Does your customer owe you money? Is s/he ignoring your requests or refusing to pay for no good reason? What should your next move be? Here’s what you need to know about debt recovery, court orders and judgement enforcement.
The debt recovery process
There are four main stages to the legal process of collecting a UK business debt –
- Final Demand
- Legal Proceedings
- Court Judgement
- Judgement Enforcement
1/ Final Demand
Before issuing any legal proceedings you should first send the debtor a Final Demand, a formal letter which sets out what is owed to your business. It gives your customer a set time period (usually 7 days) in which to pay, and makes clear your intention to issue legal proceedings if payment is not received accordingly. Read Credit Control, Cash Flow and Late Payers for information on how to write a final demand letter.
2/ Legal Proceedings
If you do not receive a satisfactory response to your final demand then your next move is to issue legal proceedings through the County Court. You can do this easily enough through the ‘Small Claims Court’ if you’re owed under £10,000 or Money Claims Online if you’re recovering less than £100,000 from either a sole trader, two persons in a partnership, or a limited company. Under the County Court Act interest is also claimable at 8% per annum.
An alternative to issuing a County Court claim is to commence insolvency action. If you’re owed £5000 or more by a sole trader or a member of a partnership, or a company owes you and any other creditors £750 or more, you can complete a Statutory Demand form and deliver it personally to the individual or business owing you money. Once served, they have 21 days to respond. If they ignore the Statutory Demand or fail to make a satisfactory payment arrangement you can petition the court to bankrupt the debtor or ‘wind up’ the company.
Bear in mind the upfront costs of issuing proceedings can be high. There is no guarantee that you will get any of your money back.
3/ Court Judgment
If you go ahead and issue proceedings the debtor will be obliged to respond. S/he may pay your money claim in full. However, s/he may also choose to defend the claim, ignore the claim, or admit the claim and ask the court for time to pay. You might have to attend the court to make your case in person. Judgment will be entered accordingly unless the claim is struck out due to some procedural error on your part.
Once judgment has been entered the defendant will be told how much to pay, when to pay it and where to send the payments. The payments should be sent to you and not to the court. The judgment will also be entered on a public register by Registry Trust Limited so that it will appear on the defendant’s credit report.
4/ Judgement Enforcement
Sadly, obtaining a court order may not be enough to persuade the debtor to pay you what they owe. If s/he fails to make payment as ordered you will have to apply to the court to enforce the judgment. The most common enforcement methods are described below. Each of these enforcement options will require you to complete another court form and pay a further court fee.
Is the debt worth enforcing?
Enforcement action is only worth taking if the debtor has assets that can be seized and sold. If the debtor has no assets then trying to enforce the judgement is likely to result in you throwing away more good money for nothing.
You need to gather as much information as possible about the debtor before going ahead with enforcement proceedings. The questions you need answering include:
- Is s/he employed? If so, by whom? How and when does s/he get paid?
- Is s/he a business owner? If so, where is the business based and what is its financial position?
- Doe s/he own land/property? If so, where is it and what is its value? Is there a charge against it? Is the charge satisfied in full or part satisfied?
- Does s/he own goods of significant value (cars, machinery, office equipment, jewellery, etc)? If so, where are these goods kept and what is their likely value? Are there any credit or hire purchase agreements involved?
- Does s/he have insurance covering the liability to you?
- Is s/he owed any money by a third party? If so, who are they and what is the likelihood of them paying or having assets?
- Does s/he have other debts? If so, what are the amounts and are they secured or unsecured?
- Does s/he have any outstanding court judgements? If so, what are the amounts?
- Has anyone sent in the bailiffs? Has anyone obtained an attachment of earnings or any other enforcement order? Has anyone issued a bankruptcy petition? Has an administration order been made?
Getting the information
The easiest way to obtain this kind of information might be to ask someone who knows the debtor personally, although chances are they will be reluctant to give you any details.
Fortunately there are other ways to get the information you need without breaching any confidentiality or data protection issues. You can:
- Check the Insolvency Register to see if the judgement debtor is bankrupt or subject to an Individual Voluntary Arrangement (IVA), debt relief or any bankruptcy restriction.
- Conduct a land registry search to establish ownership of any address you have for the judgment debtor.
- Consult the Attachment of Earnings Index.
- Check the Register of Judgments, orders and fines.
- Search Companies House to obtain basic information plus the latest filed accounts for any registered company or limited liability partnership.
- Search the Bankruptcy and Companies Court, the London Gazette and Companies House to check for any insolvency procedures against a company.
- Use the WebCheck service on the Companies House website to see if the company is in administration, administrative receivership or liquidation.
- Request the Court to issue a summons for oral examination. The debtor will be obliged to attend the court and answer, on oath, questions about their income, expenses, assets and debts.
If your enquiries reveal that the judgment debtor is (or likely to become) insolvent, it’s probably not worth taking any enforcement action. There are statutory restrictions on pursuing claims against insolvent debtors, and if you’re not a secured creditor you will be unlikely to receive the full amount of the judgment debt as your claim will not be a priority consideration.
However, if the judgement debtor does have assets and you have a fairly good idea what they are and where they are, you can make a much more informed decision on whether or not to enforce your court judgement. Your knowledge of the debtor and the assets s/he is holding will enable you to choose an appropriate enforcement option.
The most common enforcement actions include:
- Freezing Order
- Attachment of Earnings
- Warrant of Execution
- Third Party Debt Order
- Charging Order
If you suspect that that the judgment debtor will attempt to hide or otherwise dispose of any assets that could be used to satisfy the judgment debt, you may need to act swiftly and apply for a Freezing Order or Freezing Injunction. An application for a freezing injunction is most often made prior to court proceedings being issued. However, a freezing injunction can be sought during the course of proceedings or even after judgment is given, to prevent the disposal of assets before the judgment is enforced.
If the debtor is employed you can apply to the court for an Attachment of Earnings Order. If granted, money will be taken from the debtor’s wages and paid directly to you.
You can make an application to the court for a Warrant of Execution, an order that instructs bailiffs (or sheriffs) to take seizure action against assets owned by the debtor.
You can apply to the court for a Third Party Debt Order. If granted, any sums owing to the debtor that are held by a third party (the debtor’s bank or a customer of the debtor, for example) will effectively be frozen; the judgment debtor will not be allowed access to that money until the court makes a decision about whether or not the money should be paid to you.
You can apply to the court for a Charging Order against any freehold property owned by the debtor. If the Charging Order is granted you will effectively hold a legal mortgage over one of the debtor’s properties and you can then pursue possession and sale of that property.
Be aware that the judgement debtor can respond by applying to Set Judgment Aside if s/he feels that judgement has been entered incorrectly. S/he can make an application to vary the terms of the judgement and/or suspend enforcement by providing the court with a Financial Statement (i.e. a list of income, expenses and debts) demonstrating an inability to pay your debt in full. Most likely s/he will be granted a Variation Order allowing payment by installments. Only if s/he defaults will you be able to make another enforcement application.
If someone owes you money and payment is seriously overdue you should send them a properly worded Final Demand. Most business owners will pay up rather than the risk damage to their reputation and credit rating, however if you do not receive a satisfactory response then your next move is to issue legal proceedings.
The upfront costs of litigation can be high and you may not get any of your money back. Even if your money claim is successful the judgement debtor may still ignore the court order. It’s only worth enforcing a judgement if the judgement debtor is holding assets of significant value.
Related post – Credit Control, Cash Flow and Late Payers
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