Given the current climate of economic turmoil, many companies will fall into cash flow problems. This article is written to provide some options on things to consider staying on top of bad debts. When reminder emails and chaser letters to debtors are not working, here are some other legal tools available for debt recovery or seeking payment.
The route to take will depend on whether the debt is disputed or undisputed, the party being pursued (individual or company), and the amount.
Insolvency – Undisputed Debts
Although this is not a debt recovery process, threatening to make your debtor bankrupt / insolvent may help you achieve a resolution quickly as it forces the debtor to act or risk insolvency.
A statutory demand is usually the pre-cursor to insolvency proceedings. It is a written demand for payment of an undisputed debt that can be issued against an individual or company. A statutory demand can be used against individual debtors owing £5,000 or more and against companies owing £750 or more. If the demand is not paid within 21 days by the debtor, it creates (as far as the court is concerned) a presumption that the debtor is insolvent and can be used as the basis to issue a bankruptcy (for an individual) or winding up (for a company) Petition.
As it does not involve the courts, sending a statutory demand can be a fast and inexpensive legal tool to recover a debt. However, creditors should bear in mind the potential negative impact issuing a statutory demand may have on any ongoing trade relations. What may be a better solution to managing ongoing trade relations would be to discuss alternative repayment plans where fees are paid in instalments over a longer period.
Bankruptcy or Winding-Up Petition
If a debtor still does not pay within the 21 days following service of a statutory demand, you might consider issuing a bankruptcy / winding up petition in court. A petition must be signed and dated by the creditor or their authorised representative. The petition will include (but is not limited to) details of the creditor and debtor, statement of the value of the debt, evidence of the debtor’s inability to pay, dates to comply with, and rights of the creditor and debtor.
Accordingly, the threat of bankruptcy or winding-up petitions often prompts debtors to pay; in practice, those who can pay will at this stage to avoid further legal action. However, creditors should be aware that if a bankruptcy or winding-up petition is granted, it does not guarantee repayment of the full debt. Instead, the Official Receiver/Trustee who has been given responsibility for administering the debtor’s assets will have an order of priority for those that have outstanding charges or debts that need to be fulfilled. More commonly, creditors will receive a percentage of what was owed to them, but not the full amount.
Claim in Court – Disputed Debts
In the event the debt is disputed, a claim at court will be the most appropriate venue. A claim at court can also be used for undisputed debts and provides another legal avenue for debt recovery.
A claim form with the particulars of the debt must be filed at court along with a court fee. The debtor will then acknowledge and respond to the claim by a certain deadline (usually 28 days). If disputed, the debtor would also file a defence and the claim would be allocated to a particular track (small claims, fast track, and multi-track) depending on the value of the debt and the level of complexity of the case.
If the debtor does not acknowledge the claim or file a defence, the creditor can apply for judgment in default. They may then enforce the judgment debt (which will include interest and costs) against the debtor if the debtor continues not to pay (see below regarding enforcement).
If a defence is filed, the case is set down for trial. It is at this point that the process can become costly (if legal representatives are instructed) and protracted (it can take over a year for even the most straightforward cases to be tried).
Enforcement of a Judgment
Once a judgement is handed down, examples of enforcement action include obtaining a writ or warrant of control (seizing the debtor’s assets), a charging order (i.e. securing the debt), an attachment of earning order (paying the debt out of the debtor’s salary), or a third party debt order (if the debtor is owed money, it is instead owed to the creditor).
A writ or warrant of control authorises enforcement agents (they used to be called ‘bailiffs’) to seize and sell the debtor’s assets, and use the money raised to satisfy the debt owed. A couple of things to bear in mind with this enforcement action is the value of the goods: (1) goods sold by auction usually sell for less than their true worth, and (2) whether the goods are exempt from seizure such as hired goods – only goods owned outright by the debtor can be seized.
A charging order over the debtor’s property requires the debt to be paid off from the proceeds of any sale or re-mortgage. The creditor should first consider how much equity is available in the property; mortgage companies and other charges with a higher priority will have to be paid out first. Also, if money is being paid from a sale, this may take some time for the creditor to receive payment given that a charging order and an order for possession and sale will have to be obtained first.
An attachment of earnings order instructs employers to deduct the Judgment Debt from the debtor’s salary. This method is limited as it can only be used against an individual debtor who is employed and cannot be used against company debtors.
Lastly, a third-party debt order allows a creditor to directly receive any money that is owed to the debtor from a third party. Although considered the safest option when considering enforcement methods, the third party must be within the jurisdiction and the debt must wholly belong to that debtor; orders cannot be made against joint debts. The creditor should ensure that the third party can pay the debt and consider whether instalments or a lump sum may be more appropriate. If the third-party debt order is made against the debtor’s bank account, the creditor should consider how much credit is available.
Accordingly, a judgement against the debtor could produce various methods for enforcement. However, creditors should be warned that these methods come at additional costs, are dependent on the debtor and their assets and circumstances, and, like bankruptcy or winding-up petitions, may not guarantee a full recovery.
This article is provided by Jarmans for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Mr Pavan Sokhi or write to us using the contact form below.