We previously did a blog entry about commercial debts from business to business and how using the Late Payment (Commercial Debts) Act in the absence of any fixed interest rate in a contract, there is a statutory rate of 8% plus a penalty charge per invoice that can be applied to a debt. But how do you recover that debt? This blog entry is going to focus on the options available to you on recovering a debt. There are a number of ways debts can be recovered, this article will mainly focus on the options available at court.
A County Court Judgement is the first port of call if you are looking to take court action to recover a debt. There is a fixed procedure, we will focus here on small claims proceedings which are claims up to a value of £15,000.
Here is a summary of the procedure:
- Before issuing a claim, you have to file what is known as a pre-action letter or letter before action. It’s a letter that you send to the debtor setting out why you intend to make a claim, how much you are owed, what evidence you are relying upon, why they must pay the debt and inviting them to admit liability and settle the claim. It warns that if the claim is not settled or if the debtor fails to respond within a period of time (normally 21 days) then proceedings will be issued at court.
- If proceedings are necessary then there are two ways to do this, firstly through making a paper application using form N1 that can be obtained from the governments website gov.uk or by going to www.gov.uk/make-money-claim and using the money claims online system. Court fees will be payable when making the application and full details of those fees can found on form EX50 on the government’s website www.gov.uk.
- The claim form (form N1) contains details of the claim, the defendant, how much you are seeking and you must include a statement as to how the debt occurred and why you are seeking payment. Interest can also be included at this point.
- The court will then send the claim form to the debtor who has 14 days to file an Acknowledgment of Service form which the court provides and it invites the debtor to confirm whether they admit all or part of the claim, or whether they wish to defend the claim. If the debtor admits all or part of the claim then a court will issue a judgement with part acceptance, the defendant still has to file a defence for the element of the claim they do not accept.
- If the defendant decides to defend the claim, they then have 14 days (making a total of 28 days from the date they were served the claim form) to file a defence. The defence has to address each point in the claim form and the defendant has to say whether they admit or deny each section. Where part of the claim is denied they have to explain their reasons why it is denied.
- The court will then set a series of directions and encourage the parties normally to enter into small claims mediation which is a mediation service that takes place over the telephone where the court try and encourage parties to settle the claim early. The directions will normally set a date for trial and set out what the parties need to do to prepare for that trial, this includes filing all documents at court that they want to rely upon and prepare witness statements to support the claim/defence.
- The court will also make an order for the claimant, which in this instance will be the person trying to recover the debt, to pay a hearing fee for the trial. If the claimant is successful, that hearing fee will be added to the sums as well as the court fee paid when issuing proceedings that they are looking to recover from the defendants. It is important to note that with small claims proceedings, it is very rare to be awarded solicitors costs if a party is successful. The court will only usually award costs where it feels one party has acted unreasonably but the tests for this are very strict and it is difficult to recover legal costs in most instances.
- The trial will then take place, it is usually 2-3 hours in length where the parties will give their evidence and the judge will decide whether to dismiss the claim or award a County Court Judgement in favor of the claimant.
- If the County Court Judgement is awarded, the defendant will normally be given 28 days to make the payment in full and interest is added until the sum awarded in the claim is paid.
- If the defendant fails to pay the county court judgement within 28 days then the claimant can look to enforce that judgment and that is what we will focus on next.
Warrant of Execution
Most of you will have heard of County Court Bailiffs and seen programs such as ‘Can’t Pay, Take it Away’ where bailiffs are what are known as High Court Enforcement Officers recovering goods. A Warrant of Execution is an application that a person holding a County Court Judgement can make against a debtor. It involves applying to the court which does carry an additional court fee but again this is added to the debt. The court will then refer it to their bailiff who will set an appointment to see the debtor. The claimant will get notification of that appointment which will be at a specific date and time. The court bailiff might ask for some additional information on the debtor, such as alternative addresses, details of their appearance.
The bailiff then attends the debtor, normally at their home, and will seek to recover either a payment from that debtor for the County Court Judgement and any other court fees that have been added to it, or if they are unable to make the payment then they can recover goods to satisfy the claim. Those goods are then sold and the money from the sale proceeds are paid to the claimant to satisfy the debt.
Third Party Debt Orders and Freezing Orders
If the details of the debtor’s employers are known to the claimant then another enforcement method is to make a Third-Party Debt Order, this involves obtaining a court order which will be directed at the debtor’s employer to deduct a sum from their wages to pay the debt, usually its in installments until the debt is paid in full.
