Recovering Debt
Written by Jamie Carr | Commercial Dispute Resolution | 26th Jan 2022
Cash flow is important to any business and we are often asked to advise on what options are available to creditors in recovering their money or debt. This has been particularly important over the last 18 months, with unprecedented commercial pressures caused by the pandemic and associated lockdowns.
Early negotiation with debtors can be crucial, and, in many cases will prove successful in securing payment or an agreeable payment plan. However, in some cases, it will not be enough and it is vital that businesses understand the options available, and the economy of these options, in seeking to recover their money.
There are two main approaches for recovering unpaid invoices (which are classed as a debt); either through instigating court proceedings or through seeking bankruptcy or winding up of the debtor. Both procedures can be instigated against businesses and individuals, however, there are procedural differences depending on which one is the other party.
Pursuing the debt through the courts
Court proceedings should always be considered the last resort in recovering debt and the court will have expected the parties to have tried all reasonable means to resolve the matter outside of court. It is very important therefore that you follow what is known as the “Pre-action Protocol” and send a “letter before action” to the debtor before you approach the Court.
The letter before action will set out the basis of your claim and the total amount you are claiming. It is often a productive way of opening up a dialogue with the debtor and can be the first step towards meaningful negotiations. Here at Nash & Co, we have a debt recovery pricing structure which can be seen by following this link –https://nash.co.uk/business/commercial-dispute-resolution/asset-and-debt-recovery/
Where you are attempting to recover a debt from an individual (including a sole trader) you will be expected to follow the “Pre-action Protocol for Debt Claims” and allow the individual 30 days in which to respond. Whereas, with business debt, there is a more general Pre-action Protocol that allows them 14 days to respond.
If, after the pre-action stage, the debt remains unpaid, you will need to consider, in the absence of any acceptable payment proposals from the debtor, whether to class the debt as a “bad debt”, accepting that it may never be repaid, or take steps to refer the matter to court.
Obtaining a court order for an undisputed debt is generally straightforward. You will need to prepare and file a claim with the court. The court fee payable is dependent on the size of the debt. Once your claim is logged, the Defendant will have 14 days in which to respond. If they do not defend the claim, you will be entitled to ask the court to enter judgement after the expiry of the 14 days.
However, receiving judgment means very little if that judgment is not paid by the debtor. Where a debtor does not pay the judgement debt, you can ask the court to enforce the same against the debtor.
The most appropriate method of enforcement will depend on the debtor’s circumstances. Options include appointing a bailiff (who shall seek to take the debtor’s property in recovering part or all of the Judgment debt), obtaining a charging order against a property (this secures the debt against the Debtor’s property), a third-party debt order (where the court orders a bank to transfer funds directly to you) and an attachment of earnings order (where a court orders the debtor’s employer to pay part of the debtor’s wages directly to you).
Enforcement action is comparatively inexpensive. However, it is important to obtain as much information on the debtor as possible to understand what method of enforcement may be both suitable and effective. I generally advise our clients to consider the following: –
Does the debtor own valuable goods?
Does the debtor own any property?
If so, is there likely to be any equity in the property?
Is the debtor employed?
Do I know the debtor’s bank account details i.e. sort code and account number?
Whilst you may not have all the information above, it is important to consider what information you do have on the debtor. There is no value in proceeding to court if the debtor is unlikely to have the funds to repay the debt. I go into more depth on enforcement methods in our Recovering your Money article here – https://nash.co.uk/business/commercial-dispute-resolution/asset-and-debt-recovery/commercial-debt-recovery-services/
Petitioning for the debtor’s insolvency
If any negotiations with the debtor are unsuccessful and it appears that the debtor cannot afford to pay the debt, you may also have the option to pursue the debtor’s bankruptcy (if they are an individual) or winding up (if they are a company).
The first step is normally to serve what is referred to a statutory demand, demanding payment of the full debt within 21 days. If this is not paid you will, if the size of the debt meets the relevant threshold, be entitled to issue a petition against the debtor.
Petitions can only be pursued if minimum debt thresholds are met. This is currently £5k for individuals and £10k if the debtor is a business.
Serving a statutory demand on its own can have a powerful effect on debtors as it opens the door to their potential insolvency, which most debtors will want to avoid.
Before issuing a petition, it is important that all reasonable steps are taken to establish the amount you are likely to recover. Whilst winding a company up or the bankruptcy of an individual can yield a recovery, creditors will often find themselves in a position where they recover very little, or nothing. In simple terms, you may be in a situation where you throw good money after bad.
This is important because issuing a petition can be expensive, as a creditor is required to pay an initial deposit up front, alongside the court’s own fee, which is intended to cover the trustee in bankruptcy’s initial fees. This means administrative fees of £1,600.00 before any legal costs are incurred.
Once a petition is issued, the debtor will have the option to challenge the petition and the court will, ultimately, list a hearing at which the application will be heard. The court may finalize the bankruptcy or wind up at that hearing, adjourn the hearing for further information or dismiss the petition. In general terms, a court will not finalise the bankruptcy or winding up if it appears that the debt is disputed or, if prior to the hearing date, it has been paid.
The best approach, when considering how to recover debt, will depend on a myriad of factors, which include your relationship with the debtor and the value in securing any business relationship moving forward. The size of the debt and likelihood of recovery will always be important and will inform what options are available. Ultimately, a view will need to be taken on the economy of taking steps against the debtor.
Can we help?
Our experienced team would be happy to help with any queries which you may have and would be happy to discuss how we can help you.
Speak to an Asset and Debt Recovery Solicitor
You can call Jamie Carr, Head of Commercial Disputes, on 01752 827014 or email him on jcarr@nash.co.uk
