13 Jul 2011

Know Your Debtor

Know Your Debtor

Sarah Jack, Solicitor advises why it is vital for business of all sizes to regularly analyse their debts in order to decide which to pursue and which to write off as 'bad debts'.

Sarah Jack, Solicitor advises why it is vital for business of all sizes to regularly analyse their debts in order to decide which to pursue and which to write off as 'bad debts'.

It is vital for businesses of all sizes to regularly analyse their debts in order to decide which to pursue and which to write off as 'bad debts'. Getting the decision right becomes even more important during tough economic times.  

Making Informed Decisions

Businesses are often hesitant to consult a solicitor, concerned that they will end up further out of pocket only to be advised that a debt is not worth pursuing. A basic knowledge of the recovery and enforcement tools available can facilitate a more considered approach and enable businesses to approach a solicitor confident in the knowledge that further action is worthwhile.

There is often little sense chasing the proverbial ‘man of straw', however, it is prudent to assess your debtor prior to dismissing a debt as a lost cause. The following questions all provide helpful insight into the prospects of recovery:

"Does the debtor own heritable property or other assets of significance?"

"If the debtor is an individual, is the identity of their employer known?"

"Is the debtor's bank account branch known?"

"Is the identity of any of the debtor's customers known?"

If the answer to any one of these questions is ‘yes', fruitful routes to recovery may be available...

Routes to Recovery

Often, the first step is a simple ‘Letter Before Action' (or LBA) demanding payment within 7 days. Instructing such a letter is inexpensive and there is no obligation to follow up with legal proceedings.  A solicitor's threat of proceedings alone often persuades the debtor to act.

If not, a creditor may choose to raise a court action. In a straightforward undefended action, a creditor can quickly obtain 'decree', (which is the court's order to the debtor to make payment). Furthermore, the debtor will usually be ordered to pay the creditor's expenses. Debts owed under a publicly registered agreement such as a lease often enable the creditor to bypass court action and go straight to the enforcement stage.

There are various means by which the court decree, or the registered agreement, can be enforced:

  • If the debtor is an individual, an Earnings Arrestment can be served on the debtor's employer, meaning that a specified amount will be deducted from the debtor's monthly salary and paid to the creditor.  If the employer doesn't make payment, they become personally liable.
  • If the debtor owns heritable property, the creditor may choose to ‘Inhibit' them. This prevents the debtor selling or refinancing property without first satisfying the debt or having the creditor's agreement to discharge the inhibition.
  • If the creditor has knowledge of the debtor's clients, they can ‘Arrest' sums currently due to the debtor and ultimately uplift payment from the arrested funds. Similarly, funds in the debtor's bank account can be Arrested. Arrestments can prove to be very effective given the restrictive effect on the debtor.
  • In certain circumstances, attachment orders can be instructed, enabling certain goods belonging to the debtor to be seized and auctioned for sale.

Money Attachment

Bankruptcy or 'winding up' proceedings can also be brought against the debtor or his company; however, with creditors' claims competing against each other, the recovery prospects are again of paramount consideration prior to taking such action.

It is good practice for a business to gather information on their customers and gauge reliability prior to engaging in business relationships. As the various methods of recovery demonstrate, knowing your client or purchaser can prove just as valuable when things go wrong.  

Sarah Jack, Solicitor

To find out more about Debt Recovery contact our Litigation Department on 01224 560600 or litigation@acandco.com.


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