Debt Collection in the UK

• A rise in the total DSO to 53 days is viewed as an effect of outstanding high value invoices.

• UK courts are effective in making prompt rulings, but recent rate changes mean that large value judgments can be costly. Timely escalation from credit control to competent agencies for the collection of external debt remains effective.

• The insolvency process is tailored towards securing investors' interests, while the need to save profitable companies has been emphasised.

• These litigation would not ensure the debt would be restored, as there are no limits in law as to how much liability can be written off during renegotiations.

• In addition, liquidation proceedings rarely would yield any proceeds to unsecured creditors.

1. Summary

1.1. General financial information

1.1.1. Visibility on company records is accurate, though limited. SMEs, for example, are not required to publish complete financial records.

1.2. Key legal structures

1.2.1. Corporate debt responsibility is defined by legal structures which are listed as follows:

• Rather limited companies sometimes take the form of a sole proprietorship, a corporate corporation formed by assets donated and operated by a person acting on their own account who can thus be held liable for all debts. Partnerships are formed by at least two parties, who are collectively and severally liable for the entity's obligations.

• Liability restrictions may be enforced by Limited Partnerships (LLPs) which require one or more jointly liable managing partners for the activities and debts of the business, together with silent partners who are responsible only in relation to their capital investment.

• Shareholders in a Limited Liability Company (Ltd) are held liable for the company's obligations in proportion to their capital investment, but a minimum capital fund of GBP may remain 1. Larger companies would rather be formed by Public Limited Companies (PLCs) or Joint Stock Companies (minimum GBP 50,000 capital).

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1.3. Regulatory framework

1.3.1. The UK is split into three distinct legal structures, England and Wales legislation, Scottish rules and Northern Ireland laws. The rule is partially established by legislation, but the judgments of the higher courts are regarded as a statutory case law that the lower courts will obey. The information given here applies to loans, contracts and lawsuits that are regulated by England and Wales laws.

1.3.2. Business court proceedings are regulated by the Code of Civil Procedure (CPR). County courts will usually hear small claims (professional error, personal injury) greater than GBP 50,000, while the Queen's Bench Court manages most contract (and tort) lawsuits.

1.3.3. Although it would prefer to deal with claims involving trusts, estates, land, mortgages, deeds, partnerships and corporate insolvency matters, the Chancery Division may also consider certain contractual disputes. In addition, the Court of Commerce (High Court), the Court of Bankruptcy and Companies and the Court of Patents (Chancery Division) render judgments by specialized judges.

2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. DSO has grown to an average of 53 days for listed companies in the United Kingdom (2016 figures). This increase is believed to be due to an increase in unpaid high value invoices, in particular when trading outside the UK.

2.2. Late interests

2.2.1. Directive 2011/7/EU on late payment interest, which stipulates that EU payments must be rendered within 60 days, has been transposed into domestic law through the 2013 Late Payment of Commercial Debts Regulations (which amends the 1998 Late Payment of Commercial Debts (Interest) Act). The transposing statute is more strict than the directive: Invoices must be paid within 30 days, unless specifically accepted and given that the borrower is not unreasonable.

2.2.2. Consequently, compensation on late payments providing a 'substantial solution' may be sought either on the grounds of the contractual agreement, or on the basis of a rise of at least 8 percentage points in the base rate of the Bank of England.

2.3. Costs of debt collection

2.3.1. Moreover, the new law requires borrowers to recover reasonable costs and cover the costs of commissioning DCA.

2.4. Protecting ownership

2.4.1. The law entitles a creditor to retain ownership of goods until its debtor has fully paid the related invoice, as long as a written agreement has been concluded between the parties. Moreover, more sophisticated forms of Title Retention (RoT) provisions(' all monies clauses') allow ownership to be maintained even though the goods have gone through a process of transformation, but the goods must remain identifiable (i.e. untransformed).

2.4.2. RoT provisions are normally applied in connection with insolvency proceedings; however, in practice they may also be an effective means of exerting pressure when collecting the debt, as they would allow the goods to be reclaimed if the invoice is left unpaid.

2.5. Payments

2.5.1. The most common methods of payment are as follows: bank transfers are among the most prevalent means of payment for international transactions, as they are quick, protected and sponsored internationally and domestically by an increasingly integrated banking network. Transfers are usually guaranteed for export transactions through an Export Credit Insurance policy which helps to minimize the risk of sudden or unforeseen insolvency of customers.

2.5.2. Additionally, Standby Letters of Credit (a bank guarantees the creditworthiness and repayment ability of the debtor) are often used in conjunction with export shipping transactions because they reflect payment terms: invoices must be charged within 30 days, unless otherwise explicitly accepted and given that it is not unreasonable to the borrower.

