Adam WonnacottBurlington Group

ICM Managing Change Masterclass, 10th October 2013

www.burlingtongroup.co.uk

Adopting Litigation and Enforcement as a Debt Recovery Tool

Scope of this seminar

Economic context and the need for robust debt collection methods

Use of statutory demands and insolvency procedures

Obtaining and enforcing judgment & comparison

Putting judgment and enforcement processes in place

‘Zombie businesses’: Businesses that generate just enough cash to service their bank and supplier debts and have liabilities far in excess of their assets

‘Growth’ in so-called ‘zombie businesses’ has soared by 108% in the last five years, to 227,000 (approximately 1 in 10 of all UK businesses)*

Total negative net worth of about £70 billion *

* Source: Company Watch

Having to negotiate paymentterms with creditors

Unable to repay debts if smallincreases in interest rates

Struggling to pay debts whenthey fall due

Just paying interest on debts

R3 Business Tracker Survey Results, May 2013

Source: R3 Business Tracker; ONS

0

5,000

10,000

15,000

20,000

25,000

30,000

UK Company liquidations in England and Wales, 1960 to present

Source: BIS; Insolvency Service

What are the risks?

DEFAULT

Effect of sustained lack of investment

Interest rate rises

Economic recovery sorting

the ‘wheat’ from the ‘chaff’

Who else isn't getting paid?

Am I a critical supplier?

Is there a risk of insolvency?

How do I get to the front?

Debt Collection v Enforcement

Debt Collection

• Internal ‘Soft Collection’ techniques: Letters/Calls• Instructing DCA

Enforcement

• Insolvency Proceedings: Statutory demands/Winding up petitions• Litigation

Statutory Demands and Corporate Insolvency Procedures

Statutory Demands are a demand to the debtor to make payment/satisfy the demand within a given timeframe (21 days from date of service)

If the demand is not met and is not challenged, the creditor can proceed to issue a petition at court to obtain a winding up order

If the parties agree payment terms the creditor can set aside service of the demand

Advantages

• Inexpensive: A statutory demand is not ‘court issued’ and, as such there is no fee (besides process server fee)

• Leverage: As the first stage in insolvency, a Statutory Demand can be an effective way of prioritising a debt

Statutory Demands

Disadvantages

• If the debt is disputed in good faith and on substantial grounds, the creditor may obtain an injunction against winding up – and ask you to pay the cost!

• The next step (Winding up Petition) can be costly and ultimately unrewarding – which can leave the debtor to conclude that a Statutory Demand is an ‘idle threat’

Statutory Demands

Issuing a claim at County Court can be an effective method of engaging with the debtor

Costs of issuing a claim between £500 and £5000 range from just £60-£100 and can take as little as 4-5 weeks if the claim is undefended or admitted (85% of judgments issued are ‘judgment in default’ or ‘on admission’)

Proceedings can be issued using Court Service portal (moneyclaimonline.co.uk) or using a specialist debt recovery solicitor either on a fixed fee basis or under a contingency arrangement (Damage-Based Agreement)

Litigation

Advantages

• Issuing a claim form may prompt the defendant to pay

• If it doesn’t the ‘next steps’ (enforcement) are much less costly than under the insolvency process

• A prompt attitude towards enforcing a CCJ can place you in a priority position if the debtor business is facing liquidation/administration

Litigation

Disadvantages

• If a claim is defended, it may take time to obtain judgment (although note summary judgment procedure)

• If issuing the claim/obtaining judgment doesn’t work, you will need to think about a suitable enforcement method

Litigation

Enforcement methods as against commercial entities:

• Enforcement against goods (High Court Enforcement, where Debt > £600)

• Charging orders against property

• Third Party Debt Orders

NB: You can also use a judgment as ‘belt and braces’ for serving a statutory demand an ‘unsuccessful return’ from a High Court Enforcement Officer can also allow you to proceed straight to a winding up petition

What happens if getting judgment doesn’t work?

High Court Enforcement Officers enforce judgments awarded in the High Court and County Courts by seizing the goods of the defendant/debtor

If payment isn’t made, goods can be removed and sold to pay the amount owing under the writ

If the defendant opts to make payment, it will be liable to pay costs awarded under the judgment (including court fees) and the High Court Enforcement Officers costs in addition

High Court Enforcement

Under a High Court writ, an HCEO can:

• Force entry to commercial premises (if necessary)

• Seize stock, infrastructure (telecoms, IT equipment, etc.)

• Charge costs directly on to the Defendant rather than charging a commission to the creditor

High Court Enforcement is particularly effective in recovering commercial debt

No Commission

The most appropriate method will depend on circumstances:

• What is the debt amount? • What is the provenance of the debt? Goods or services? • Is the debt disputed or is it likely to be? If so, is there a substantive defence? • Does the debtor have assets that could be seized? • Does the debtor business have any less tangible assets; debt book etc?

Also consider what you can develop as a scalable process

Insolvency v Litigation

In summary:

Economic recovery is likely to bring an ‘insolvency lag’ that will almost certainly affect your customer base to some degree

If it affects you, it will affect others: The ‘domino’ effect

If you haven’t already, put in place some more robust debt recovery methods and be prepared to use them before everyone else

Email: adam.wonnacott@burlingtongroup.comCall: 07788 871250 / 0845 520 2000

Get your copy of Getting to the front of the queue: A commercial creditor’s guide to High Court Enforcement

@BurlGroup

www.burlingtongroup.co.uk