Focussing Debtors’ Minds

by Kevin Holliday

In the right circumstances, serving a Statutory Demand might be the most efficient way of collecting an unpaid debt.

By its very nature, collecting an unpaid debt is often a damage limitation exercise, hence the importance of effective credit control measures. However, when then these fail and a debt remains uncollected, it is important that the correct decisions are taken at the outset as to the best way to proceed. It is important to identify, at the earliest opportunity, those debts that are not capable of being collected, eg where the debtor has insufficient assets to settle the debt, so as to avoid wasting time and money doing so. It is also important, if the decision is made to chase a debt, that the costs and time spent doing so are minimised, and the chances of a swift recovery are maximised, by making sure that the most appropriate tactics and tools are deployed.

The starting point is to gather in as much information about the debtor as possible. For example: what is the state of the debtor’s financial position, what assets does he own, and are they charged and/or mortgaged, what liabilities does he have, is he employed, is he being chased by others, and if so, for how much, why he is not paying the debt - is there a genuine grievance, does he lack the resources, or is he just playing for time?

If the debtor has, or appears to have, assets that a debt can be enforced against, the next step is to decide, based on the information that has been collected, how best to maximise the chances of recovering the debt.

Whilst a simple “Letter Before Action” from a solicitor or debt collecting agency can be effective in many cases, particularly if it is backed up with telephone calls and/or personal visits, some debtors know how to play the system to delay payment. For these debtors, the traditional approach of issuing court proceedings, obtaining a county court judgment, and then taking steps to enforce that judgment, may lead to a recovery in time.

However, there are many reasons why using the court is unattractive: court proceedings can be expensive, particularly if the debtor defends the case through to final hearing; the outcome is uncertain even where a case might appear straight forward; a debtor can cause lengthy delays by defending a case even though he knows his defence is unlikely to succeed; very often the problems only start once the creditor has obtained a judgment as the court’s methods of enforcing a judgment can be time consuming, expensive, and ineffective.

This is why it is sensible to see court proceedings as a last resort.

If the debtor appears to have a genuine reason not to pay, or, a reason that he perceives as being genuine, then the best approach is to open discussions either informally or, for larger sums, formally, by way of mediation. Even if these discussions fail, you are likely to be a better position to understand why the debt is being disputed and thus you can make more informed decisions as to the best way to proceed.

Where a solvent debtor does not dispute that the debt is due and is simply avoiding payment, a better approach to issuing court proceedings might be to serve a Statutory Demand.

A Statutory Demand is a formal request for the payment of a debt and may be used where the debt is for an amount equal to or greater than £750. The debtor must not ignore a Statutory Demand and he needs to apply to the court to have it set aside within 18 days of being served with it. He will only be successful if he can demonstrate to a Judge at a court hearing that there is a good reason why he is not paying the debt ie because there is a genuine dispute.

If the debtor ignores the statutory demand, or, if his application to have it set aside is not successful, it is open to the creditor to proceed to the next step, that is, in the case of an individual debtor, to make an application for the debtor to be made bankrupt, or, in the case of a corporate debtor, to make an application for the company to be wound up.

These consequences, if they are properly spelt out to the debtor when the Statutory Demand is served, are likely to have the effect of “concentrating minds” and so serving a Statutory Demand with the threat of action to follow, can be a very effective tool when used in the right circumstances.

Kevin Holliday works in Burnetts’ debt recovery department. For advice and information on debt recovery, contact Kevin on 01228 552222.

Nov 2007