2.5.4. Reliable (though costly) promises that can be activated as a' bill of last resort' if the client fails to fulfill a contractual obligation. In fact, irrevocable and verified Documentary Letters of Credit (a debtor promises that a certain amount of money will be made available to a borrower through a bank once certain terms specifically agreed upon by the parties have been met) are gradually being dependent upon.

2.5.5. Checks are becoming less used within the United Kingdom and should be avoided since they can be cancelled at any time and offer no guarantee (bad checks do not result in criminal prosecution). Payments by credit and debit card over the phone have replaced the payments by checks.

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3. Collecting payments

3.1. Amicable action

3.1.1. Negotiating. Domestic courts are effective, and legal changes have significantly improved lawsuit procedures since 1999, while agreeable mediation options can nevertheless be viewed as a serious alternative to structured litigation.

3.1.2. Before starting legal proceedings against a debtor, asset assessment is important as it allows verification as to whether the firm is still active and whether the chances of recovery are good. Therefore, it is important to be mindful of the solvency condition of the debtor: once insolvency proceedings have been started, payment of a loan will indeed become unlikely.

3.2. Legal proceedings

3.2.1. Ordinary proceedings. Legal action usually starts after amicable selection has ended. Before making a claim, the claimant must send a detailed letter to the defendant setting out a clear summary of the facts on which the claim is based, including any supporting documents and providing the defendant with a reasonable period of time to respond.

3.2.2. The defendant will respond by checking whether the argument is approved, and if not, why, providing supporting evidence. All sides will act reasonably and try to resolve disputes before trial and should strive to act in this way throughout the lawsuit otherwise the court will have the right to penalize unfair actions.

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3.2.3. Summary decisions may be received on the condition that the liability is certain and incontestable. For example, if the debt reaches GBP 750, a compulsory demand process (costing about GBP 1,500) requires you to seek reimbursement within 21 days (it also enables you to lodge a wind up motion if the debtor fails to respond).

3.2.4. In addition, a European Payment Order mechanism which enables the recovery of undisputed debts (under Regulation EC No 1896/2006) may be activated when the debtor entity has assets in other EU Member States. In this situation, the suing party may order a domestic court to issue an Order to Pay which will then be enforceable without exequatur proceedings in all European Union countries (except Denmark).

3.2.5. When action is unavoidable, the petition will be released by the court involved and served on the claimant, who will be granted 14 days of notice to accept the allegation or lodge a defense. If the defendant accepts the lawsuit within that period, they will be granted another 14 days (i.e. a minimum of 28 days from the allegation to submit a defense service), but if the defendant refuses to file a response, the defendant may petition for default judgment before the trial.

3.2.6. If the defendant presents a response and the complainant finds it to be without substance and unlikely to succeed, the defense and/or summary judgment can appeal to the court for strike.

3.2.7. The judge will typically schedule an appeal hearing and the complainant will have to show the court that the defendant has no fair chance of winning the lawsuit, and that there is no other justification why the claim should go to trial. If the complainant is successful, judgement will be taken against the defendant and the applicant will demand fixed claim costs. If the submission is rejected, as laid out below, the lawsuit must proceed as defending evidence.

3.2.8. If an appeal is lodged, the court will assign the lawsuit to a particular track based on its interest (Small Claims Track for cases where the importance of the argument is below GBP 10,000, Fast-Track for cases up to GBP 25,000 expected to last less than a day, and where specialist testimony is restricted to one witness per side, and Multi Track for all other claims in just two fields).

3.2.9. If the lawsuit is assigned to the small claims list, the judge must set a date (which is informal) for the final hearing when the court can make a decision. If the lawsuit is moved to the fast track or multi-track, the judge may set guidelines for bringing the dispute to jury instead of merely scheduling a final hearing as with the small claims track.

3.2.10. Instructions will include the declaration by each side of the facts, the sharing of defendant testimony and the setting of a trial date. On the multi-track, the court may require the parties to attend a pre-trial case management conference to ensure they have complied with the orders and are ready for trial.

3.2.11. By filing a petition, the defendant must determine the relief they are pursuing, which may include a monetary judgement for a loan, compensatory damages, statutory or prohibitory injunctions, notices, relevant compliance and property sales orders.

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3.2.12. Required documents. The applicant must always be in a position to justify their entitlement to the redress they pursue. For example, if the complainant requests a money judgement of non-payment of the products, it should provide:

• Confirmation of the defendant's request
• Invoice
• Distribution notice
• Order for payment

3.2.13. The necessary paperwork will rely on the redress requested, but it is always best to keep good records, including accounting records, and copies of consumer correspondence. Note whether the loan is insured or whether it is protected by personal guarantee.

