the funds held by the bank for the drawer of the cheque. Neither the drawer nor the bank on his behalf may thereafter deal with that sum. 5.     Problems arise in practice where a cheque is presented to a bank for payment (or, as often happens, a number of cheques are presented simultaneously) when there are insufficient funds to satisfy the cheque or all of the cheques. In those circumstances, no payment is made by the bank. Instead, the available funds are "attached" and placed in a suspense account. The money stays in that account until, in respect of each cheque: it is re-presented and met, because the drawer has by then provided sufficient additional funds, or the holder returns the cheque to the drawer, who can then demonstrate to the bank that the holder has relinquished his claim to the attached funds, or the drawer can produce a written declaration from the holder that the latter's claim has been relinquished, or a judicial settlement is reached, or a five year prescriptive period has expired. 6.     This can cause considerable difficulty for the drawer of the cheques, for the holders whose payment is delayed and for the bank concerned, which incurs administrative costs. The Committee of Scottish Clearing Bankers estimates that this costs their members in the region of £225,000 a year. It also causes expense and inconvenience for approximately 100,000 of the banks' customers each year. 7.     The operation of the funds attached rule was considered by the Review Committee on Banking Services Law, chaired by Professor Jack, whose Report, Banking Services: Law and Practice, was published in 1989 (Cm 622). The Review Committee noted that no similar rule applied in the rest of the UK. So where several cheques were presented simultaneously when there were insufficient funds to satisfy all of them, the bank in practice would choose which cheques it would satisfy from the funds available. This could be done in a way which would do the least damage to the interests of the customer of the bank, whilst also ensuring that at least some creditors received payment. The abolition of the funds attached rule in relation to cheques would mean that the banks in Scotland would be able to operate a similar practice. 8.     The Review Committee recommended the abolition of the funds attached rule in relation to "instruments other than bills of exchange (which are not also cheques)". In 1990 the then Government published its White Paper Banking Services Law and Practice (Cm 1026) and decided to consult interested parties regarding that recommendation. The consultation showed general support for abolition of the funds attached rule in so far as it relates to cheques. It was in relation to cheques, as distinct from any other kind of bill of exchange, that the problem was seen as arising. COMMENTARY ON CLAUSES Clause 1: Abolition of funds attached rule for cheques 9.     This clause abolishes what has become known in Scots law as the funds attached rule, in so far as it operates in relation to cheques. The clause abolishes the rule under both common law and statute and applies solely to Scotland. 10.     Subsection (1) abolishes the funds attached rule, so far as relating to cheques. 11.     Subsection (2) explains what the funds attached rule is. It describes the rule of Scots common law, whereby the presentation of a bill of exchange to the drawee (eg the bank on which a cheque is drawn) operates as an assignation in favour of the holder of the bill of the funds for which it is drawn or, where the drawee holds insufficient funds, of the amount of those funds. 12.     Subsection (3) amends section 53 of the Bills of Exchange Act 1882 (the "1882 Act"). Section 53(2) restates the funds attached rule in respect of bills of exchange where there are sufficient funds available for the payment of the sum for which the bill has been drawn. Scots common law still applies where there are insufficient funds available to satisfy a bill. The amendment provides that section 53(2) does not apply in relation to cheques. Clause 2: Supplementary 13.     This clause makes the supplementary provisions which are necessary as a consequence of the abolition of the funds attached rule. 14.     Subsection (1) provides that the Act will have effect only in relation to cheques which have been presented for payment after it comes into force. 15.     Subsection (2) applies the definitions used in the 1882 Act to the terms used in the Bill. Thus: "bill of exchange" has the same meaning as in section 3 of that Act, namely "an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed 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"; and "cheque" means "a bill of exchange drawn on a banker payable on demand" as defined in section 73 of that Act. 16.     Subsection (3) makes various consequential repeals. In particular, it repeals section 75A of the 1882 Act which was inserted by section 11 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 to deal with a problem which arose in relation to stopped cheques, in the context of the operation of the funds attached rule. Given the abolition of that rule, the problem which section 75A addressed no longer arises. FINANCIAL EFFECTS OF THE BILL 17.     The Bill is not expected to give rise to expenditure out of public funds. EFFECTS OF THE BILL ON PUBLIC SERVICE MANPOWER 18.     None are expected. REGULATORY APPRAISAL 19.     The Bill does not impose any additional costs on business. It is expected to result in significant savings of administrative costs for the clearing banks and the removal of expense and inconvenience experienced by customers of the banks. COMMENCEMENT 20.     The Bill will come into force two months after it receives Royal Assent.