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D Michael Rose

Q: Overdue payment from insolvent agent

My cheque from an agent has bounced and insolvency action is pending against the firm. Do I have any chance of getting my money back?

A: It depends entirely on the financial position of the agent. Failing to honour a cheque for no good reason other than lack of funds is sufficient evidence to justify commencement of insolvency action. In the case of an individual or partnership this would be by means of a bankruptcy petition, or in the case of a company by a winding up petition to the court.

However, the minimum amount of indebtedness necessary for the presentation of such a petition is £750. Otherwise some other method of recovery would need to be pursued, such as court action on the debt to obtain judgement, followed by enforcement measures such as seizure and sale of the debtor's chattels (if any) by court bailiff, or attachment of debt or attachment of earnings or other appropriate means. In my column in the issue of The Stage dated May 3, 2001 (see ‘Enforcing Claims Court Action’ in Using The Law) I listed the various enforcement methods available, to which reference may be made in case of need.

In the present instance I note that insolvency action by someone else is pending against the debtor. In that case, you may find that the best and cheapest course is simply to monitor and support the action already initiated by another creditor. It is desirable that you should give formal notice of supporting the insolvency action by the other creditor concerned, so that, if your debt is of sufficient size, you can 'take over' the conduct of the insolvency petition if the petitioner seeks to withdraw it (perhaps because he is paid off by the debtor). This can be done without the approval of the court prior to the petition being advertised but only with approval of the court after advertisement.

You should look carefully at the cheque to see by whom or on whose behalf it has been signed, because if the cheque is drawn by someone other than your agent you may have a right of action against the drawer as well as your agent.

Also, if it is a cheque which has been drawn by someone else other than your agent and endorsed over to you by the agent, then you may need to give formal notice of dishonour to other parties on the cheque, against whom you may have a good cause of action. That aspect of the matter is rather technical and, if the cheque is not drawn by the agent, it would be as well for you to let your solicitor have sight of it to enable him to advise you whether it gives you any rights against a third party.

If your agent is made bankrupt or, in the case of a company, made the subject of a winding up order, you will probably be notified. But in any event, you should make sure that your claim is formally lodged with the trustee in bankruptcy or liquidator as the case may be.

It will be for the latter to realise the debtor's assets - such as they may be - and apply the net proceeds towards paying off the debts pro rata to their respective amounts. This will be subject to certain debts being given priority, either because they may be secured in some way or because they are classified in law as 'preferential' to be paid in priority to the general body of creditors.

Whether or not you get paid in whole or in part depends on whether the debtor (in this case your agent) has assets sufficient to realise - for ordinary unsecured and non-preferential creditors such as yourself - more than or at least part of what he owes, which is something only investigation and enquiry will reveal. It may not be much consolation but from what you say it seems possible that the agent may have committed an offence because, under existing employment regulations, he should have paid you within ten days of his receipt of your money. Alternatively, if authorised by you in writing to retain your money for any longer period, he should have held it in a special client account used only for deposit and distribution of clients' money thereby ensuring that such a cheque would not bounce.

The conduct of such a client account is tightly controlled under statutory regulations made in 1976. A breach of those regulations could result in the agent being fined and/or prohibited from carrying on such an agency business. You might therefore think it desirable to let the agent know that you intend to report him to the Employment Agency Standards Directorate of the Department of Trade and Industry. This may encourage him to pay up.

However, in view of his apparent insolvency, if he now for whatever reason offers to pay you what he owes, you should try to ensure that he arranges for a third party to make the payment so that it will not be treated as an unlawful preference and recoverable from you for the benefit of his creditors generally.

In any event, it seems desirable in the circumstances that you should terminate the agency appointment as soon as practicable and get yourself another agent.

First published February 2002