Stephen Cowan: A quick guide to Scottish debt recovery
Stephen Cowan, managing director of Yuill + Kyle, provides information on the Scottish Debt Recovery system.
Many English solicitors are mystified with Scotland’s procedures for the recovery of undisputed debt. This should not be the case. Like our English cousins ultimately the process involves disposing of a debtor’s moveable property for auction and sale or to put it more prosaically “to convert the court’s judgement into cash”.
First of all, we have to look at the types of court action which a litigant will take before passing the decree to Sheriff Officers for enforcement.
In Scotland, there are two different types of court action depending on the debt value being Simple Procedure – debts up to £5,000 and Ordinary Actions – debts over £5,000.
With the Court of Session having a privative jurisdiction of up to £100,000 invariably all debt actions will be taken in the Sheriff Court of the defender’s residence or, for business debts, the court where the defender trades.
In Scotland, a creditor can seek recovery of interest at the rate of 8% per annum from the date when the Court document is served on the debtor until the principal sum is paid (and more if the contract allows). Of course, in addition, the creditor can either charge interest and collection costs in terms of the Late Payment of Commercial Debts (Interest) Act 1998 or interest in terms of the contract subject to such terms actually being incorporated into the contract.
Simple Procedure [up to £5,000]
A court action is commenced by the claimant preparing a Claim Form on a pre-printed form. Supporting invoices or a statement of account do not require to be produced along with the Form. However, details of the invoice or statement have to be narrated in the body of the Form as opposed to having to be produced. In addition, a witness who can “speak” to the contract has to be detailed in the form. A copy of the Form will require to be served (issued) on the respondent. This is done by the claimant’s lawyer – usually by recorded delivery post – and thereafter by sheriff officer, if the postal service is unsuccessful.
The court will issue the Claimant with a Timetable. This will contain the “Response Date”. This is the date that the Respondent will have to intimate either a defence to the action or a Time to Pay Application. If there is no response then the claimant has to apply to the court for a decision within 2 weeks from the Response Date.
What happens if the claim is disputed? - If the Respondent intimates an intention to dispute the claim then the Sheriff will send “first written orders” within two weeks from the date the court received the Response Form. The “first written order” may do one of five things:-
a. Refer the case to alternative dispute resolution;
b. Arrange for a case management discussion;
c. Arrange a Hearing;
d. If the Sheriff thinks a decision can be made without a Hearing indicate that this is the Court’s intention.
e. Possibly dismiss the case.
Remember that if this happens it is likely the Sheriff will attempt to negotiate and secure settlement of the claim. Remember too that, if possible, the Sheriff will reach a decision on the whole dispute on the basis of information presented to it. Accordingly, you will need to provide a response to the following:-
1. Have you attempted to negotiate settlement? If so, what happened as a result of the negotiations.
2. For example, if negotiations fell through why did this happen?
3. What is your response to the defence?
4. Will you be happy to try to negotiate a settlement of the case and, if so, on what terms?
5. Be sure to send all contractual documentation to support your claim.
Ordinary Actions [£5,000+]
Unlike simple procedure there are no pre-printed forms. The writ will be drafted and forwarded to the court. The defender has 21 days after service of the writ to decide what action to take.
Defender’s responses – There are various ways the defender can respond to the service copy writ. The defender does nothing – the claimant can, on the expiry of 21 days, minute for decree. If the defender admits the claim and makes a payment offer, the claimant completes an appropriate form and sends it to the court. If the offer is unacceptable the case will call in court and the court will decide if the application should be granted. The court takes about three weeks to send the judgment to the claimant’s lawyer.
Enforcement of Decrees – The responsibility for enforcing sheriff court decrees falls on sheriff officers.
The generic term for Scottish enforcement is known as ‘diligence’. Different measures are employed depending on whether the defender’s moveable property is situated either outwith or within a dwelling house. The effectiveness of diligence can best be described as a ‘filtering process’ with the slow payers settling earlier on in the enforcement regime.
Judgment enforcement in Scotland was radically reformed by the Debt Arrangement and Attachment (Scotland) Act 2002 and by the Bankruptcy and Diligence (Scotland) Act 2007, certain elements of which still require to be fully implemented. The legislation deals more sympathetically with individual consumer debtors. Commercial debtors have less protection.
The Debt Arrangement Scheme
A central feature of the 2002 Act is the Debt Arrangement Scheme available to individuals and sole traders, allowing them the opportunity of repaying their debts in a managed way over a given period of time without the threat of enforcement. Such individuals should have surplus income to repay their debt by instalments. During the existence of a DAS judgment enforcement and applications for the debtor’s bankruptcy will be prohibited.
Charge for Payment
Before commencing judgment enforcement the sheriff officer serves a charge, which is a formal written request, on the defender along with a Debt Advice and Information Pack. It requests payment of the principal debt, interest and charges. It requires that the debt be paid within 14 days.
Detailed Examination of Attachment Orders: Generally Business to Business Debts: Goods outwith a House.
Attachment orders will most often be used for business-to-business debts where it is obvious goods are outwith a dwelling house.
How does the above action define a dwelling house
There is no definition of ‘dwelling house’ but it does not include:
A garage, even although it forms part of the structure or building which consists of or includes the dwelling house, or
Other structures or buildings used in connection with the dwelling house.
The effect of this is that all items stored within a garage, including a car, can be attached by an attachment order (which offers quicker enforcement) even although it is obvious the debtor may be the consumer.
