Problem: Company stopped cheque after learning building company had entered administration
Unfortunately, the building company that I was the managing director of ceased trading earlier this year and subsequently entered into administration.
Shortly before entering into administration, the company received a cheque from a client in relation to an interim payment application that had been made under a building contract for work being carried out for the client. No doubt the client learned that the company had entered into administration shortly after issuing the cheque, and it was stopped.
I am now assisting the joint administrators in collecting the debts whilst the company attempts to re-structure itself. I have seen that you have previously written about the cheque rule, but wondered whether this rule applies where a company has entered into administration?
Response: Using the cheque rule when in administration
The cheque rule is where cross-claims or defences are not permitted when proceedings are brought on a bill of exchange. I see no reason that a cross-claim or defence could be successfully raised by the party that issued but then stopped the cheque, where a company is in administration.
There is no authority to support the suggestion that a company in administration would be sufficient to defeat the cheque rule. Further, it would seem that where a company is in administration, there is actually real justification for the cheque rule to apply, as the consequence of administration is to bring about a temporary moratorium on enforcing rights and debts against the company.
The intention is to give the administrators the time to formulate and lay proposals before its creditors with a view to reviving the company, as opposed to allowing it to be destroyed, and any form of withholding payment on the basis of the company being in administration goes against that intention.
I suggest that a letter is initially drafted to the company that stopped the cheque, and if payment is not forthcoming within a given period, then Part 7 proceedings are issued in the normal way, and an application for summary judgement under the Civil Procedure Rules Part 24 at the appropriate time.
© Michael Gerard 2016
The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.