Debt Recovery in Scotland: A Brief Guide for Non-Scottish Lawyers

Debt Recovery in Scotland: A Brief Guide for Non-Scottish Lawyers

1. The Background

1.1 Pursuing debtors in the Scottish jurisdiction can prove time consuming, difficult and costly for English creditors and those from other jurisdictions. Differences in jargon, procedure and timescale can all add to the pain of the experience. BBM provide a liaison service for Non-Scottish solicitors (particularly for English firms of Solicitors) and also act on an agency basis in appropriate circumstances. We serve the whole of Scotland from offices in Edinburgh and the Highlands and Islands (Wick, Caithness).

1.2 This brief guide is intended to give some information about pursuing debts in Scotland.

2. Court Action

2.1 Initial Demand

Most action in Scotland is initiated by a demand for payment, either in formal terms (see reference to Statutory Demands below) or an informal written request for payment within, say, 7 days.

2.2 Choice of Court

Unless the debt is subject to a very complex legal dispute and/or is high value (say over £100,000) it is likely that the court action will be brought in the local Sheriff Court. Scotland is divided into 49 Sheriff Court districts, which as the name suggests, have a Sheriff Court in each one. Some Sheriff Courts, in the major centres, have many Sheriffs sitting in them, but some of the smaller Sheriff Courts are not permanently staffed which can lead to delays. The complex and high value claims are generally litigated in the Court of Session (roughly equivalent to the English High Court, although the Court of Session sits as both a Court of first instance and in appellate capacity).

2.3 Choice of Procedure

In terms of procedure relevant to debt recoveries, each sheriff court operates a small claims roll, a summary cause roll and an ordinary cause roll (in this case a “roll” is a list of cases calling in court using a particular procedure).

2.4 Small Claims

If the debt pursued is under £3000 the action must be raised as a small claim. In practical terms this means abbreviated written pleadings and a summary procedure where the case will call in court once and then is usually appointed to an evidential hearing. The difficulty is that if these claims are defended they can be uneconomic to pursue (the maximum expenses one can usually hope to recover, even upon success, is 10% of the amount sued for).

2.5 Summary/Ordinary

Causes Summary Causes relate to those debt recovery cases where amounts between £3000 and £5000 are being pursued. Ordinary Causes are those where amounts over £5,000 are being pursued. As the name suggests Summary Causes still have a summary procedure but Ordinary Causes have full written pleadings. This can mean that even they are uneconomic for smaller value amounts if there is a genuine dispute being litigated between the parties. More often than not, such cases are settled on an economic basis because of this. An ordinary cause can often cost between £5,000 and £10,000 plus VAT and outlays to litigate to a conclusion, and some complex ones can cost considerably more. However, even upon success normally one would only expect to recover about two thirds of the expenses (Scottish courts refer to expenses as opposed to costs) of the amount the client has actually spent on fees and outlays (our equivalent of disbursements).

2.6 Court Costs

In an Ordinary Cause court costs will usually be under £1,000 over the duration of the case and are much less in Summary Causes and Small Claims.

2.7 Defended Procedure

Defended procedure is broadly similar to the kind of approach one would expect south of the border, although the terminology is very different. Commercial Cases in the Court of Session or in one of the Sheriff Courts that operates commercial procedure (in these cases a Sheriff or Judge Case Manages for expeditious progress), and which has a specialised commercial Judge case managing commercial disputes, have their own streamlined procedure. Otherwise, normal procedure will usually involve service of the documents and the defender having around three weeks to indicate whether the intend to defend the claim or to counter claim. The Defender will then usually have a further 2 weeks to lodge initial defences. Parties then enter into a period, depending on the case, of between 8 and 16 weeks, when the respective written cases can be adjusted and finalised. In the Sheriff Court the case then calls generally for an “Options Hearing” in front of a sheriff where he comes to a view about how the case can be most expeditiously be moved forward (for example, is a legal debate or argument required on a legal point or is a Proof (trial) required to hear witnesses for either side). Typically parties would expect to get to a Proof hearing within about 12 months of the case starting. Although terminology in Court of Session Cases is different again, the general thrust of progress is very similar.

3. Insolvency as a Debt Recovery Option

3.1 The best recovery option in Scotland will normally depend on what ultimate enforcement mechanisim is likely to be the most beneficial. If there is an admitted debt (or no substantial good faith denial of the debt) a petition for winding up (liquidation) may often yield best prospects of a return-assuming it is a Corporate Debtor being pursued.

3.2 Appointment of Provisional Liquidators

Winding-Up may bring best prospects of a return to Creditors, partly because in Scotland provisional liquidators are appointed much more commonly than in England. There is of course no official receiver in Scotland. The creditor nominates an insolvency practitioner who is willing to consent to be appointed. The court will appoint if they are satisfied that it is in the interest of the general body of creditors that a holding operation is put in place. Although the Scottish courts do not commend provisional liquidation as a debt recovery process per se, the fact is if there is an admitted debt with no other obvious assets to attach or arrest (more on these expressions below) the individual creditor’s best chance of a realisation may well be to petition for the winding up of the company. As is the case throughout the UK, the creditor who gets in first will often have the best chance of being paid off by third party funding, either through director, bank or other connected party. 

