Does your company receive payments by check? If so, you may be exposed to a hidden risk that can freeze your cash flow without the debtor being subject to any sanction.
A Federal Court has recently confirmed that a check remains legally valid even if the drawer’s (debtor’s) signature appears outside the designated signature space.
In such a case, the bank must honor the check (unless there are insufficient funds or the bank has been notified that the drawer is subject to insolvency proceedings). However, this circumstance opens the door to disputes and procedural delays that may postpone collection for several weeks.
Why could this situation be concerning?
Unlike cases where a check is dishonored due to insufficient funds—where the drawer is required to pay at least 20% of the face value of the check if the lack of funds is attributable to the drawer—in these situations no statutory sanction applies to the issuer of the check, even though the payee may suffer delays in collection.
In practical terms:
Your company may receive a check that appears to be properly completed and that does not lose its legal validity, yet its effective collection may be delayed.
Result: direct adverse effects on the company’s liquidity.
What should companies do?
Implement a mandatory internal protocol for the review and acceptance of checks, which should include:
👉 Guidelines to identify potential risks arising from omissions or legal ambiguities that do not trigger sanctions against the drawer, as well as
👉 Recommended actions to mitigate such risks.
Such actions should specify the circumstances under which defectively completed checks should not be accepted, even if they appear to be properly filled out, as well as critical elements to be verified when reviewing checks and other negotiable instruments.
This protocol will enable companies to identify scenarios in which payments may be deferred and reduce the likelihood of becoming entangled in litigation that may compromise the company’s liquidity.
The court’s decision does not constitute binding precedent and merely represents a non-binding but highly useful interpretative criterion.