3.2.14. Time limits. Employment applications will usually be made within six years, as provided for in the 1980 Limitation Act (as amended). Legal proceedings can not be released for recuperation beyond this limitation period.

3.2.15. Precautionary measures. Pending a final decision, precautionary measures may help to preserve the interests of the creditor. Upon request, the courts would typically grant preliminary injunctions to preserve the status quo (freezing injunctions, search orders, specific disclosure, etc..). However, it is necessary to demonstrate that irreparable harm (dissipation of assets, destruction of evidence, etc.) is likely, unless the injunction is granted.

3.2.16. These measures can usually be ordered ex parte (i.e. without the respondent being present) and can be obtained on the same day depending on the circumstances of the case, although the court may require the claimant to provide security on costs in order to compensate the respondent for potential losses resulting from the emergency action.

3.2.17. Appeal lodging. The parties may be allowed to lodge an appeal against a first-instance ruling, and they must meet the criteria for appeal which is that the court made an error in law or evidence in making its verdict. Appeals are not common since the risk of costs can often outweigh the commercial advantage of the proceeding.

3.2.18. Enforcing court decisions. Once a verdict is issued, either in default or after conviction, if reimbursement is not collected from the defendant of the judgment, enforcement action may be required. The judgment claimant has a number of options to sell. The appeal for a warrant of execution may be submitted to the court where the verdict was issued.

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3.2.19. This form of enforcement is apt for smaller outstanding debt amounts. The Bailiff County Court will attend the address of the debtor's judgment and ask for payment. The bailiff may impose the equivalent value of the debt judgment upon the products. The bailiff shall not be able to enter residential properties, unless invited. The duration of an execution warrant is generally for a maximum of 12 months, and may be expanded progressively upon submission.

3.2.20. A demand for a Writ of Fieri Facias (Writ of Fi Fa) may also be filed with the court where the judgment was rendered. If the outstanding debt is below GBP 600, the judgment defendant will not cover the execution charges, and as such a warrant of execution would be more acceptable. If the debt reaches GBP 600, an appeal may be made for the move of litigation to the High Court to enable the issuing of a Writ of Fi Fa. The Fi Fa Writ should then be sent to a High Court Enforcement Officer sometimes identified as a judge.

3.2.21. The prosecutor will then try to execute the writ and add to the debt verdict any fines, poundage, or other execution charges. The sheriff will charge merchandise at the equivalent value of the debt judgement to be offered at the sale in order to offset the outstanding amount.

3.2.22. Orders to obtain information will assist in determining the assets of the judgment debtor and can be obtained against an entity or a company / corporation director. The judgment claimant will be ordered to attend trial and questions will be raised regarding their financial means so that the judgment creditor will agree on the correct disciplinary process.

3.2.23. Debt judgments by third parties may be issued if the claimant is owed money to the judgement. The judgment borrower may insist that these monies be paid directly to them, e.g. money kept inside the bank account of the judgment debtor.

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3.2.24. Charging orders require the judgment claimant demanding protection of property owned by the judgment defendant (e.g. their home) to exceed the interest of the default verdict. It is not strictly a' charge' over property but gives the creditor of the judgment an interest in the property's proceeds of sale. Once a judgment borrower has a payment order they will appeal to the court for an order to sell the property to which they refer. There should be collateral available and the judge must take into account a number of factors such as whether the house is a family home.

3.2.25. Duration of a legal action. Cases involving international parties would not be treated differently from domestic claims by the courts; however the costs and delays for bringing foreign witnesses may be greater.

3.2.26. Costs of a legal action. As a general rule, the defeated party may be obliged to pay part of the costs of the other party. Also fixed costs can be claimed on the small claims line, so one will only be able to pursue compensation of a fixed amount if successful, irrespective of legal costs. The parties will file and serve cost statements prior to the trial for quick track and multi-track claims, and the court will consider what proportion of the claimed costs should be payable by the defeated party after the trial's conclusion.

3.2.27. The rules of the court require the court to take into consideration a wide number of factors when determining expenses, including the actions of a defendant and whether it has acted reasonably and in the spirit of the rules of the court before and during the trial.

3.2.28. Conditional contracts that lawyers are not paid in advance but instead earn a fixed amount of performance (i.e.' no-win-no-fee') are valid. After April 2013, contingent payments that allow legal professionals to obtain a share of the final award have been limited to 50 percent of the demand. Third-party litigation support companies are licensed, although uncommon.