A Freezing Order can be made in respect of a defendant’s bank account whereby their assets or in most circumstances their bank accounts are frozen and the bank is ordered by the court to deduct money from that account to satisfy the debt, again, this will involve an application to the court and for the court to officially make an order which will normally involve a hearing. The debtors bank details would need to be known in order to be able to use this method.
A Charging Order is where the holder of a County Court Judgement applies to the court to have a charge, which would not be too dissimilar from the charge that you would have with a mortgage, secured against the debtor’s property. This is made through a court application, again there is an additional fee which is added to the debt. The court will then make an interim charging order allowing the claimant to secure a charge by registering it against the Land Register of the debtor’s home. Before using this method, the claimant has to be satisfied that they can prove that the defendant owns the property, usually by obtaining a copy of the Land Register for the property that will be subject to the charging order.
The court then set a date for a final Charging Order hearing, whereby the debtor has an opportunity to raise a defence and object to the charging order. A hearing will then take place and if successful the claimant will then be awarded a final Charging Order which can be secured against the debtor’s property.
Order for Sale
After a Charging Order is obtained, the claimant can then apply for an Order for Sale. In this instance, the claimant is asking the court to order that the defendant’s property is sold and from the sale proceeds, given that the person claiming will have a secured debt because of that Charging Order they will recover the monies from the sale of the property. This involves an application to court, which again includes another court fee but this is added to the debt. The court will set a hearing and the debtor will have an opportunity to defend that Order for Sale, some examples of a defence would be to state that it would cause the defendant exceptional hardship as the effect of an Order for Sale would be that they would have to vacate the property. Another might be, that the amount secured against the property is not sufficient to warrant selling the property, for example, if the house is worth £500,000 and the debt is only worth £500.
If the court decide to grant an Order for Sale then the debtor will normally be required to vacate the property and the claimant then puts the property on the market or places it up for auction and seeks to sell the property and recover the debt from those sale proceeds. If there is a mortgage secured against the property, they would get notification when the application for a Charging Order is made, so that they will have an opportunity to make representations at the hearing.
After all of the secured charges and this would include the County Court Judgement secured against the property and any mortgages are paid off, as well as the fees associated with selling the property then any surplus funds are paid to the debtor.
If the debt is £5000 or over then the person owed the money can apply for a bankruptcy order against the defendant. This does not involve obtaining a County Court Judgement although bankruptcy is an option after obtaining a County Court Judgement but it is not a necessity. It involves making an application to the court and then the court will set a bankruptcy hearing to determine whether to grant the bankruptcy. It can be defended by the debtor but they would have to show that they have means of settling the debt, i.e. that they are solvent. It does put the debtor in a difficult position though because if they prove to the court that they are solvent then they are obliged to pay the debt. It is also a risk however for the individual owed the money because they have to be sure that the debtor has sufficient assets so that they can recover the debt. Bankruptcy is an expensive process and there is a hierarchy of who gets paid from the debtor’s assets, it will go as follows:
- The trustee and bankruptcy or official receiver, i.e. the person administering the bankruptcy gets paid their fees first (they can in some instances charge as much as £400 plus vat an hour).
- Any secured creditors are then paid, i.e. mortgage companies who have a charge against the debtor’s property.
- Unsecured debtors are then paid, which is where the individual owed money in this instance would fall into, unless they had obtained a County Court Judgement and secured it against the debtor’s property. It is very rare, unless there are considerable assets, for creditors who are unsecured to get paid all of the money that they are owed and where there are insufficient funds to satisfy all of the unsecured debts, then they are paid a proportion according to the amount they are owed, for example, they may receive 20 pence for every pound that is owed.
- If there are any surplus monies, these are then paid to the debtor.
If you are owed money and you wish to proceed down the court route then the first thing you should be realistic about is you have to spend money to recover that debt through court fees and potential solicitors costs, as you have probably noted throughout the article most of these costs are payable upfront and although they are added to the debt, as we all know, a debt on paper is not the same as physically obtaining the funds. There are a wide range of options available but the key before determining whether to commence any court proceedings is to firstly exhaust all of the other methods in recovering the debt and secondly to be satisfied absolutely that the individual who owes the money has the means of settling it. There is very little value to proceeding down the court route, obtaining a County Court Judgement or even looking to make the person bankrupt if at the end of the day, they do not have funds to satisfy the debt. None the less, the options available to the individual owed money are extensive and robust and there are a number of different methods as you have seen to be able to recover debt.
This article is intended as a summary to give you an idea of what options are available. Each option has its own complexities and detailed procedure. If you are owed money or if someone is pursuing you for money and you would like further advice on any of the points in this article, detailed advice can be obtained by contacting our offices on 01341 281108, 01654 711499 or 01766 831882 or by emailing email@example.com