Understanding Debt Collection Law – Part 2

Hello, and welcome back to part 2 of our ‘understanding debt collection law’ series. If you missed part 1, you can read it here. The aim of this mini-series is to help you understand some of the basic laws, guidance and regulations that guide the debt collection world so that you, whether you’re a creditor or a debtor, know your position and how best to handle it. In part 1 we looked at the legal frameworks that govern debt collection practices, fair practice, communication, interest, charges and fees. Today, we’re going to be looking at some slightly more specific regulations and situations and what they mean for you.

Debt Recovery Costs

This is where things get a bit murky. You may remember that in part 1, we discussed the fact that businesses can add recovery costs onto the fees they charge to their client on top of interest, and even claim for it if the case goes to court. But the actual legislation around the amount that businesses can claim for recovering a debt is quite ambiguous. It simply states that the cost should be ‘reasonable’. This means that it should be proportionate to the size of the debt recovered. However, the costs are also allowed to include the businesses’ time spent trying to recover the debt internally, as well as any costs incurred using a debt collection agency.

But that doesn’t mean creditors or debt collection agencies can inflate the amount owed for no reason. Any interest, charges or fees have to be included in the original agreement, or must be legally permissible according to the Late Payment of Commercial Debts (Interest) Act 1998 and the Late Payment of Commercial Debts Regulation 2013. If you apply excessive charges or fees, they can be challenged in court.

Disputed Debts

Disputes can and do happen, and debt owed is no exception. If a debtor disputes a debt, then collection efforts need to stop until the dispute has been answered. During this time a collector can’t keep demanding payment, and the creditor needs to explore all avenues open to try and settle the conflict. If all of these efforts fail, legal proceedings can be started as a final option.

Vulnerable Consumers

There are also some regulations around vulnerable consumers. Specifically, the FCA says that businesses should have special considerations for dealing with vulnerable customers, like those with mental health issues or financial hardships. It’s very much an unregulated space, but it’s recommended that any non-regulated debt collection agencies should adopt a lenient approach and provide additional support.

The FCA rules are mainly aimed at retail customers, but that doesn’t mean B2B companies should ignore them. The FCA guidance also states that businesses should remember the principles and the obligation to treat all customers fairly, including business customers.

Legal Action

If a debtor refuses to pay, the creditor has the right to take legal action to recover the debt. This is done by issuing proceedings in County Court. This can be a short or a lengthy process, depending on the type of debt, the amount owed and whether a defence is filed. If your claim is successful a County Court Judgment (CCJ) is given in your favour.  If payment is still not made following the judgment, you can look to take enforcement action.

If it’s a business debt over £750 for a limited company, and you have a court order or written demand for payment, you could also issue a Winding-up Petition in the High Court. More on that shortly.

Statutory Demand

A Statutory Demand isn’t a court document – but it is a document that the courts recognise as an official demand for payment, which is important if you think you may need to move to legal proceedings. For the demand to be valid, it must be completed and served in a prescribed format, which is laid out in the Insolvency Rules 1986.

There are three types of forms:

• Debts payable immediately
• Debts payable pursuant to a court order
• Obligations payable sometime in the future (this is often used if a creditor thinks a debtor won’t be able to pay a debt in the future when they need to)

A creditor can issue a Statutory Demand for payment due immediately without a judgment, but the debt mustn’t be disputed. If there is a dispute, then this method can’t be used.

In all of these cases, the debtor has 21 days to pay the debt. Once received, they also have 18 days from the service date to apply to the court to set aside the demand – in which case the creditor will need to provide a particularised witness statement and any evidence providing the dispute. If the court finds that there are reasonable grounds for the dispute, then they could set aside the demand and order the creditor to pay the debtor’s incurred legal costs.

Winding-Up Petitions

As we mentioned earlier, if your company has issued a statutory demand to a limited company that has expired without payment, then you could issue a Winding-up Petition. This petition is part of the Insolvency Act 1986. In Section 123 of the Act, it states that:

“A company is deemed unable to pay its debts” if a creditor has served a demand for payment on the company at its registered address and three weeks have elapsed since the date of service, and after that, the company has neglected to pay the sum owed “or to secure or compound for it to the reasonable satisfaction of the creditor,” or “if it is proven to the satisfaction of the court that the company is unable to pay its debts as they fall due”

Then the company may be wound up. It also states that:

“If it is proved to the satisfaction of the court that the value of a company’s assets is less than its liabilities, taking into account its contingent and prospective liabilities,” it may also be wound up.

This is a big legal step, and one you should think carefully about. Issuing these petitions can be fatal to the debtor’s business once you put the ball in motion, and you might not actually get what you want in the end. Due to the way these things are handled by the courts and assets are realised, there’s no guarantee you’ll actually get the money you’re owed if the debtor doesn’t have enough money and assets to pay all of its creditors. If this is an option you’re considering, always seek legal advice.

Remember, this is a simplified version of some of the UK’s debt collection laws and regulations. It’s not an extensive guide, and should not be construed as advice. If you need information or guidance on a situation you’re experiencing, we highly recommend you seek expert advice. At Debtcol, debt collection is what we do, day in, day out. We pride ourselves on our ethics and our results, and we aim to help business owners not only recover money owed to them, but also put policies in place to ensure late payments are reduced in the future. If you’d like to know more, just get in touch with the team today.