The Creditor’s Dilemma
We often act clients who wish to recovery their debts. Where debts are disputed or ignored and debtors refuse to engage in negotiations the only option is often to raise court proceedings. A genuine concern is that by the time proceedings come to an end the creditor will have no chance of getting paid because the debtor has either become insolvent (i.e declared bankrupt if they are an individual or put in to liquidation if they are a company) or they have hidden or otherwise transferred away all of their assets.
The Scottish Courts however provide the remedy of “diligence on the dependence”. Dilgence is simply the term for the various processes of debt enforcement under Scottish law. Getting diligence on the dependence means that it is obtained at the very beginning of a court action as opposed to at the end. This can be an exceptionally powerful remedy if used correctly. In essence it is a provisional measure which can be used to secure money, goods or property to prevent the debtor from disposing of them while the court action is ongoing.
What Kinds of Diligence?
Whilst there are various ways in which a debt can be enforced in Scotland, there are principally two methods which can be used in this fashion:
Arrestment on the dependence
An order for arrestment on the dependence prevents a debtor from disposing off or transferring any cash which is held by a third party on their behalf. The most obvious example is funds held in a debtor’s bank account. If the bank where those funds are held is served with an arrestment it is not allowed to transfer those funds, they are effectively frozen and can be forwarded on to the creditor.
Arrestment can also be used against other third parties who may hold funds or goods on behalf of a debtor. For instance a creditor could serve an arrestment on the debtor’s employer in certain circumstances to freeze their wages. It could also be used against third parties who they themselves owe the debtor money.
Arrestment can be highly effective where the creditor has good knowledge regarding the debtor’s assets and finances (for instance where they bank).
Inhibition on the dependence
An order for Inhibition on the dependence prevents the debtor from disposing of any heritable property they own (e.g. their house) pending the outcome of the court action. The extent of such an order can be limited by the Court If it sees fit. For instance if the debt is relatively small and the debtor owns a lot of property, the effect of the inhibition could be limited to specific properties.
What do you need to prove to obtain it (and keep it)
It is worth noting that an application can be made and granted without the debtor being given notice. In some cases the matter may have to call before a judge; however we have been involved in cases in which diligence on the dependence has been granted without the need for a hearing on the strength of our written application alone.
That said the granting of diligence on the dependence is not as common as it used to be and the remedies open to creditors are not as strong or numerous as they used to be. There are a number of relatively high hurdles which must cleated by a creditor to obtain such an order.
Firstly the creditor must have a good and arguable case. Secondly the creditor must show that there is a likelihood that their claim will be defeated by the debtor’s insolvency (i.e. the debtor being delated bankrupt) or by the defender hiding assets which could be used to discharge the debt.
Furthermore If the order is granted the Court will automatically set down a hearing at which the debtor will be given the opportunity to have the diligence recalled. At this hearing the onus is on the creditor convince the Court why the order should stay in place.
To understand how these hurdles can be overcome in practice, it is useful to have regards to a case study.
A Case Study
We acted for a client who was owed professional fees from an individual. The individual did not dispute the debt but was evasive. A settlement agreement had been drawn up for the payment of the debt. This has been set to the debtor on a number of occasions but it had not been signed or returned.
It came to the creditor’s attention that the debtor was in the process of selling his house. The debtor had told the creditor on a number of occasions that he was “asset rich, but cash poor”. The creditor was understandably worried that given the debtor’s prevarications he would sell his house and then hide the free sale proceeds received from the buyer.
We raised an action for recovery of the debt and sought inhibition on the dependence in order to halt the sale of the debtors house. In terms of the application of the above test it was relatively easy for us to demonstrate a good and arguable case.
The creditor had raised invoices for work done which had not been paid or disputed. Furthermore the debtor had on a number of occasions acknowledged the debt and had stated that he wished to enter in to an arrangement for its payments.
We then successfully argued that if diligence on the dependence was not granted, there was a high possibility that the debtor would sell his house and then hide the proceeds before any substantive decision was made and any judgement enforced.
An order for diligence on the dependence was made and an inhibition was put in place to prevent the sale of the debtor’s house. Settlement terms were agreed shortly thereafter as the debtor was understandably keen to complete the sale.
Debt recovery can often be a frustrating and drawn out process for all those involved. However in the right set of circumstances, diligence on the dependence can be a highly effective means of either getting the debt paid or furthering a strong negotiation position.
Disclaimer:While every effort has been made to ensure the accuracy of this blog post, it is not intended to provide legal advice as individual situations will differ. No recipients of content in this blog post should act or refrain from acting on the basis of the blog post without seeking the appropriate legal advice on the particular facts and circumstances at issue from a qualified solicitor in their jurisdiction. The blog post is for general information only and is not legal advice. The law changes frequently and varies from jurisdiction to jurisdiction. No solicitor-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with a solicitor qualified to practise in your jurisdiction.