They think it’s all over...

dealing with debtors at home and abroad

In most cases, the sending of the invoice will mark the end of a job well done. However, what happens when the debtors don’t pay? In law firms where a large number of lawyers are regularly billing time, an increasing level of debt can easily be lost under a whole pile of unpaid bills, which can ultimately lead to a serious loss of profit. Claire Turner, a solicitor with Bevan Ashford, highlights the steps that can be taken and the legal pitfalls of recovering debts both in the UK and abroad.

When clients fail to pay their bills, court proceedings to obtain a judgement against them can be the last and only option to recover the money. Court proceedings can be lengthy – it can sometimes take in excess of a year to obtain judgement, especially if the claim is disputed. Also, your professional rules may contain a procedure for assessing the reasonable amount of your fees. After the time and trouble of court proceedings, you could be excused for thinking that once you have obtained a court judgement against a debtor, either at trial or by default if the debtor does not defend the claim, this will mean the end of court involvement.

Unfortunately, this is true only if the debtor pays the judgement debt. If they fail to pay within the time stipulated by the court order, then obtaining the judgement itself can be just the start of a long, and potentially costly procedure where successful recovery is by no means guaranteed. This article considers some of the more common problems and questions that arise when recovering debts and enforcing judgements.

There are a number of methods that can be used to try and enforce a judgement debt, which include, if the debtor is in, or has assets in England and Wales, putting a charge on the debtor’s property, obtaining an attachment of earnings order against the debtor’s salary, getting an order that the debtor’s bank pay funds directly to you from the debtor’s account, or instructing the court bailiffs to seize goods to the

value of the debt. A further possibility is to commence bankruptcy proceedings in the case of an individual, or winding up proceedings where the debt is owed by a company. The choice of which method to use depends on the individual circumstances of the case.

All these approaches require the further involvement of the courts, and court fees always need to be paid up-front. The court fees and some costs can normally be added to the debt to be recovered, but the harsh reality is that it is very difficult to recover more than a proportion of the costs that you incur enforcing a judgement.

None of these methods guarantee recovery of the debt if the debtor is particularly elusive or does not have any assets to attack, and knowledge of the assets and means of the debtor is invaluable in deciding which route to follow. In the case of private companies, it can often be extremely difficult to uncover details of company assets. A useful weapon is that it is possible to ask the court for an order requiring the debtor or, in the case of a company, an officer of the company, to attend court to answer specific questions as to the debtor’s means and assets. If the debtor or company officer fails to attend two such court appointments, there is a possibility that he could be imprisoned for contempt of court.

However, if the debtor cannot be traced, it may be necessary to use the services of private investigators to find him, which can significantly add to the costs, depending on how difficult it is to obtain information.

The time taken to enforce the debt depends on the method of enforcement used. Obtaining a charge on a debtor’s property means that the charge may only have to be paid when the property is sold. Although, once you have a charge, it is possible to apply for the property to be sold, this is not necessarily straightforward and where the debt is relatively small, it can be difficult to force a sale of the property, which means that a creditor may have to wait for years to recover the money.

Sending round the county court bailiffs or high court sheriff is a quicker method, although the length of time taken varies among different courts, as do the levels of persistence of individual bailiffs.

If one method of enforcement does not succeed it will be necessary, in order to pursue the debt further, to try other methods, which can lead to increased costs and delays.

If the debtor is based abroad, recovering the debt can prove even more complicated. The courts’ definition of ‘abroad’ can be even closer to home than you might think. Scotland, Northern Ireland and even the Isle of Man all have separate legal systems and do not automatically recognise judgements obtained in England and Wales, although procedures do exist within those jurisdictions for the reciprocal enforcement of judgements obtained in England and Wales. This usually requires the judgement to be registered with the relevant court as a foreign judgement and then following the enforcement procedures of that jurisdiction.

The UK has reciprocal arrangements for enforcing judgements with various countries under the Brussels and Lugano Conventions and certain unilateral treaties. The procedures involved can vary greatly between countries, and there is a danger that a UK judgement may be deemed unenforceable if these are not followed. It is therefore important to ensure that the procedures are fully understood, if necessary (as is usually the case) with reference to a lawyer in the country concerned. However, there are no agreements in place with a number of jurisdictions, complicating enforcing English judgements in those jurisdictions.

There are a number of problems that may be encountered in enforcing judgements outside the jurisdiction of the English and Welsh Courts. The most frequently encountered are that:

The procedures involved can be time consuming and expensive. Where the claim is relatively small there is a danger that the majority of the costs involved in obtaining payment of the debt will not be recoverable, and that the costs may even exceed the amount of the debt outstanding;
In order to obtain recognition of the debt within the relevant jurisdiction, it will normally be necessary to instruct a lawyer within the jurisdiction to prepare the paperwork and manage the proceedings. It may also be necessary to obtain official translations of court documentation. This can substantially increase the costs, not all of which may be recoverable;
If little is known about the assets of the debtor, there is always the risk that it will not be possible to enforce the debt in any event. Asset tracing can be difficult and expensive, especially in respect of companies registered in jurisdictions such as the Isle of Man, where for example, the requirements for companies to file returns that are open for inspection are more limited than in England and Wales.

The road to debt recovery can therefore frequently be a rocky one, and success is never guaranteed. However, strict credit control procedures can obviously help to alleviate the need to commence court proceedings in the first place.

In an organisation such as a law firm, with a large number of individuals billing their time on a regular basis, outstanding fees can amount to large sums of money, but those outstanding fees can sometimes be overlooked by those busy generating the bills. While managers should try to ensure that individual fee-earners keep on top of outstanding fees and invoices as far as possible, it is often preferable for credit control and debt recovery to be managed by a separate individual or department with specific responsibility for this area.

Other methods for controlling the level of outstanding fees include ensuring that sufficient payment on account is always obtained from new or financially insecure clients. It is also obviously advisable (if possible) to obtain money up front from clients in respect of large disbursements, in order to limit a firm’s liability to third parties in respect of debts incurred on behalf of clients.

There are also tactical considerations to bear in mind when billing. Although this will depend on the nature of the work undertaken, many practitioners subscribe to the view that it is better, if possible, to bill clients little and often. This softens the impact of the total amounts billed and allows monitoring of whether and when those (regular) bills are paid. It should also be remembered that clients are often more amenable to paying the bills of their advisers while they are still in need of their services or, at least, when the memory of what their adviser has done is still fresh in their minds, rather than some months down the track. Also, subject of course to professional obligations, if bills regularly remain unpaid, it allows work to be stopped in order to minimise the extent of exposure to unpaid fees.

However, where all else has failed, many businesses will feel that they have no other option but to sue the debtor for their unpaid fees. Nonetheless, if the debt is small and the financial situation of the debtor uncertain, the likely costs of obtaining and enforcing judgement should always be borne in mind.

In some cases, it will quite simply not make commercial sense to spend further money and fee-earning time chasing a debt that may never be recovered, while in others it may be that the arrival of a claim form will focus the debtor’s mind to settle the bill.

Finally, while this article sets out some basic principles relating to debt collection and the enforcement of judgements, all cases turn on their own facts, and therefore, must be considered on their own merits.

Claire Turner is a solicitor at Bevan Ashford. She can be contacted at www.bevan-ashford.com/litigation.