Debt Recovery News Winter 2010
In this edition:
Recovering Statutory Interest on Commercial Debts
The Late Payment of Commercial Debts Act 1988 allows businesses to claim interest on debts incurred under contracts agreed after 7th August 2002. This right applies to small businesses and large organisations alike. The Act applies to contracts for the supply of goods and services where the purchaser and supplier are both acting in the course of business. Certain contracts are not covered, for example consumer credit contracts.
The entitlement to claim statutory interest does not need to be written into the contract or your business standard terms and conditions. If you are revising your business terms and conditions, however, it is a good idea to include a reference to the fact that you are entitled to claim statutory interest, as this may encourage customers to pay promptly. Any contract term that tries to exclude the right to statutory interest will normally be invalid. The right to statutory interest does not apply, however, if the parties have made their own arrangements for interest on late payment.
The rate of statutory interest that can be claimed varies and is currently set at 8% above the “prescribed rate”. The prescribed rate is fixed for 6 monthly periods and is the equivalent of the Bank of England official lending rate or base rate at the beginning of each period.
To determine which interest rate to use, add 8% to the “reference rate” for the 6-month period in which the debt became due. The rate fixed on 31st December will apply to the following 6-month period - that is from1st January until 30th June and the rate fixed on 30th June will cover the period from 1st July until 31st December.
Click here to find the correct rate for the relevant period.
If the parties have agreed a credit period, the payment will be late if it is not paid after the last day of that period. If no credit period has been agreed, the Act sets a default period of 30 days, after which interest can run.
In addition to statutory interest, the Act gives the supplier an automatic right to recover a fixed sum of compensation for debt recovery costs and the amount of this compensation depends on the size of the debt.
| Size of Debt |
Amount of Compensation |
| Less than £1,000 |
£40 |
| £1,000 but less than £10,000 |
£70 |
| £10,000 or more |
£100 |
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MONEY ATTACHMENT
Money attachment is a new diligence introduced by The Bankruptcy and Diligence (Sc) Act 2007. The provisions came into effect in November last year.
Before money attachment was introduced, creditors could not take steps to recover a debt due to them by taking money and banking instruments, e.g. cheques and banker’s drafts, from the debtor.
The new provisions mean that, after a charge for payment has expired without payment, Sheriff Officers can enter a debtor’s premises and attach money and other items like cheques and postal orders held on the premises. There is a presumption that any money held on the premises is owned by the debtor.
Sheriff Officers must submit a report to the Sheriff after the attachment and the creditor can then apply for a payment order. The Sheriff will consider any objections to the money being released to the creditor. Objections may come from people arguing that the money belongs to them and not to the debtor. Ultimately, the Sheriff must consider whether or not the attachment is unduly harsh in all the circumstances.
If a payment order is granted, this gives authority for the funds to be released to the creditor.
There are restrictions on the use of money attachment. Money attachments can’t be used to attach money that could be the subject of an arrestment, for example, funds held in a bank account. Money kept in a private home cannot be attached. Money attachments can‘t be carried out on Sundays or public holidays, or between 8pm and 8am unless the court allows this.
In practice, many businesses do not hold a large amount of cash or cheques etc on the premises and money attachment is only likely to be of significant effect against “cash businesses” like bars and clubs.
This new form of diligence is not without its issues. Problems may arise if the debtor gets wind of the fact that a money attachment is about to take place and transfers the cash, cheques etc from the till into his pocket. This would defeat the procedure, as sheriff officers do not have the power to take money or banking instruments from the debtor directly. In addition, although the courts have the power to resolve disputes over who owns the attached funds, this may be easier said than done in practice.
Nevertheless, this new form of diligence is to be welcomed as a further tool for enforcing payment of debts.
We have drawn up practical guidance for retailers on the steps to take if a money attachment is carried out at their premises: Click here to view this.
LATEST INSOLVENCY FIGURES
The latest figures published by the Accountant in Bankruptcy (AiB) show that there were over 5,500 personal insolvencies (both bankruptcies and Protected Trust Deeds) in the second quarter of 2009/10 - the period from July to September 2009. This figure represents a decrease of eight per cent on the previous quarter and a decrease of four per cent on the same period in the previous year. There were just over 3,500 awards of bankruptcy and more than 2,000 Protected Trust Deeds recorded.
Full details are available from the Accountant in Bankruptcy’s website.
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DILIGENCE - FORMS OF ENFORCMENT ACTION
In our last newsletter we gave an overview of the steps we can take on your behalf to recover sums owed to you. The term “diligence” covers procedures that a creditor can use against the debtors’ assets to recover the sums due to him.
We will now look at some diligence options in more detail.
Charge for payment
After the court has granted a Decree in your favour, we can instruct Sheriff Officers to serve a Charge for Payment if the debtor has not paid the sums due. A Charge is a formal notice served on the debtor demanding payment of the principal sum plus interest and expenses, including the Sheriff Officers’ fees. If payment is not made within 14 days, the debtor is deemed to be apparently insolvent and an action for sequestration (bankruptcy) can be raised against an individual or a partnership, or you can begin winding up proceedings against a to a company.
A period of 14 days after service of the Charge must pass before a creditor can carry out most other forms of enforcement.
INHIBITION
An inhibition is a form of diligence over the debtor’s heritable property. When an inhibition has been put in place, this prevents the debtor dealing with his property. The debtor cannot sell or otherwise transfer ownership of the property or take security over it, until the inhibition has been lifted and, in practise, the creditor will not lift the inhibition until the debt has been paid.
An Inhibition does not allow the creditor to sell or take possession of the property, however.
