Insights

A Brief Guide to Debt Recovery & Legal Action 

In light of the ongoing, and seemingly never-ending, economic crises, many individuals and companies continue to fall into cash flow problems. This article is written to provide a summary of the legal options one may consider so as to recover outstanding debts and seek recourse.  

Once chaser correspondences such as letters, messages and emails prove futile, yet provide a paper trail of attempts to recover the bad debt, you may consider the following options which the law provides. Each option will differ depending upon the capacity in which one attempts to recover the debt, be it as an individual or as an entity (e.g. a company), or if the debt is disputed or undisputed and the value of the debt. 

  • Litigation

Should a debt be disputed between parties, and having exhausted pre-litigation through instructing a solicitors practice, a claim at Court will be the most appropriate option. It is worthwhile emphasising that a claim at Court can also be used for undisputed debts and provides an avenue to cement repayment, for example. 

In order to litigate in Court therefore, the procedure requires that a claim form (N1) is filled out along with a particulars of claim and any supporting evidence, which must be filed at Court along with the appropriate court fee. The defendant, or debtor, will thereafter be required to acknowledge and respond the claimant’s, or creditor’s, claim within a specified deadline, ordinarily 28 days. Should the matter be disputed by the debtor, the debtor has the option to file a defence and the matter would consequently be allocated to a particular track, which is dependent upon the claim value and the complexity of the matter. These are the small claims, fast track, intermediate track (introduced as of 1 October 2023 and concerns the recoverability of costs) and the multi-track.  

The Court will thereafter issue directions with which parties will be required to comply within a specified deadline. The matter may merit a trial, the length and scale of which will vary depending upon the track allocation of the matter. 

In the event the debtor does not acknowledge the claim or fails to dispute the claim in part or in full by not providing a defence, the claimant can apply for a default judgement. Should the debtor still not comply with the outcome of the default judgement, the creditor may consider enforcing the judgement, including interest and legal costs, against the debtor.  

It is worth noting that should a matter proceed to trial, one is expected to incur high legal costs in the event a barrister is required to provide representation in Court and should the matter protract.

  • The Enforcement of a Judgement 

If the Court provides judgement in the creditor’s favour, be it default or by being successful at trial, examples of enforcement of that judgement include obtaining a warrant of control in order to seize the debtor’s assets, obtaining a writ, a charging order upon an asset for example so as to secure the debt at a future date, an earnings orders which includes paying the debt out of the debtor’s salary, or through a third party debt order. 

Accordingly, a judgement against a debtor could provide a variety of methods for enforcement. However, such methods are subject to additional costs and dependent upon the debtor, their circumstances and assets. Therefore, the enforcement of a judgement does not always guarantee the full recovery of a debt.  

  • Insolvency – An Undisputed Debt 

While insolvency is not a debt recovery process, threatening to make your debtor insolvent or bankrupt may help you to achieve a resolution for the matter, since it forces the debtor to take action or risk becoming bankrupt.  

A statutory demand is often the pre-action required to insolvency proceedings. This is a formal and written demand for payment of an undisputed debt that can be issued against an individual or company. If the individual debtor owes £5000 or more and if an entity/company owes £750 or more, then the statutory demand threshold is met. In the event that the demand is not paid within 21 days, then the Court will presume that the debtor is insolvent and this provides grounds for a winding up petition for a company or to issue bankruptcy against an individual. 

Statutory demands can provide a fast and often inexpensive resolution to the recoverability of an outstanding debt that is not disputed, as it does not involve the Courts. However one ought to note that it can be particularly damaging to trade relations in the event it is unsuccessful. It therefore may be worth attempting alternative dispute resolution and potentially a repayment plan for the recoverability of the debt. 

  • Bankruptcy or Winding-Up Petition 

Should the debtor not pay the debt within 21 days following the service of a statutory demand, then as mentioned above, one could either issue a bankruptcy or a winding up petition in Court. The effect of the threat of either of these is often sufficient to prompt the debtor to pay the debt, in order to avoid further legal action. 

A winding up petition requires the authorisation and signature of the creditor or their appointed legal representative. It will usually include details of the creditor and debtor, a statement of the value of the debt, supporting evidence and a list of the rights of the creditor and debtor in relation to debt.  

However, it is worth noting that even if a bankruptcy or winding up petition is granted by the respective Court, it does not guarantee the repayment of the debt. This is because the person(s) appointed to administer the debtor’s assets will have an order of priority for those with outstanding debts or charges against the creditor that need to be fulfilled. Creditors therefore usually receive a percentage of what was owed to them. 

*This article is not legal advice but provides a general overview. The specific details of your case will determine the best course of action.