Partner Article

Fiona Gaskell – partner and dispute resolution solicitor at Clough & Willis – on why business should never rely on informal agreements.

During the last 15 months or so since the beginning of the pandemic the measures taken by the government to severely restrict normal Court business and the enforcement of Judgments it has become apparent that many creditors have been forced to enter into informal arrangements with debtors. These are a very poor alternative to having a Court Judgment as the vast majority of informal agreements are simply agreements to accept payment by instalments but have no “teeth” if the paying party is late, pays less than the amount agreed or doesn’t pay at all. This has had disastrous consequences for many firms.

It’s usually the case that informal agreements don’t provide for the payment of interest on the outstanding debt which means that the creditor is effectively providing an interest-free loan to the paying party. In pre-Covid times if we obtained a Judgment for a creditor, we would seek to enforce it by sending in the High Court Enforcement Officer, threatening to wind up the company or bankrupt an individual or to take a Charge on a property and in most cases the creditor’s chances of being paid were increased substantially if they were the first creditor to pursue enforcement against the debtor. If you simply enter into an informal agreement with a debtor, you are sacrificing the ability to force the debtor to pay or risk having goods uplifted by the High Court Enforcement Officer, a Charge put on a property or insolvency proceedings being issued against the debtor.

It is understandable that during the Coronavirus pandemic creditors felt that their options were limited but if they have entered into an informal agreement with a debtor who is not keeping to the terms of the agreement, they should seriously consider pursuing the debt through the Court which will entitle them to 8% interest on the debt, a rate substantially better than is offered by any bank, with the chance to enforce a Judgment.

It is also likely that if a debtor is reaching an informal agreement with one creditor, they are doing the same with other creditors and in reality are probably over stretching themselves and promising to pay too much to too many. If they have a choice between paying a creditor who has a Judgment against them or one who has simply agreed to voluntary payments it is almost certainly the case that they will pay the creditor with the Judgment.

Getting a Judgment can involve incurring Court fees and solicitor’s costs but some of these can be recovered against the debtor, whereas there is no such provision if you enter into an informal agreement.

Debtors should also be worried about having a Judgment against them which can be registered in the Registry of Judgments and may stay on the record for six years depending upon when the Judgment is paid.

This was posted in Bdaily's Members' News section by Clough & Willis Solicitors .