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This product (the online recovery system) has revolutionised the administration and recovery of salary and overpayments. The whole system is very efficient and over the years has saved me a huge amount of time in administering this potentially embarrassing area of payroll administration.

Tim Kelsey, Payroll Manager
Buckinghamshire County Council

Court action - is it a necessary part of the debt recovery process?

It's easy to issue a claim and take a debtor to court but is it always the right course of action to take? Court action was once seen as the holy grail to retrieving all debt but recent figures show that there was a steady decline in the number of claims forms issued between 1998-2004. It's only in the last couple of years that it's started to see an upward trend again. This could be down to a couple of factors; I think that people started to doubt the ethics of the "let's sue them" mentality and started to see that they were throwing good money after bad. After all, what's the point of issuing a judgment to someone who genuinely can't pay? The initial impact of the Woolf reforms in 2000 may have had some influence on the decline. The subsequent changes and review of the system although intended to make it simpler in fact caused confusion. Companies may also have had better credit controls in place and therefore fewer debts.

However, with the number of claims issued starting to increase slowly again, it seems that court action has at last found it's place in the debt recovery process. In fact, contrary to industry trends, LRC have found that 20-25% of cases referred to them have been suitable for court action.

To ensure court action is the right step, you need to ask yourself these 2 questions - is it appropriate and is it necessary?

Here are a few considerations to take into account when deciding on whether or not to take court action;

  • Amount owed
    Although this may be the primary concern for the majority of those looking to take court action - it shouldn't be and considering it alone is a poor criteria for litigation. Think about the costs that you could incur in the process. The same consideration should be given to all amounts no matter how big or small. LRC figures show that litigation success rates for smaller balances are near 100%.
  • Costs
    Again shouldn't be the driving factor in making this decision. It costs less for smaller claims and the risk is also less. Obviously the risk is higher for higher balances and so is the cost. Remember costs are on a sliding scale and if you make the right decision you'll recoup your costs.
  • Information, Information, Information
    This should be your priority. Make sure that you have done everything you can do at the pre legal stage to obtain debt and debtor information that will be invaluable in making your decision.
    • Who are they?
    • What do they do? Eg are they a sole trader or a partnership
    • Is it commercial or individual debt?
    • If commercial, are they still trading?
    • What assets, if any, do they have that you can pursue? Eg building, stock
    • Are there guarantors involved?
    • What methods of enforcement would be used?
  • Alternative options
    You need to think about your ongoing relationship with your customer. Consider the long term value of the partnership and don't take a short term view just to get your money back! Why not negotiate a mutual beneficial settlement eg next time they purchase your goods you get cash in advance and a contribution to the outstanding debt. Also look at how your credit control and sales departments work - are there improvements than can be made there?
  • Age of the debt
    The older the debt is the harder it is to get back. However, don't just write off past debts - look back over your files and use any information to see if the circumstances of the debtor have changed and you could now claim your money back. Remember the 6 year limitation rule though - this gives the debtor a valuable defence should you take court action.

Court action is more appropriate if it's a business debt as it's easier to get information on them and the impact of enforcement is obvious to see. It's also useful to look and see if they have any prior judgments against them and what the outcome was. This is accessible information and is an invaluable guide in determining whether they can actually pay you back. Remember taking court action is ultimately a business decision - so make sure it's the right one.

You need to cherry pick which cases you take to court and not take a blanket approach to your cases.

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