Following on from our earlier advice on enforcing money judgments, Walker Morris’ banking litigators answer some more frequently asked questions.

Client Question 3

I have heard that I can enforce a money judgment via a third party debt order or an attachment of earnings.  What are these and what are the advantages/disadvantages?

Walker Morris Answer

If a creditor believes that a debtor has the means to pay the judgment debt but is refusing to do so, it can apply to court for a third party debt order. This allows the creditor to take the funds owed to it directly from wherever the debtor is holding funds, such as a bank or building society account. A third party debt order would also allow a creditor to secure a debtor's funds held in an inheritance, redundancy or other settlement. The creditor can apply to court for an order to obtain necessary information, such as details of accounts or any expected settlements.

The process is relatively straightforward. Initially, the creditor must apply for an interim order which freezes the debtor’s funds up to the amount of the judgment debt, preventing the debtor from dissipating the funds. The court will then usually list a hearing within twenty eight days. The debtor may contest the interim order and the court will determine the validity of the claim. If the application for a third party debt order is approved, the order is made final and the bank, building society or other third party is requested to pay over the monies owed.

Advantages

  • Quick
  • Ensures the debt is paid in cash
  • Relatively inexpensive

Disadvantages

  • Dependent upon third party holding funds
  • Dependent upon knowledge of party holding funds
  • Success rate of applications is quite low
  • Creditors cannot target any joint accounts
  • Potential adverse PR implications for creditors/lenders

An alternative is an attachment of earnings order (if the debt is over £50).  Here, a proportion of the debtor's earnings is deducted at source and paid directly by the employer to the creditor until the judgment debt is paid in full.

An application must be made to the debtor's local court detailing the amount of money owed. A notice of attachment of earnings order produced by the court then invites the debtor to either (i) pay the debt in full or (ii) complete and return the details of their employment, income and outgoings. Based upon this information, the court should then calculate a payment plan and grant an attachment of earnings order, which is served upon the debtor and his/her employer.

Advantages

  • Inexpensive
  • Easy to put into place
  • Deductions are automatic so no reliance on debtor

Disadvantages

  • Dependent upon the debtor being employed
  • Payment can take time; interest does not accrue
  • Generally only low payments are granted; therefore suitable for minimal debts only

Client Question 4

I have heard that insolvency can be used as a debt recovery tool.  What is involved, and are there any particular issues to consider?

Walker Morris Answer

Insolvency can be used as a debt recovery tool where the debt in question is undisputed. Insolvency could, therefore, be an option for recovery of a judgment debt. The procedure differs depending on the type of debtor. To recover debts from individuals, the correct procedure to follow is bankruptcy.  In the case of commercial debts, creditors can adopt the winding-up procedure.

Individual Bankruptcy

The debt must:

  • be greater than £750 – (from 1st October 2015 this is set to be raised to £5,000);
  • be unsecured; and
  • the debtor must not already be subject to some form of insolvency process.

Firstly, a formal statutory demand must be served giving 21 days’ notice of imminent insolvency action and affording the debtor the opportunity to clear the debt. If the debt is not paid within 21 days and if no valid application to set aside the statutory demand is made, the law presumes that the debtor has no funds and at that point a bankruptcy petition can be filed.

When deciding whether to uphold the petition, the court will consider the debtor's ability to pay all debts owed and whether the petitioning creditor had unreasonably refused any offer from the debtor to settle the debt before the petition was issued.

Advantages

  • The threat of insolvency can prompt payment
  • Relatively quick procedure
  • Can be cost-effective, depending on the level of debt

Disadvantages

  • If debtor has no assets, can be little/no recovery
  • Realisation of assets may take significant time
  • Unsecured creditors all rank equally and other creditors (eg. secured) may even take priority.  Others’ priority/entitlement could diminish or even entirely preclude your recovery, even if you have paid all of the bankruptcy petition fees

Winding-up a Company

Again, the debt must:

  • be greater than £750;
  • be unsecured; and
  • the debtor must not already be subject to some form of insolvency process

and the statutory demand procedure must be followed. When a winding-up petition is filed at court and served on the debtor company, it must also be advertised in the London Gazette, which involves an additional fee.

The court will again take into consideration the debtor company’s ability to pay alldebts owed and whether the debtor made any reasonable settlement offers to the petitioning creditor. If the petition succeeds and an order is made to wind-up the company, a liquidator will deal with the distribution of any assets to creditors.

Advantages

  • The threat of insolvency can prompt payment
  • Relatively quick procedure
  • Can be cost-effective, depending on the level of debt
  • A liquidator may, in some circumstances, be able to unravel prior transactions to make more funds available for creditors.

Disadvantages

  • If debtor has no assets, can be little/no recovery
  • Realisation of assets may take significant time
  • Unsecured creditors all rank equally and other creditors (eg. secured) may even take priority.  Others’ priority/entitlement could diminish or even entirely preclude your recovery, even if you have paid all of the bankruptcy petition fees
  • A wound-up company cannot trade and will cease to exist – this can affect any other ongoing dealings with the company and could result in the writing-off of other deals or debts.