The main drawback with an inhibition is that, if the debtor is in arrears with his mortgage, the mortgage lender can repossess and sell the property. An inhibition will not prevent the lender doing so.
An inhibition lasts for five years but can be renewed.
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ARRESTMENTS
The effect of an arrestment is to freeze funds or goods belonging to the debtor that are in the hands of a third party. The funds that can be arrested include bank accounts, earnings, insurance claims, grants and legacies. An arrestment can be used to catch goods in the hands of third parties, for example, a car in the possession of a garage, or goods in a warehouse.
An arrestment prevents the person on whom the arrestment is served (the arrestee) releasing the funds or goods to the debtor.
Sheriff Officers can be instructed to serve an arrestment without a Charge for Payment being served beforehand, except in the case of an earnings arrestment.
There is now a limit to the amount that can be subject to an arrestment. Previously, a creditor could arrest more funds than were required to satisfy the outstanding amount.
Within 3 weeks of the date of the arrestment, the arrestee must inform the creditor what has been arrested and its value. A copy of these details must be sent to the debtor and any other person who owns, or claims to own, the property/funds.
If the arrestee does not provide this information within the required 3-week period, the creditor can apply to the Sheriff for an order making the arrestee pay the creditor the amount due, or when the funds arrested are less than the outstanding debt, that lesser sum. On that basis, it is obviously very important for the arrestee to make sure that he provides the necessary information in time.
There is now provision for the automatic release of arrested funds. If a period of 14 weeks has elapsed from the date of the final decree, or from the date of service of the arrestment, the arrestee can release funds to the creditor. The Bankruptcy and Diligence (Sc) Act 2007 provides the method for calculation the sum to be released. The debtor, the arrestee or anyone else with an interest in the arrested funds, has an opportunity to object to their release.
A separate court action is still required for the release of arrested goods, however.
The debtor, arrestee or other interested party can apply to the Sheriff for an order to recall or restrict the arrestment by lodging a Notice of Objection and a hearing has to take place within 8 weeks of the day on which the application is made to the Sheriff.
The debtor can apply to the Sheriff for an order requiring that the arrestment will cease to have effect on the grounds that it is unduly harsh.
It is possible to arrest a debtor’s bank account, building society account etc. The arrestment only attaches to sums that are in the account when the arrestment is served. For example, an arrestment served at 11:00 on a debtor’s bank will not catch money that goes into the account at 11:01.
A minimum protected balance (MPB) has been introduced where the debtor is an individual and the account holding the arrested funds is not a business or trading account. The arrestment of the debtor’s bank account may only cover sums in excess of the MPB, currently £370. If the debtor has less than the MPB in his account, no funds can be arrested. This is set to rise to £415 in April 2010.
An arrestment can be served on a debtor's employer and this instructs the employer to make regular deductions from the debtor’s earnings. The deductions are taken off wages every pay -day in the same way that tax is deducted and the deductions continue until the debt has been repaid in full.
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INHIBITIONS AND ARRESTMENTS ON THE DEPENDENCE OF AN ACTION
Both inhibitions and arrestments can be used on the dependence of a court action in either the Sheriff Court or the Court of Session – this means they can be put in place as soon as a court action has been raised and the creditor doesn’t have to wait until he has a decree against the debtor.
It used to be the case that the court would grant authority to arrest or inhibit as a matter of course when proceedings were raised but now the party applying for an inhibition or arrestment on the dependence of a court action must be able to justify that this step is necessary and before granting the appropriate order, the court has to be satisfied that it is reasonable to do so.
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CAVEATS – IMPORTANT ADVANCE NOTICE FOR YOUR BUSINESS
Lodging caveats in the Sheriff Courts and Court of Session in Scotland can be a very useful and important tool. It gives you or your business advance notice if an application is made for certain types of court order before the papers in relation to the court action have been served. These orders are known as "interim orders" and a party who raises a court action can ask the court to grant these before you are even aware that court proceedings are underway.
Caveats are generally lodged in relation to an application for an interim interdict and/or the appointment of a provisional liquidator or interim trustee in relation to a company registered in Scotland. If no caveat in place, there is a risk that such an order will be granted and the consequences for you or your business could be severe.
If there is a caveat in place, however, no interim order can be granted unless you have had an opportunity of being heard. The court will contact your Solicitor and confirm details of the hearing that has been fixed. This gives you an opportunity to arrange to be represented at the hearing and to argue that the interim order should not be granted. The court may decide to grant the order, but at least you have had the chance to put forward arguments against this.
A caveat remains in force for a period of 1 year from the date of lodging. It can be renewed annually after that.
There are limitations on caveats. They are only triggered by applications for certain orders so that, even if a caveat has been lodged, this would not allow you to have advance notice of an application for authority to lodge an interim arrestment or inhibition, for example. Nor will a caveat stop ordinary court proceedings being raised.
A caveat will only give you protection in the sheriff court where the action has been raised. This means that, if a caveat is lodged in Glasgow Sheriff Court, but an interim order is requested in an action raised in Edinburgh, you will not be advised of this. That is why we recommend that you lodge caveats in all the sheriff courts covering the areas where you have a place of business and, in the case of a company, that caveats are also lodged on behalf of the main directors.
Our fee for lodging a caveat is £50 plus VAT and the court fees are £30 per caveat in the Sheriff court and £45 in the Court of Session. Caveats are a straightforward and inexpensive way of giving your business vital protection. For more details of our caveat service, please contact David Scott (0141 228 8000).
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The information contained in these articles is given for general information only, reflects the current law on the date of the article, and does not constitute legal advice on any specific matter