3.3 Appropriate Forum

The insolvency process either takes place in the Sheriff Court (if the company’s issued share capital is less than £120,000), or the Court of Session (usually only if the issued shared capital is greater than that amount). In each case, the procedure to appoint a provisional liquidator involves presenting a petition and associated documents to the court and then appearing at a hearing.

3.4 Caveats

Companies may register their interest by way of a Caveat (all limited companies with significant Scottish interests should have these documents lodged and advice can be provided in that regard as required). These operate so as to give companies with a caveat the opportunity to argue against the appointment of a provisional liquidator (or an other interim order (e.g. interdict, Scottish Equivalent of an injunction) if such an appointment is sought.

3.5 The Provisional Liquidation Process

In the event that an insolvency practitioner is appointed, the typical Scottish practice is that they will carry out a number of investigations on a speculative basis. If the creditor is paid off then the insolvency practitioner will seek an order from the court removing them from office. If the creditor does not pay, the insolvency practitioner will form a view about whether there are sufficient assets to meet the costs of the winding up. If he forms the view that there is, there are various statutory steps that have to be taken in terms of advertising and intimation before a winding up order can be made and an insolvency practitioner can be appointed interim liquidator.

3.6 In the event that there are insufficient funds the insolvency practitioner may ask the creditor for an indemnity of a limited amount of his fees (in some cases a creditor might wish to indemnify the liquidator, where for example investigation may yield significant payment back from directors to the liquidation) or alternatively seek an order from the court removing him from office on the ground that there are insufficient funds to pay his fees.

3.7 Apparent Insolvency

Apparent insolvency can be created for the purposes of a winding up petition through the grounds set out in the Insolvency Act 1986. However, one Scottish difference is typically that instead of serving a 21 day Statutory Demand against a limited company, the court will hold a company is unable to pay its debts as they fall due if they fail to positively respond to a 72 hour winding up notice demand (if it is served by sheriff officer (Scottish judicial officer roughly equivalent to a process server) and if there is some other supporting evidence).

3.8 Personal Insolvency as a Recovery Route

If an individual has no cash assets or earnings that are known of, insolvency is also an appropriate option to consider if they have an interest in heritage to be realised. However, it is not always straight forward, because Scots law gives individuals certain protections when it comes to forcing a sale of their family home and secondly if sequestration (the equivalent to bankruptcy) is pursued before a court decree is obtained (that is by serving a 21 day demand) a simple denial by the debtor of the amounts due (even if there is no valid reason for it) brings the procedure to an end before sequestration can be applied for.  

4. Other Enforcement Options

4.1 Other enforcement options can be appropriate if there are particular assets of value (assets in an individual debtor’s home or certain “tools of the trade” are sometimes harder to realise or attack because of debtor protection rules) These include:-

4.2 Attachment: This effectively involves Sheriff Officers attaching goods (anything from motor vehicles to boats, to unencumbered machinery), except goods in the debtor’s dwelling house which can only be attached if an exceptional attachment order has been granted. Within 14 days of carrying out the attachment the Sheriff Officer must make a report to the Sheriff who can arrange to remove the items and sell them at auction which the Sheriff Officer must attend. The net price for the goods auctioned is then paid to the creditor.

4.3 Money attachment: In limited circumstances this allows Sheriff Officer to enter premises, such as retailers or hospitality providers, and attach the money in the till or safe;

4.4 Arrestment/Earnings Arrestment: This effectively freezes the money in a third party’s hands that is due to the debtor (and can include (although there are restrictions on the amounts involved) earning arrestments which involve amounts being paid to the creditor by the debtor’s employer). A normal arrestment freezes transfer or delivery of the goods or amounts. The arrested funds are automatically released after 14 weeks. The arrestee has a statutory duty to send the creditor a form of disclosure within 3 weeks of the arrestment detailing the nature and value of the items arrested.

4.5 Inhibition: This allows an order preventing sale of heritable property belonging to debtor and can be a useful negotiating tool. The Scottish Government have enacted provisions to bring in a further diligence/enforcement mechanism called land attachment which would allow land to be sold on a forced basis, but they have not actually brought those provisions into force.

4.6 Diligence on the Dependence of a Court Action

Another significant Scottish difference is that if a court is satisfied that a debtor may be verging on insolvency, or trying to dissipate assets to defeat the creditor, some of these diligences such as arrestment or attachment can be obtained on an interim basis at the beginning of a court action pending its eventual resolution (i.e assets can be frozen so that creditors know that there are some prospects of a return if they are eventually successful). There are risks that need to be discussed before such applications are made.

5. Contact Details

Eric Baijal heads our team liasing with non-Scottish Solicitors and Insolvency Practitioners. We would be delighted to discuss Scottish clients and cases on a no obligation basis if we can assist. Contact us today.

This guide is current 11 September 2012 and is our understanding of the position described at that date. It does not constitute legal advice. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).