In most circumstances, court proceedings will need to be raised by creditors to recover outstanding sums owed. Depending on the amount due, the action will be a Small Claim (up to and including £3,000) a Summary Cause (over £3,000 and up to and including £5,000) or an Ordinary Action (over £5,000).
After obtaining a Decree (or judgement in England) there are a number of steps that can be taken, if the debtor does not make payment, to recover the outstanding debt. In Scotland this process is known as “diligence”.
Charge for Payment (“Charge”)
After the court has awarded decree, Sheriff Officers can be instructed to serve a Charge on the debtor if they have not paid the sums due. A Charge is a formal notice served on the debtor demanding payment of the principal sums plus interest and expenses, including Sheriff Officers’ fees. After serving the Charge, Sheriff Officers will provide a report indicating whether there are prospects of recovering the outstanding sums by another means, for example, by attaching the debtor’s goods (as discussed below).
If payment is not made within 14 days, the debtor is deemed to be apparently insolvent and, depending on the sums due, an action of sequestration (bankruptcy) can be raised against an individual or partnership, or you can begin winding up proceedings against a company.
Another option is to serve an arrestment on the debtor’s bank account(s). This has the effect of freezing the funds in the account(s) at the time of service of the arrestment and it prevents the debtor using those funds until the arrestment has been lifted. Most funds or goods owned by the debtor and held by a third party can be caught by an arrestment. An arrestment can be instructed at the same time as a Charge or independently.
An earnings arrestment can be carried out where the debtor is an individual (not a company) and their employers are known. In this scenario, sums are taken directly from the employer in accordance with their payroll cycle.
An inhibition is a form of diligence over the debtor’s heritable property. When an inhibition is put in place it prevents the debtor dealing in the property, for example by selling it or granting a standard security over it, until the Inhibition has been lifted. In practice creditors will not lift the inhibition until the debt has been paid. The main drawback of an inhibition is that it will not prevent a mortgage lender from repossessing and selling the property. Inhibitions remain valid for five years but can be renewed. An inhibition can be served at the same time as a Charge or independently.
After the expiry of the Charge, we can serve an attachment on the debtor’s moveable property. An attachment prevents the debtor from removing attached items from the place in which they were attached. There are some restrictions on the use of an attachment.
When an attachment is carried out, Sheriff Officers prepare a schedule detailing the items that have been attached and their value. The Sheriff Officers will determine the open market value of the attached goods. A report must be given to the court within 14 days of the attachment and the debtor has an opportunity to object to the valuation given to the items. The debtor can redeem the attached items by paying the value determined by the Sheriff Officers within 14 days of the attachment. If they do not do so, Sheriff Officers can make arrangements for the items to be auctioned.
If the debtor, or anyone else in possession of the attached items, attempts to remove, sell or otherwise dispose of any of the items before these have been removed by Sheriff Officers, they will be in breach of the attachment and may be held in contempt of Court.
An attachment lasts for six months, after which the items must be removed or auctioned, or the attachment will fall. All proceeds from an auction will be put towards the expenses and principal debt plus interest. If any articles are unsold, ownership will transfer to the creditor and the value of those items will be credited against any outstanding debt.
After a Charge 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 (for example in tills and safes). 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 debtor. 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 landlord. There are restrictions on the use of money attachment.
If the creditor becomes aware that the debtor is having difficulty meeting their payment obligations, it is best to act promptly in order to attempt to recover sums due before the situation gets any worse.