How does the Sheriff Officer carry out the Attachment?
Entry and Valuation – Basically the officer enters the property and values the articles being attached at a price which they are likely to fetch if sold on the open market.
Reporting the Attachment – The attachment must then be reported to the court within 14 days.
Removal and Auction of Attached Articles – Once the report of the attachment has been received by the Sheriff, arrangement can then be made for the removal and sale of the articles.
The officer gives seven days’ notice to the debtor of the date specified for the articles removal and may open shut and lockfast places for this purpose.
Any articles which were attached but not removed will no longer be subject to the attachment order. The action of the removed articles shall not take place until at least seven days after the articles have been removed.
There are various actions in relation to the attached articles which are unlawful after their attachment and prior to their removal such as their removal, their gift, damage or destruction. In these circumstances a further attachment may be competent.
Can a debtor stop the process? The debtor can make an application to the Sheriff requesting the attachment should be lifted on the grounds the aggregate value of the attached articles is substantially below the aggregate of the prices they are likely to fetch if sold at auction.
How to attach articles kept in dwelling houses: Consumer Debt. To provide improved debtor protection, the Act has introduced the Exceptional Attachment Order.
However, if granted, an exceptional attachment order will still allow for the debtor’s goods being valued and attached by the order which can thereafter be removed for auction and subsequent sale.
Examination of Exceptional Attachment Orders
Unlike attachment orders which, in effect, will be available to creditors on demand on all occasions (although subject to conditions), an exceptional attachment order will only be granted on specific application being made by the creditor to the Sheriff.
Creditors should note a whole host of items are exempt from being attached leaving only ‘luxury’ items before being capable of attachment. Before commencing the procedure a charge payment has to be served along with the Debt Advice and Information Package.
How is an application for an Exceptional Attachment Order made?
An Exceptional Attachment Order will only be granted on application by the creditor which the sheriff may grant on being satisfied certain matters exist and also that there are exceptional circumstances.
In the event there exceptional circumstances exist the sheriff will grant the order. However, the order will only apply to ‘non-essential’ assets of the debtor kept in any dwelling house specified in the application.
What are exceptional circumstances?
The exceptional circumstances which must exist before granting an exceptional attachment order are an effort to encourage less intrusive enforcement. They include negotiations, arrestment and earnings arrestment (attachment of earnings) which should be first attempted. Also the sheriff will require to be satisfied that there is a reasonable prospect the sum recovered from an auction of the debtor’s non-essential assets would be at least aggregate to the following:
A reasonable estimate of any chargeable expense, and £100.
Subject to exceptional circumstances existing, what matters will the sheriff take into account in deciding whether to make the order?
The nature of the debt (and in particular, whether the debt incurred relates to any tax or duty or any trade or business carried on by the debtor).
Whether the debtor resides in the dwelling house specified in the application.
Whether the debtor carries on a trade or business in that dwelling house.
Whether money advice has been given to the debtor.
Any agreement between the debtor and creditor for the settlement of the debt; and whether a time to pay order has been entered into but not adhered to.
So subject to the conditions of the Act being fulfilled, the sheriff may more readily grant an exceptional attachment order in relation to the jobbing builder who carried on business from his house (essentially a commercial debt) as opposed to a consumer who has fallen into arrears with credit card repayments.
What is the effect of an exceptional attachment order?
The exceptional attachment order shall have the following effect:
Authorise the attachment, removal and auction of the debtor’s non-essential assets kept in any dwelling house specified in the application.
Specify a period during which the order is executed.
Empower the officer to open shut and lockfast places for the purposes of executing the order. The officer must be satisfied there is a person in the house not younger than 16 and capable of understanding the procedures being carried out. Failing this, forced entry can still be taken subject to four days’ notice being given.
Does the Sheriff have any other powers?
Before deciding whether to make an exceptional attachment order the sheriff may make an order for a visit to the debtor by a person specified for the purpose of giving money advice to the debtor; or such other order as the Sheriff may think fit.
When are the attached articles removed?
The Sheriff Officer shall ‘unless it is impractical to do so immediately remove any article attached by an exceptional attachment order from the dwelling house’.
Where however, it is impractical to remove the articles immediately then the Sheriff Officer shall give more notice to the debtor for the date arranged for their removal.
When can the articles be sold and can the debtor redeem them?
Articles cannot be auctioned until seven days have passed since their removal from the dwelling house.
Within the seven-day period the debtor can redeem the goods at the value fixed by the Sheriff Officer, the consequences being that once so redeemed the article will cease to be attached.
Whilst in theory at least, Scotland does have effective debt enforcement remedies actually using them can be a bit more problematic. This is because the more advanced stages of enforcement can incur fairly significant fees due to the sheriff officer. Sheriff officers are the only individuals able to enforce a sheriff court decision. Whilst the debtor is liable for their fees, in the event of these not being settled, they will be the creditor’s responsibility. In certain instances can be as much as 10% of the value of the attached goods (the percentage reduces once the value of attached goods escalates). So it is possible that where there is a poor recovery from auction and sale the creditor could have quite a hefty bill to pay to the sheriff officers. However, in Scotland, there is a realistic alternative by using the insolvency processes of bankruptcy and liquidation. These can often work out far cheaper than their English counterparts. They can be very effective in recovering debt from slow paying debtors with positive results often being quicker and cheaper than instructing an attachment and sale.