Bouncing all the way to the bank

With gloomy predictions of a credit crunch and economic downturn, inevitably more and more customers will be unable to pay for goods or services they have been supplied with. This may mean an increase in the number of suppliers who are paid with cheques that subsequently bounce.

The law is such that a cheque is treated as a bill of exchange and is therefore as good as cash. It is effectively a promise that payment should be made by the customer’s bank and that the debt will be honoured. By implication, if for some reason the bank does not honour the cheque, the customer will compensate you.

Are there any circumstances in which a customer has a defence?

The answer is not really, unless he can show that either there was no consideration given in return for the cheque (eg if he never received whatever should have been supplied) or that the cheque was obtained in respect of an illegal contract or in a fraudulent or unlawful manner. Unless one of these ‘defences’ applies, then a claim made against the customer is likely to succeed.

As supplier, you then have to decide whether to issue a court claim against the customer (followed by an application for summary judgment) or alternatively, to pursue insolvency proceedings against him.

How do you decide which route to take?

Top of the list is to consider the value of the debt and the potential legal costs involved. If the debt is under £5,000, it counts as a ‘small claim’. Accordingly, if you issue proceedings, you will not be entitled to recover your legal costs.

If the debt is over £5,000, your legal costs should be recoverable. However, you still need to consider the potential risks. Is it likely that you will have to enforce any judgment obtained? If so, does the customer have any assets available? One of the more secure methods of enforcing judgment may be obtaining a charge over the customer’s property, but that is not always an available option.

Insolvency proceedings can be an effective way of encouraging the debtor to pay up but can only be used for debts of £750 or more. Usually you issue a statutory demand, with the threat of a winding-up petition (if the contracting party is a company) or a bankruptcy petition (for an individual) to follow in 21 days if the debt is not settled.

The process of serving a statutory demand is relatively straightforward. Generally speaking, most customers will respond very promptly to avoid the risk of a petition being served upon them.

It is worth adding that, if a cheque has been returned as ‘refer to drawer’ (ie there are insufficient funds in the customer’s account), you are usually able to issue an immediate winding-up or bankruptcy petition, thereby speeding up the process.

As a supplier, whatever course you decide to take, it is important that you give notice to the provider of the cheque that it has been dishonoured and that he has a limited period in which to pay up. If you fail to do this and simply issue proceedings, you risk having to pay the customer’s costs.

As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.

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