How to deal with Bad Cheques

What action can you take if you get a cheque from your customer but that cheque bounces?

On the face of it, your customer has a problem. Under law, when you write a cheque to someone you effectively promise that the cheque will definitely be honoured by your Bank, and if for whatever reason the Bank does not honour the cheque you imply that you will compensate that person in full.

So, if your customer’s cheque is not honoured or is stopped by the customer (for example, because they are unhappy with the goods or services you supplied to them), you can immediately sue the customer and there is virtually no defence that the customer can raise to that claim. You can claim not only the amount of the cheque, but also interest on that money and payment towards the costs you incur in chasing up payment.

In most cases, where you sue on a cheque in this way, you will get an early judgement against the customer, with no need to go through the expense and rigmarole of a full Court case.

Is there anything the customer can do when you sue him?

The problem for the customer is that even when they are unhappy with the goods or services you supplied, this is no defence to your claim for payment. There will only be a defence to your claim in two situations:

1. If the customer can prove that they received absolutely nothing from you in exchange for their payment, this may legally justify their stopping the cheque. If, however, they obtained even very deficient goods or services from you, this removes this defence from them and you will still get judgement against them (it might be different if you failed to supply any goods or services at all)
2. The only other defence they can raise is where the contract with you was illegal or you obtained the cheque from them in a fraudulent way.

If neither of these two defences can be raised, your claim will succeed, you will get judgement, and you can then proceed to enforce that judgement if the customer still does not pay you voluntarily.

The Position Worsens...

A further problem for the debtor arises where the cheque is not honoured because it has been returned by their Bank marked “refer to drawer”. This means that there are insufficient funds in the debtor’s account and, legally, this is proper evidence that the debtor is unable to pay his or her debts as they fall due. This opens up another way for you to recover payment which can be far more severe for the debtor (provided the debit is for £750 or more). If the debtor is a limited company, you can write to them demanding immediate payment, and if they do not then pay up, you can start winding up proceedings against them - there is no need for you to serve a separate and formal statutory demand on them which is the normal pre-requisite to commencing winding up proceedings and which gives the debtor about three weeks “breathing space”.

If the cheque is dishonoured for some reason other than “refer to drawer” (e.g. where the debtor actually stops the cheque) these severe proceedings are still available to you (again provided the amount outstanding is £750 or more), although you will have to serve a statutory demand first.

Direct Debits

The law applicable to cheques is now also applicable to direct debit payments. So, if a customer cancels a direct debit payment to you, you will be entitled to sue immediately. Like cheques, direct debits must be honoured unless there has been a total failure on your part to provide goods or services, or the contract between you and your customer is illegal or you have acted fraudulent.

What if your customer has supported their cheque with a cheque guarantee card?

If you get a cheque guarantee card when the customer pays, you are in a better position than you would otherwise be, as the Bank must then honour that cheque whatever happens. However, the Bank is only obliged to pay you provided you have complied with the following conditions:

• The payment must not exceed the maximum amount stated on the cheque card
• The transaction has to be before the expiry date stated on the card
• The cheque must be from a pre-printed cheque book
• The cheque must be signed in your presence
• Details of the card (number, expiry date etc) must be written by you on the back of the cheque.

Wherever possible, therefore, a cheque card should be asked for and the above conditions complied with.

Multiple Cheques

A problem that arises in relation to cheque cards is where the total amount of the purchase exceeds the amount stated on the cheque card but you accept several cheques from the customer, each of which is below the amount stated on the cheque card. You should be careful of accepting payment in this way - the Bank is not obliged to pay. Only one cheque may be used for payment in a single transaction.

The other side of the coin

You can now see the rights you have where a customer pays you with a cheque or by direct debit. There is another side to the coin however - where you use a cheque or a direct debit to pay. Everything that is set out above in relation to your customer applies equally to you.

So, if you are considering cancelling a cheque or direct debit because you are dissatisfied with the goods or services which you have received, this is no defence to the claim that your supplier will inevitably bring against you. You will then be embroiled in a Court action, and you will have to pay not only the debt but also interest on it, together with your supplier’s legal fees.