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This is something many businesses
hear all too often when they are trying to chase their
unpaid debts. Debtors come up with ever more creative reasons
as to why the debt has not yet been paid.
Either that or the debtor simply
evades their calls and does not respond to the repeated requests
for payment.
So what can you
do?
Clearly if you can get the money
owed to you amicably, that is the best way. However, if having
tried everything the cheque never materialises, there are other
alternatives:
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1. Letter before Action
A solicitor's letter before action
is a formal and cost effective way which can prompt even a stubborn
a debtor to make payment. Such a letter is also a required
"tick in the box" stage before going ahead with Court action and
shows to the Court that you have tried to resolve the matter.
However, if the debtor still does not pay after receiving the
letter before action, there are two options available which both
have distinct advantages and disadvantages - statutory demands and
issuing Court proceedings.
2. Statutory Demand
What is a statutory
demand?
A statutory demand is a formal
written demand for payment of a debt that exceeds £750.00 within 21
days. If the debt is not paid, a creditor can present a
petition to the Court for a company's winding up or for an
individual's bankruptcy. Statutory demands are not to be used
where the debt is disputed on substantial grounds.
Why a statutory
demand?
This is sometimes the most cost
effective and quickest way of getting payment from a debtor.
Although the debtor may have ignored the letter before action, the
quick serving of a statutory demand upon them (usually by personal
service) should prompt payment due to the risk of being wound up or
made bankrupt.
Is it always plain
sailing?
No...
There are a number of potential
drawbacks. You will not be successful in petitioning for
bankruptcy of an individual or the winding up of a company if the
debt is disputed on substantial grounds. In these
circumstances you will likely receive an application from the
debtor to set aside the statutory demand or an application for an
injunction against you taking winding up proceedings. If you
do not consent to the application or agree to withdraw the
statutory demand you are likely to get a costs order made against
you if the application is successful.
However, if the debt is not
disputed on substantial grounds but the debtor still does not pay,
the next step would be issuing a petition for bankruptcy (for an
individual) or a petition for winding up (for a company). The
Court fees are considerable, owing largely to a deposit to the
Official Receiver, and no priority is given to you as the
petitioning creditor. You will end up being part of a pool of
all other unsecured creditors and receive only a percentage of the
realisations from the sale of assets, if anything, while having had
to pay the Court fees.
3. Issuing Court proceedings
What do we mean by issuing
Court proceedings?
This is a process whereby you issue
a claim in respect of a disputed or an undisputed debt. The
process is generally straight forward and, for undisputed debts,
quick. However, the process could be longer if the debt is or
becomes disputed. The level of Court fees is determined by
the amount of money you are trying to recover. If a debt is
disputed or becomes disputed after issuing proceedings, you can
continue to trial or, if appropriate, apply for summary judgment if
the defence is spurious. Once you have a judgment you
can then enforce it against the debtor's assets.
What are the pitfalls of
issuing Court proceedings?
Obtaining judgment against a debtor
is often the easy part. Getting them to pay is often more
challenging and the availability of assets against which to enforce
a judgment will usually determine whether it is worth issuing Court
proceedings. However, if you have no information
about the defendant's assets, once you have a judgment it is
possible to obtain an order that the debtor must attend Court and
provide information about their assets.
If someone else issues insolvency
proceedings against the debtor, this can have implications for any
Court proceedings you may have started or wish to start.
Final considerations
Knowledge is king and the more you
know about your debtor and their assets the quicker and easier it
will be to take the appropriate action. If you know that the
debtor has some assets but that there are other creditors, it may
be important to act quickly to obtain and enforce a judgment before
a winding up or bankruptcy petition is filed by another creditor as
the assets would then have to be shared among all of the
creditors.
However, if there are little or no
assets, it may not be worth the costs of obtaining a judgment
(especially if the debt is disputed) if there is little prospect of
being able to enforce it. In those circumstances, it may be
better to wait and see if another creditor will file a bankruptcy
or winding up petition, unless your debt is particularly large, in
which case you may wish to file a petition yourself.
The key tip is to find out as much
as possible about those you do business with at the outset and keep
your ear to the ground if you suspect they are falling into
financial difficulties.
The choice of which is the
appropriate debt recovery method will depend on the specific
circumstances of each case and you should obtain advice relevant to
your situation. For more information or to book a free
meeting to discuss how our Debt Recovery Department can assist you
please contact:
Sally Mouhim, Commercial Solicitor
Dispute Resolution: 01273 447068; sally.mouhim@acumenbusinesslaw.co.uk
Linden Talbot, Commercial Solicitor
Dispute Resolution: 01273 447075; linden.talbot@acumenbusinesslaw.co.uk
July 2012