3.3. Alternatives to legal action

3.3.1. Alternative methods of dispute resolution (ADR). Instead, parties can decide to settle their disagreement by alternative methods such as mediation, early impartial appraisal, professional decision or arbitration.

3.3.2. Mediation requires the selection of a mediator who is in control of having the sides reach a compromise. The mediator, in other terms, has no authority to decide on behalf of the parties and can not commit the parties to a judgment. An agreement is only binding where a settlement agreement is concluded at the end of the mediation between the parties. The mediator really does act as settlement facilitator.

3.3.3. Arbitration involves the parties agreeing to rely on an independent and impartial third party arbitrator who is authorized on their behalf to settle the dispute. Decision of the arbitrators will be binding upon the parties.

3.3.4. As an out-of-court mediation process, ADR can be cost-effective, usually eliminates appeals, requires secrecy to be maintained and creates a legal judgment that can then be applied before the courts if appropriate. The international arbitration may also be considered when involving international transactions.

3.3.5. Foreign forums. It is rather unique to have global forums for enforceable rulings against domestic debtors as domestic courts normally give timely judgments. Nonetheless, the United Kingdom is a signatory of the Rome I Agreement on the law relevant to contractual obligations, which specifies that the parties to a contract may, by mutual agreement, choose the law applicable to a contract and choose the court which will have jurisdiction over conflicts.

3.3.6. The court will decide whether the case is one which has exclusive jurisdiction over the England and Wales courts (e.g. employment, consumer protection, unfair contracts). If the England and Wales courts do not have sole jurisdiction, the court can nominate the matter to be "seized" jurisdiction.

3.3.7. The court would then decide whether the parties have agreed (within the contract) that the England and Wales courts will have authority, or whether it is a matter that would be better tried in England and Wales courts. England and Wales courts normally hear disputes that are subject to English law but occasionally hear cases that are based on other legal codes, particularly international contracts for the supply of goods.

3.3.8. Enforcing international rewards. International rulings against legal debtors may be applied in the United Kingdom while different circumstances can occur. On the one side, decisions made in an EU country will profit from the especially favorable requirements for compliance. In comparison to EU enforcement judgments which are usually enforceable immediately in domestic courts, the two primary ways of imposing an EU judgment in the United Kingdom are the use of a European Compliance Order (EEO), as provided for in Regulation EC No 805/2004, where the argument is undisputed, or the declaration of the judgment under the terms of Brussels I Regulation (44/2001).

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3.3.9. If the decision applies as an uncontested argument, it can be applied automatically without registering in England and Wales, using an EEO. The English bailiffs will need I a summary of the ruling, (ii) an EEO certificate (issued by the initial decision-making tribunal) and (iii) copies of I and (ii). If the claimant has properties in England and Wales the judgement against those assets may be applied. Likewise, a European Small Claims Process (as provided for in Regulation EC 861/2007) aimed at removing intermediate steps can be counted on while implementing judgments of up to EUR 2000.

3.3.10. The process for filing an EU decision in England and Wales is relatively simple, if the argument is contested. The holder of the judgment will appeal to the High Court for the judgment to be recorded and provide the High Court with an approved copy of the judgment, a verified transcript (if not in English), a certificate of Annex V provided by the original decision-making court, and, where interest is asserted, a declaration stating the amount and interest rate at the date of the application and forwards. Once the judgment has been registered, it can be enforced as if it were an English judgment (such an exequatur procedure is no longer required as from January 2015, according to Recast Regulation EC 1215/2012).

3.3.11. On the other hand, judgments rendered outside the EU in foreign countries would normally be recognized and enforced provided the issuing country is a party to a bilateral or multilateral agreement with the UK. Exequatur proceedings would take place before domestic courts, in the absence of reciprocal arrangements. As a general rule, international judgments can not be challenged on the merits of the case, although courts may usually reject admissibility where the issuing foreign courts do not accept and impose British (reciprocity) judgments, where the foreign judgment is neither conclusive nor enforceable in the issuing region, considered inconsistent with domestic public policy or with domestic c decisions

4. Managing insolvent debtors

4.1. Insolvency in UK

4.1.1. In the UK, insolvency may be considered from various perspectives. On the one side, the word 'bankruptcy' in the UK generally refers to insolvent persons, but they may have few or no properties, and bankruptcy proceedings will typically not be cost-effective to seek since the unsecured creditor will obtain a very small payout, if any, at all.

4.1.2. Nevertheless, bankruptcy proceedings may be used against persons (such as sole traders) who are responsible for undisputed debts in excess of GBP 750, unless the borrower is able to show that the debtor can not pay.

