Our clients often ask us to assist them with recovering overdue invoices and debts from parties who have delayed or failed to pay them on time. In Scotland there are several ways to recover commercial debts and it often depends on the circumstances of the case which of the options is most suitable. While debts can be recovered through courts, most of our clients wish to avoid having to raise court proceedings, largely due to the cost and time it involves. Luckily there are alternatives to raising court proceedings and we have set out below the most common ones.
1) Seven Day Demand Letter
The first step to debt recovery is sending a seven day demand letter to the debtor putting them on notice of the sums outstanding. Under the Late Payment of Commercial Debts (Interest) Act 1998, all business owners and managers can claim reasonable debt recovery costs and Statutory Interest on the debt. More information on calculating your recoverable costs and Statutory Interest can be found here.
Occasionally the debtors disregard letters from our clients. Before taking any further action, it helps to have your solicitors send out a similar seven day demand letter. Often receiving a demand letter on lawyers’ letter headed paper helps to push the debtors into action and contact the creditor business with the aim of settling the debt.
2) Statutory Demand
If the debtor fails to pay the sums due under the demand letter and the debt exceeds £750, then the next step would be to serve a Statutory Demand on the debtor company. The Statutory Demand is a more detailed demand letter in a prescribed form that demands payment of the debt within 21 days of service on the debtor company’s registered office. The advantage of a Statutory Demand is that it allows the creditor to bypass the often lengthy and costly court procedure for debt recovering. Instead, if the Statutory Demand is not complied with and the debtor company does not genuinely dispute the sums being due, then the creditor can ask the Court to liquidate the debtor company. Often the threat of liquidation will motivate the debtor company to settle its debts.
3) Petition to Wind Up a Company
If the Statutory demand does not result in the debts being paid, then the next step would be asking the Court to wind up the debtor company. As this will be a more costly process than the previous two steps, it is worth determining beforehand whether the debtor company actually has the funds to cover debt, as well as the creditor company’s expenses in winding up the debtor company.
4) Recovery of Debts from Individuals
Similarly to businesses, a seven day letter and a Statutory Demand can also be served on an individual. If the debtor fails to comply with the Statutory Demand within 21 days, then the Statutory Demand can be used to bankrupt the individual.
However, if the individual is in employment and does not genuinely dispute the statutory demand, then the latter could also be used to serve an arrestment on the debtor’s earnings. That would result in the debt being repaid from the debtor’s earnings over a period of time. As bankrupting the individual can take time and carries the same inherent risk as winding up a company i.e. that the creditor may not recover its debts and costs in full following the Trustee in Sequestration being paid, the arrestment of earnings can present a good alternative to debt recovery.
There are multiple ways to recovering commercial debts without having to resort to often costly and lengthy court proceedings. While the above steps focus on undisputed steps, there are also options available in settling disputed debts in a cost efficient and quick manner outwith courts.
Please note that this article is a non-exhaustive description of some of the routes to debt recovery and only provides a general overview of the options available to creditors.
If you would like advice on recovering commercial debts, please do not hesitate to contact our Dispute Resolution team on 0131 226 8200.
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 and 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. Should you be interested in seeking our assistance with a legal matter, please contact the Dispute Resolution team on 0131 226 8200.