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| This study examined the policies and practices of commercial organisations with regard to debt recovery and, in particular, sought their views and experiences of the procedures introduced by the Debtors (Scotland) Act 1987. The study was based on interviews with a sample of 55 organisations identified from court records in 5 sheriff courts, largely conducted between January and June 1994. The study is one part of an evaluation of the reforms of the Act and considers only the views of commercial creditors. |
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| Main Findings |
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- The main concern of creditors on default was the recovery of their money. Most, however, stated that they were willing to take account of the circumstances of debtors in taking action. Creditors were generally willing to accept alternative payment arrangements as 'some money was better than none'.
- Informal recovery procedures were very important to creditors, and were becoming increasingly sophisticated in large organisations.
- Litigation was not entered into lightly, and most creditors claimed such action was only taken against debtors who would not pay their debts, rather than those who could not do so.
- Creditors were generally happy with the principle of time to pay directions. However, opinion was split as to whether such directions achieved successful recovery of debts.
- Most creditors also accepted the principle of time to pay orders, although a minority believed that debtors should not be able to apply for time to pay after the granting of a decree.
- Creditors were very positive about the new earnings arrestment procedures introduced by the Act, which were seen as efficient and effective. This was the preferred form of diligence for most creditors.
- Not all creditors were willing to use poindings and warrant sales, either because they did not regard the diligence as an acceptable means of debt enforcement or because they regarded it as ineffective.
- Creditors who used poindings and warrant sales thought the effectiveness of the diligence in cases involving private individuals had declined. They thought that the Act had introduced too many protections for debtors, and were particularly critical of the revised list of goods exempt from poinding.
- Despite their criticisms, a significant proportion of creditors continued to use the diligence as a threat to elicit payment from private individual debtors.
- Creditors expressed a high level of dissatisfaction with the debt recovery 'system' as a whole, which they saw as costly, time consuming, unproductive and weighted towards the debtor (with the Act seen as an important contributory factor).
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| Introduction |
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| This survey forms part of a programme of work designed to evaluate the Debtors (Scotland) Act 1987 (the Act). This Act, implemented in 1988, introduced major changes to the procedures for enforcing debts in Scotland. The Act dealt with 3 main areas: new measures allowing debtors unable to pay their debts outright to do so over time (time to pay directions and orders); new diligences against earnings (earnings arrestments, conjoined arrestment orders and current maintenance arrestments); reforms to poinding and warrant sale procedure intended to protect debtors from the harsher aspects of the diligence. |
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The study of commercial creditors aimed to evaluate the success of the Act in providing creditors with effective machinery for the recovery of their debts. Specifically, the study sought to provide information on: - the policies and practices of commercial organisations with regard to debt recovery and debt enforcement;
- the views of creditors towards the effectiveness of available diligences and diligence stoppers and, in particular, the reforms introduced by the Act;
- the attitudes of commercial organisations toward debt recovery in general;
- the factors which influence their attitudes and practices towards the collection and enforcement of debts;
- the degree of change in attitudes, policies and practices of commercial creditors since previous work carried out in 1978-79 1.
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| Policies and practices on recovery |
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| Creditors employed a variety of informal recovery procedures involving written correspondence, telephone contact and home visits. While the prime aim of such procedures was the recovery of the money due, creditors stressed their concern to take into account the circumstances of the debtor and their corresponding willingness to enter into alternative payment arrangements. |
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| In larger organisations, some priority was attached to informal recovery procedures which were becoming increasingly automated and sophisticated. At the other end of the scale, smaller organisations gave this function much lower priority and there were often no set procedures or timescales. |
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| Few organisations had strict policies on court action. However, the most common criteria applied in the decision-making process were that the debt had to be above a certain limit and that litigation had to be 'worthwhile'. The debtor's circumstances were also important, with a distinction drawn between those seen as unable and those seen as unwilling to pay their debts. |
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| Many creditors embarked reluctantly on formal recovery procedures. They preferred to resolve situations using informal means, though some saw the threat of legal action as a useful step in eliciting payment or payment arrangements. Having raised court action, most creditors were happy to accept time to pay directions, realistically seeing this as their best chance of recovery. |
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| Few organisations had strict policies on enforcing a decree. Decisions were based mainly on the likely cost and the prospect of recovery. The circumstances of the debtor were also a factor. Writing off debts was not uncommon after receiving a sheriff officer's report or after carrying out a poinding. |
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| The diligence most often used was the earnings arrestment. Poindings and warrant sales were used by about half of the creditors, but for most this was a rare occurrence. Some creditors had a policy against using poindings, some did not use sales, based either on a dislike in principle of the diligence or a fear of attracting bad publicity. The threat of diligence was often seen as being as effective as diligence itself. |
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| Views on diligence and diligence stoppers |
