Debt Recovery: Some Practical Pointers

Author: scott
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Is it Really Worth it?

  • Court action to recover a debt may result in a court “decree” saying the debtor must pay – but if he or she has no money the decree may not be worth much in practice: “you can’t get blood out of a stone”.
  • Some checks may help assess the likelihood of the debtor’s being able to pay:
    • It is possible to arrange for various forms of “credit check” on a debtor – usually for a small fee;
    • The Companies House website Companies House will give a range of information about a limited company debtor; and
    • The Accountant in Bankruptcy’s website Home | Accountant in Bankruptcy can show whether a debtor is bankrupt or has entered into a “protected trust deed”.

Credit Checks, Limited Companies, & “Statutory Demands” 

  • If a company debtor is a consistent slow-payer, or if a credit check or Companies House information suggest that the company debtor is in a bad way financially, then it may be worth considering a “statutory demand”.
  • In outline, if a company is “unable to pay its debts”, then a creditor may petition to get the company “wound up”.
  • If a creditor serves a “statutory demand” (under section 123 Insolvency Act 1986) for a sum exceeding £750 then unless within 21 days the company either (i) pays up or (ii) gives a genuine denial that the debt is due – that will count as showing that the company is “unable to pay its debts” and so the creditor could petition for the “winding-up” of the company.
  • For a company which is a going-concern that can operate as an effective lever to make it pay up.
  • But “statutory demands” are no “magic wand” – a little more is said about them at the end of this Note.

Details About Debtor to Facilitate Recovery 

  • Details about the debtor, supplied when the goods or services were provided, may help recovery of a debt further down the line. For example:
    • Bank Account details will assist freezing (“arrestment”) of the debtor’s bank account  to facilitate payment (as long as the account is actually in credit).
    • If the debtor is a sole trader then the business name and trading address as well as the home address of the debtor will facilitate recovery of the debt.
    • If the debtor is a partnership its name, trading address, and the names and home addresses of the individual partners may again facilitate recovery of the debt.
    • If the debtor is a company the correct company name and company number is a good start. 

If the Debt is Due for a Business Transaction do you have “Standard Terms of Business”? 

  • The general advice (albeit sometimes difficult to apply in practice) is for a customer debtor to sign any standard terms and conditions, and any other confirmation, before any goods are delivered or any services performed. 
  • In any event, standard terms of business often address central issues and, again, may help in the recovery process, for example:
    • the period of credit (often 30 days);
    • interest due on late payment (consider also the Late Payment of Commercial Debts (Interest) Act 1998 in a “business to business” contract where an entitlement to “statutory interest” may apply);
    • the period allowed for inspection of goods or certification of work done;
    • the customer debtor’s full names and address; and
    • any “retention of title” clause under which the seller may retain ownership of the goods – even though they have been delivered.

The “Pre-sue” Letter 

  • This should take the form of a letter from the creditor’s solicitor requiring payment of the debt within a specified time. In particular the letter:
    • should state how the debt has arisen; the basis of the claim; how much is due; and, if terms and conditions exist, these should be referred to;
    • should state a specified date by which the debt must be paid – as opposed to e.g. “seven days from the date of this letter” which may prove equivocal;
    • should make clear that if payment is not made then court action will be commenced to recover the debt, judicial expenses, and interest;
    • may make reference to “diligences” (i.e. methods of enforcing the decree) available to the creditor if a court decree is obtained, and possible consequences to the debtor’s credit rating if the decree were reported to a Credit Reference Agency.

Further Points About the “Statutory Demands” Mentioned Above 

  • As noted above, for companies the “statutory demand” procedure is available where the debt is more than £750.
  • In relation to individuals that minimum is, for general practical purposes, £3,000 (sections 5(4) and 7(1)(d) Bankruptcy (Scotland) Act 1985; and Bankruptcy (Scotland) Regulations 2008/82 (Scottish SI)). 
  • In either case, if the debtor fails to pay, then – subject to various conditions – the creditor may be entitled, 21 days after the “demand”, to go ahead with “insolvency procedure” i.e. the bankruptcy of an individual or the winding-up of a company.
  • The prospect of those possibilities can be a valuable lever in persuading a debtor to pay. But, again, if the debtor simply cannot pay because of there being no funds the “statutory demand” is of little avail.

Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Paul Neilly: pdn@mitchells-roberton.co.uk

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