Comment: Don’t let debt recovery knock your firm for six

Unwise assumptions have led to substantial amounts proving irrecoverable, says David Crossan.
Picture: Peter Devlin — Unwise assumptions have led to substantial amounts proving irrecoverable, says David Crossan. Picture: Peter Devlin

It is a common misconception that the limitation period for debts is the same in Scotland as it is in England – but in fact it is five years as opposed to six. Failing to appreciate this can have serious consequences for creditors, so they and their teams dealing with outstanding bills and credit need to be alert to limitation issues earlier than they might otherwise expect.

We have recently come across a number of instances where unwise assumptions about the six-year rule have led to substantial amounts proving irrecoverable.

As would be expected, the detail is extensive. However, the 1973 Prescription and Limitation (Scotland) Act states that debts will generally prescribe five years after the date that they are due for payment.

Obligations and rights are also covered. For example, bank debts will prescribe five years after the date they are due for payment as they are debts due under a contract (for example, the facility letter).

The date on which the debt is due for payment will depend on a number of factors such as the wording of the agreement. This may be straightforward, such as one capital payment at the end of the term; or the contract may require a series of individual payments on a rolling account.

Take, for example, a 36-month term loan with 36 separate payments. Depending on the wording of the loan agreement, each of these payments could fall due separately – in which case, each individual payment will prescribe five years after it is due. Careful consideration should also be given to the whole agreement to determine whether the creditor’s right to recover instalments is reduced or extinguished.

Each interest payment will also have its own five-year recovery period, and if the agreement requires that an “all sums” demand is issued before payment, the entire debt will crystallise on the date the demand is due, so the five-year period will run from that date. Alternatively, the agreement may provide that the whole debt is due on the expiry of the repayment period.

Secured debts in Scotland are treated in exactly the same way as unsecured debts. Again, this is different from England. Theoretically, it is possible to argue that secured debts prescribe after 20 years but the latest case law suggests this is wrong. Creditors need to think carefully about the nature of the obligation being enforced.

There are circumstances in which the five-year period can be “interrupted” and will start to run for a further five years from the new date. These circumstances include where the debtor provides a “relevant acknowledgement” of the debt. This must be a clear and unequivocal written acknowledgement, eg “I accept the debt”.

Businesses should note that, in Scotland, merely issuing court proceedings is insufficient to interrupt the limitation period – service of the proceedings on the debtor is required. Some of the things that creditors should also keep an eye on to prevent debts from lapsing due to time bar include no payments for several years; demand letters issued several years ago; where the “primary default” occurred several years ago, and non-payment or lack of engagement.

Lengthy negotiations with, or no engagement from, the borrower; a lengthy complaints process period and frequent staff changes in the creditor’s debt recovery team can also lead to creditors taking their eye off the ball and to debts lapsing.

As with many legal issues, there are various exceptions and unusual individual rules, so each case must be considered carefully, but consultation with a legal expert will help avoid business owners falling foul of the differences in Scottish and English debt recovery laws.

- David Crossan, associate with Pinsent Masons.