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| Earnings arrestments |
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| Earnings arrestments were often cited as creditors' preferred form of diligence. The diligence was seen as effective, efficient, and fair to both creditor and debtor. Creditors liked its reliability and the guarantee of eventual payment. Most creditors were content with the level of deductions they received. However, some reported a high rate of job loss amongst arrestees. |
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| Conjoined arrestment orders were less popular. Although the principle was supported, problems had been encountered with complicated forms, delay in receiving payment and disputes over jurisdiction. The amounts received were criticised as low and there was a belief that debtors should be penalised through higher payments for having more than one arrestment in place. |
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| Poindings and sales |
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| The diligence of poinding and warrant sale came in for considerable criticism, either because it was seen as harsh on the debtor or because it was seen as ineffective. Those creditors who took the former view did not use the diligence or used poindings only as a lever to payment. Those that thought the diligence ineffective believed that there was too much debtor protection. The list of exempt goods, in particular, was criticised as too generous. Warrant sales were often seen as effective only in specific circumstances: where the debtor was a business or where the debtor had valuable, saleable goods. In other cases, though, creditors relied on debtors responding to the threat of use. |
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| Time to pay directions and orders |
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| Creditors were generally content with the principle of time to pay directions, seeing this as a realistic way of getting their money. However, some reported a high level of default. Specific aspects of the procedure attracted comment. Instalments were criticised as too low and it was felt that sheriffs took insufficient account of the creditor's perspective. The definition of default attracted 2 similar suggestions for change: that one missed payment should constitute default in all arrangements; and that one missed payment should constitute default in monthly arrangements. |
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| Although some were content with this facility, there was some feeling that it was inappropriate for debtors who had failed to apply for a time to pay direction to be given a second opportunity to apply for time to pay after enforcement activity had commenced. At this stage creditors often preferred informal arrangements with the possibility of immediate diligence if the arrangement broke down. |
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| The debt recovery system |
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| Attitudes towards the debt recovery system (ie, the court and diligence systems) as a whole were largely negative. Major complaints involved the cost and time taken to resolve disputes. The courts themselves were criticised as complicated and intimidating. There was a general belief that the system was stacked against creditors, with too much protection for debtors at both court and diligence stages, for example, in setting time to pay instalments and in the list of exempt goods for poindings, both of which relate to provisions of the Act. Creditors were frustrated by their perceived powerlessness having obtained a decree, and there was a certain amount of cynicism about the value of raising court action. |
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| The approaches adopted by creditors towards debt recovery displayed a largely pragmatic attitude. They were willing to accept payment arrangements at most stages in the procedures and were realistic about their prospects of recovery in relation to a debtor's circumstances. They were constantly assessing the economic viability of proceeding. However, some actions were pursued on 'principle'. |
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| Factors influencing attitudes and practices |
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| A number of key factors can be identified as influencing creditors' practices and attitudes. These include the perceived shortcomings of the court system, the cost of taking action, the low value attached to obtaining a decree and the problems experienced in recovering money, all of which would appear to encourage informal recovery. The advent of new technology has meant that more intensive use of informal recovery procedures is now an option. Importantly for this evaluation, the Act itself appears to have influenced creditors' behaviour and attitudes with, for example, creditors expressing a reluctance to use the reformed diligence of poinding and warrant sale, and the provisions of the Act seeming to have compounded the feeling that 'the system' is loaded in favour of debtors. |
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| Another important factor was the need to protect the long-term interests of the organisation. Creditors acted to recover their money to protect their interests in the short-term but, where appropriate, they acted to maintain existing customers (by choosing options other than court action and keeping customers 'afloat'). They also acted to minimise alienation of potential customers by avoiding situations which could attract bad publicity (eg, instructing diligence against someone in poor circumstances). Alternatively, they were motivated to act by the desire to put up a tough stance so discouraging other instances of default. |
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| Changes in attitudes and practices |
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| There has been little marked change in the practices of creditors since the work carried out in 1978-79 (see footnote 1). Organisations follow the same type of informal recovery practices and have the same concerns. At the early stages of recovery the greater use of the telephone and increased computerisation and sophistication of procedures can be identified as new trends. The involvement of advice agencies has also increased, with creditors now often reporting dealings with them and with similar groups, and referring defaulters to them. |
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| Court action and diligence are both used as much, if not more, as a threat rather than a desired course of action. Earnings arrestments are still the preferred diligence. |
