A guide to diligence in Scotland
So, you’ve been successful in obtaining a court order against a debtor who owes you a sum of money, but the debtor is still not engaging. What next?
A court order for payment of money unfortunately does not guarantee that the debtor will pay. It is often the case that the debtor maintains no contact with the creditor after a court order is issued. A court order outlines the Sheriff’s decision in a case and comes in the form of a decision form (used in simple procedure actions for claims of £5000 or less) or a decree (used in ordinary cause action for claims of over £5000). If the debtor still does not pay once the court order has been sent to them, you have options to enforce the court order through diligence.
Diligence is also known as enforcement action in Scotland. The type of diligence you may use will depend on the information you have about the debtor, such as whether or not they own heritable or moveable property, who their employer is, who they bank with, or their financial situation for example. It can be beneficial to research this information prior to raising a court action, to ensure that there is a means of enforcing a court order if the debtor won’t pay.
Diligence is most often carried out after the court order has been issued, as a means of enforcing it. However, in certain circumstances diligence can be used before a court order is granted or, even, before the debtor knows that the court action has started. This is called interim diligence, and the creditor must convince the court that it is justified before the court will grant an order in its favour.
Post-court order, a Charge for Payment is often the first step taken in enforcing the order. It is a formal demand for payment and is served by Sheriff Officers. It gives the debtor 14 days to pay the debt, before enforcement action is taken. This article focuses mainly on diligence after a court decree or decision form has been issued.
Arrestment
An arrestment is used to freeze money owned by or that is due to be paid to the debtor. Types of arrestment can include an earnings arrestment, bank arrestment or third-party arrestment.
If you know who the debtor’s employer is, an earnings arrestment is a good means of obtaining payment, usually by instalments. The arrestment is served on the employer by Sheriff Officers and obliges the employer to pay out a sum of the debtor’s earnings to the creditor usually every month. There is a protected minimum that is required by law to be kept back for the debtor’s subsistence.
A bank arrestment involves freezing money in the debtor’s bank account. The pitfall of this type of diligence is that the money requires to be in the debtor’s bank account at the time that the arrestment is served. If there are not sufficient funds in the bank account, no funds will be caught by the arrestment. As with an earnings arrestment, there is a protected minimum that must be left in the debtor’s bank account.
A third-party arrestment is used where money is owed to the debtor by a third party, but the money has not been transferred yet. The arrestment is served on the third party by Sheriff Officers, and it restricts the third party from transferring the money to the debtor until the debt has been settled.
Inhibition
An inhibition can be used if you are aware of the debtor owning heritable property (usually land or buildings).
An inhibition is served on the debtor by Sheriff Officers and is registered in the Register of Inhibitions for a period of 5 years. The inhibition can be renewed at the end of the 5 years and for up to 20 years. The inhibition prevents the debtor from selling, transferring title to or obtaining a new security over their property until they have accounted to the creditor for their debt.
An inhibition is often not a quick means of securing payment (it can take a few years to successfully recover outstanding debt if the debtor doesn’t intend to sell their property for some time), but it can be an effective way of enforcing a court order if the creditor is prepared to wait. Sequestration or bankruptcy, pre-existing securities or debts secured over heritable property can all render an inhibition less effective, so it is important to take legal advice in a particular case.
Attachment
If you have knowledge that the debtor owns assets, attachment can be used to remove and auction certain goods. “Attachment and sale” involves instructing Sheriff Officers to attach moveable property that is kept outside of a dwelling house. This can include items stored in a garage or outhouse.
Attachment is generally effective for business debts where it is likely that goods are not kept inside a dwelling house e.g. in a factory or office. Assets that will not be included in an attachment are assets reasonably required for the debtor’s trade/business not exceeding £1000 in value (correct at time of writing).
To carry out an attachment, the Sheriff Officer will value the goods at the price they are likely to achieve at auction and will report to the court within 14 days of valuing the goods, during which time the debtor can redeem them. At auction the goods can be bought by a third party, the creditor or the debtor. If the goods are not sold at auction, the creditor can make arrangements to take possession. The same property cannot, generally, be attached twice. The main pitfall of attachment and sale is the unpredictability of auction – there is no guarantee that the goods will sell, and Sheriff Officers’ and Auctioneers’ fees will still require to be paid if this is the case.
Exceptional attachment is an option that involves goods being removed from inside a debtor’s dwelling house, sometimes using forced entry. This type of attachment is very rarely considered and is only approved by the court in exceptional circumstances.
Sequestration
A creditor can petition the court for the debtor’s sequestration; however certain criteria must be met. The debtor must owe at least £5000 and they must be declared “apparently insolvent” within the four months prior to the petition being presented. Apparent insolvency is when a debtor cannot pay their debts as they become due. The Bankruptcy (Scotland) Act 2016 outlines the criteria that need to be met in order for a debtor to be deemed apparently insolvent. In terms of enforcing a court order, one of the most common ways to evidence that a debtor is apparently insolvent is to serve a Charge for Payment. If a Charge for Payment has been served and the 14-day period has lapsed, the debtor can be deemed apparently insolvent from the 15th day, and a petition for their sequestration can be presented to the court within four months after this date.
Another common means of showing apparent insolvency involves serving a Statutory Demand. This is a formal written notice from the creditor to the debtor, giving the debtor 21 days to respond. There are rules and requirements for serving a statutory demand, on which you should seek legal advice addressing your specific case.
At Macleod & MacCallum, our debt recovery team are here to advise you in all aspects of recovering payment from a debtor, including (but not limited to) sending out a final warning letter, raising a court action, and explaining the different diligence options available to you to enforce a court decree.
We offer fixed-fee and retainer payment options for businesses, more details of which are available on request.
If you would like to discuss your situation with us, we are happy to help. You can contact us on 01463 239 393 or debtrecovery@macandmac.co.uk.
Charlotte MacCulloch