4.1.3. Petitions should be submitted to the nearest county court, and must be served personally to the debtor within 14 days of the bankruptcy hearing date. If a bankruptcy decree is released, either the Bankruptcy Official Receiver or Trustee must seek to obtain properties for creditors' gain. There are various rules regarding the properties that could be obtained and the way in which the Official Receiver/Trustee will conduct the work. There are also guidelines on how investors are to be compensated, e.g. insured and preferred creditors are to be paid first and unsecured creditors are to collect a pro-rata payout after bankruptcy.

4.1.4. There are also constitutional protections that may support the Official Receiver / Trustee, such as the ability to set aside agreements entered into by the claimant shortly before bankruptcy that were meant to put properties outside creditors ' control. Having said that, if the debtor has little or no collateral, bankruptcy typically will not be cost-effective and, if any, the unsecured creditor will earn a very small dividend.

4.1.5. Personal Voluntary Arrangements (IVA) may also be concluded: these are legally binding arrangements between the debtor and their creditors that usually last for five years, a time during which the debtor is expected to pay what he can manage above reasonable living expenses into the IVA. Both debt and costs will be fixed at 0 per cent and investors will not be able to request additional payments. Once the creditors approve the IVA, the Insolvency Practitioner must monitor the progress of the IVA and allocate fees pro-rata to all creditors until the successful completion of the IVA. Debtors also join an IVA so as not to be declared bankrupt.

4.1.6. On the other side, separate cases may also be taken against insolvent firms (as provided for in the 1986 Insolvency Act, as revised in 2000), which narrowly describes insolvency as the condition of a corporation considered unable to pay its debts as they are due, or where the sum of its assets is less than the total of its liabilities taking into account its future and prospective liabilities Insolvency proceedings for the corporation shall be considered below.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings. No particular out-of-court cases are called for in statute.

4.2.2. Debt restructuring. While the system remains focused on protecting the creditor's rights, the 2002 Enterprise Act has put emphasis on rescuing businesses. Several procedures may be considered, but in order to initiate any type of insolvency proceedings one must be able to prove the debt by either having a money payment judgment or documentation proving the debt (e.g. invoices, account statements, delivery notes, etc.).

4.2.3. Company Voluntary Arrangement (CVA) proceedings first allow a debtor, under the supervision of an insolvency practitioner, to retain legal control over the firm. The parties are thus given the opportunity to conclude a legally binding agreement which is supposed to be honored by the claimant while all interest and costs are suspended and investors are prohibited to claim additional payments.

4.2.4. Once the creditors accept the arrangement, the Insolvency Practitioner will monitor its progress and distribute payments pro-rata to all creditors until successful completion. Debtors also pursue a CVA so as not to be declared bankrupt. Administration proceedings are another form of rescue method in which the court appoints an administrator to try to rescue and restructure the debtor company on behalf of all creditors, in order to achieve a better outcome for creditors than liquidation.

4.2.5. The debtor is not left in the company charge. The administrator must take into account the needs of all creditors and act in their best interests which may ultimately lead to the liquidation of the enterprise. Alternatively, an administrative receiver can act on behalf (rather than on behalf of all creditors) of a charge holder.

4.2.6. Winding up proceedings. Winding up proceedings are more commonly relied on than restructuring proceedings and may be triggered if a debtor is liable for an unchallenged debt above GBP 750 and is unable to pay their debts as they fall due. This is proved either by fulfilling a contractual obligation on the company or by making a formal payment request.

4.2.7. Therefore, a corporation is also considered unable to pay its debts if the valuation of its assets is lower than the amount of its liabilities taking into account its contractual and forward-looking commitments. If the application is not fulfilled, a winding-up motion may be filed in court and again, if an order is made to wound up the company, the company's assets will be allocated by the approved receiver or a liquidator.

4.2.8. Priority rules. Under the total priority system, secured creditors would get interest from the debtor's asset sales gains first. Secured loans would include both debts covered under Title Retention clause and debts incurred as a result of the insolvency proceedings. Preference loans (pension schemes, compensation of employees) would then have precedence over unsecured claims.

4.2.9. Cancelation of suspicious transactions. According to the Insolvency Act, the liquidator is allowed to amend any deal that may have put properties beyond the control of creditors or that may have undervalued (e.g. transfer of valuable assets shortly before insolvency). If certain criteria are met, the liquidator has the right to recommend that the court find certain transactions invalid and set aside. Specific duration of offenders ranging from six months to two years can apply.

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4.2.10. Duration of an insolvency process. Administration proceedings take about a year, but liquidation may take at least three years, depending on the size of the debtor firm.

4.2.11. Required documents

• Copies of invoices
• Declarations of transactions
• Grant of rights from (international letter of approval, and transfer of dividend rights if UK).