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| At the formal stages of debt recovery there does, however, appear to be greater dissatisfaction, both with court and diligence procedures. The 1978-79 research (see footnote 1) reported few complaints on behalf of creditors. Now there seems to be a general dissatisfaction with aspects of the system such as time and cost and a general belief that creditors are disadvantaged. While creditors were generally pleased with the new earnings arrestment procedures, poindings and sales were seen as rendered ineffective by the increased protection afforded to debtors by the Act. Creditors also felt aggrieved about the arrangements agreed as time to pay directions. However, although creditors were dissatisfied with specific aspects of the Act, most of their criticism was levelled at the court system in general. |
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| Effective machinery for creditors? |
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| This study reports on what creditors themselves think of the 'machinery' made available by the Act and allows some comment on the extent to which their needs have been met. |
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| It would appear that some aspects of the legislation are meeting the needs of creditors. Time to pay directions provide a means of recovering debts in instalments with which most creditors appeared happy. Creditors were, however, less happy with time to pay orders, as they saw these as occurring at a stage when they would prefer to instruct diligence, or accept an informal arrangement with the option of diligence on default. Earnings arrestments seem to have successfully met the needs of creditors, providing an efficient and effective method of receiving money over a period of time. Poindings and sales appeared to be effective in as much as they could be used successfully as threats to elicit payment. However, where the threat was unsuccessful, creditors were of the view that the diligence itself was only effective in certain circumstances, particularly against commercial debtors. Creditors attributed the limited effectiveness of the diligence at least partly to the protection to debtors provided by the Act. |
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| Creditors have a particular perspective on debt recovery. The Act aimed to achieve an equitable balance between the needs of creditors in recovering debts and the needs of debtors to be protected from undue hardship and personal distress. Although creditors were of the view that, for example, the effectiveness of available machinery had been reduced in relation to poindings and sales, this does not preclude the meeting of the overall objectives of the Act. Reduced effectiveness in one area could have been the legitimate cost of ensuring adequate protection for those debtors unable to pay their debts. |
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| About the study |
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| The Debtors (Scotland) Act 1987 aimed to strike an equitable balance between the interests of creditors and debtors by providing effective machinery for the recovery of debts, while at the same time ensuring that debtors were protected from undue economic hardship and personal distress. The Act dealt with 3 main areas: firstly, it introduced 2 new procedures - time to pay directions and time to pay orders - to give debtors time to pay their debts free from the threat of diligence; secondly, it introduced reforms to the procedures for poindings and warrant sales; and thirdly, it introduced 3 new diligences against earnings - the earnings arrestment, the conjoined arrestment order and the current maintenance arrestment - replacing the previous system of arrestment of earnings and action of furthcoming. |
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Scottish Courts Administration commissioned a programme of research to evaluate how the Act was working in practice and the extent to which it was meeting its main objectives. The research consisted of 7 separate studies. Four qualitative studies sought information on the views and experiences of commercial creditors, individual creditors, debtors and facilitators (solicitors, advisers, sheriffs, sheriff officers) and 3 quantitative studies examined the characteristics of payment actions, the characteristics of poindings and warrant sales, and trends in the use of the measures introduced by the Act. Findings from each of the studies, as well as an Overview, have been published by The Scottish Office Central Research Unit (SOCRU) as follows: - Headrick, D. and Platts, A. (1999) Evaluation of the Debtors (Scotland) Act: Study of Individual Creditors. (Report and Research Findings No.10)
- Platts, A. (1999) Evaluation of the Debtors (Scotland) Act: Study of Commercial Creditors. (Report and Research Findings No.11)
- Whyte, D. (1999) Evaluation of the Debtors (Scotland) Act: Study of Debtors. (Report and Research Findings No.12)
- Fleming, A. (1999) Evaluation of the Debtors (Scotland) Act: Study of Facilitators. (Report and Research Findings No.13)
- Fleming, A. (1999) Evaluation of the Debtors (Scotland) Act: Survey of Poindings and Warrant Sales. (Report and Research Findings No.14)
- Fleming, A. and Platts, A. (1999) Evaluation of the Debtors (Scotland) Act: Survey of Payment Actions in the Sheriff Courts. (Report and Research Findings No.15)
- Fleming, A. and Platts, A. (1999) Evaluation of the Debtors (Scotland) Act: Analysis of Diligence Statistics. (Report and Research Findings No.16)
- Platts, A. (1999) Evaluation of the Debtors (Scotland) Act: Overview. (Report only)
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| 1 This work was a survey of commercial creditors carried out by Doig and Millar in 1978-79 (Debt Recovery: A Review of Creditors' Practices and Policies, 1981, SOCRU.). This study formed part of a programme of work on debt recovery carried out for the Scottish Law Commission. |
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| 'Evaluation of the Debtors (Scotland) Act 1987: Study of Commercial Creditors', the research report summarised in this Research Findings, is available priced £5. Cheques should be made payable to the Stationery Office and addressed to: |
The Stationery Office Bookshop,
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Edinburgh,
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Telephone: 0131-228 4181 or Fax: 0131-622 7017 |
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| This report can also be ordered online from: www.thestationeryoffice.co.uk |
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Further copies of this Research Findings may be obtained from:
The Scottish Office Home Department
Central Research Unit
Room J1-0
Saughton House
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EDINBURGH
EH11 3XA |
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| This document and other Research Findings and Reports may be viewed on the internet at http://www.scotland.gov.uk/cru/ |