Legal remedies for debt recovery

Companies facing a serious problem with unpaid debts must address it before it threatens the company’s long-term viability. This inevitably involves restructuring the company’s own debt recovery system; further details can be found here article. At the end of this funnel – which ought to represent sound management of outstanding loans – we find the JUDICIAL DEBT RECOVERY Furthermore, on 16 April 2021 at 12 noon, we will be holding a webinar on ‘Key strategies for effectively tackling late payments’. REGISTER FOR THE WEBINAR HERE

It is no coincidence that this step is the last option to consider in our strategy for recovering outstanding payments, as it has certain drawbacks to bear in mind. Firstly, the chances of actually recovering the amount claimed are not as high as one might expect. If more than six months have passed and the customer has not paid the invoice, it is highly likely that they are insolvent, meaning we will have to compete with other creditors in a race against time to seize whatever assets the customer may still own, provided, of course, that the customer has not already entered into insolvency proceedings. This is why it is essential to carry out a financial analysis of the debtor to determine whether they have assets that can be realised, whether they are in the pre-insolvency phase, whether it is possible to hold the directors liable, and a long list of other factors that will tell us whether or not it is cost-effective to take the matter to court. Secondly, we must also take into account the fees of the professionals who will be involved in the proceedings, which is why it is essential to exhaust all out-of-court remedies first.

Although the aim of legal proceedings may be to have the court order the debtor to pay, they can also be very useful for putting pressure on the debtor and reaching an agreement which, whilst possibly involving a certain reduction in the debt, allows us to be paid before other creditors. There are three main procedures for seeking the recovery of debts: the payment order procedure, the bill of exchange procedure and the declaratory procedure.

Judicial debt recovery procedures

The order for payment procedure has the advantage of being a fast-track process which, provided the debtor does not lodge an objection, will result in a court order that we can enforce directly. This procedure can only be used when we can provide documentary evidence of the debt, for example an invoice, even if it is not signed by the debtor. This procedure is particularly suitable for debtors who we anticipate will not respond to the demand for payment (whether through negligence or because they have effectively closed down their business). As it is the simplest procedure, it is also the cheapest, making it ideal if our aim is to meet the requirements set by HM Revenue & Customs to reclaim the VAT on the invoice issued to the customer. Nevertheless, the procedure will have been a waste of time and effort if the debtor lodges a reasoned objection to it, as this will force us to continue the proceedings through the declaratory procedure.

The bill of exchange procedure can only be used when a bill of exchange, cheque or promissory note can be produced to substantiate the debt and which meets the relevant legal requirements. It is a procedure with a high success rate, but one that we cannot use frequently because, in many cases, we are unable to substantiate the debt with such a document.

Finally, declaratory proceedings are essentially the “traditional” court case, in which facts are set out and the aim is to secure a financial award. This procedure is the appropriate course of action when we wish to hold the directors liable, or when the debtor wishes to put forward some contrived ground for opposition in an attempt to avoid payment, usually by seeking to discredit the service or product provided.

At this stage, we must enforce the judgement obtained; to do so, it will be crucial to ascertain whether the debtor may have assets of which the courts are unaware, although the likelihood of recovering the debt will become increasingly slim as time goes on.

In conclusion, it is vital to avoid undue delays when taking matters to court, as if we act later than the other creditors, we will make it much more difficult for ourselves to recover the outstanding debt, and it will be vital to carry out an investigation into the debtor and their circumstances, both to increase the chances of successful recovery and to determine whether it will be cost-effective to take legal action or not. In Auris Advocats We prioritise value for money for our clients, which is why we only take cases to court if we can see that the proceedings will not be a waste of time and money.

Juan Torrecilla, solicitor for Auris Advocats

Specialties:
Insolvency Department
Commercial Department
Civil and commercial litigation