Posted: Friday, 12 September 2008 @ 18:26
The Government is considering reducing the time limit for debt collection from 6 years to 3 years.
At the moment, firms have 6 years in which to issue court proceedings to collect debts. This is set to change and an announcement is expected to be made in the Queen's speech to Parliament in December.
Whilst it is true that the older a debt is, the harder it is to collect, there are often good reasons that a firm would delay issuing proceedings, including:
- trying other means of collection first, such as persuasion, negotiation, mediation (if there is a dispute);
- waiting for the debtor to come through some cash-flow problems - sometimes it might be worth waiting (and preferably charging interest) rather than making a court claim straight away and incurring the costs and time that that involves;
- waiting to see whether a dispute materialises at all - sometimes the debtor might claim that you've done something wrong and that this might cost them but, after waiting a while, it becomes clear that this came to nothing;
- waiting for your own cash-flow position to improve before pursuing a large debt and incurring the costs that that would involve.
We fail to see the need for this reform. It is generally argued that limitation dates are necessary as people's memories of all the details fail over time. However, debt collection is usually based on documentary evidence (invoices, statements, computer and bank records) and these records need to be retained far longer for tax reasons in any event.
If the time limit is shortened, then we predict a massive increase in court cases brought, as firms rush into issuing proceedings so as not to miss the 3-year time limit. Clearly, this would put even more pressure on an over-burdened court system and lead to more court delays as well as putting more pressure on businesses, which are under enough strain as it is at the moment.
Gary Cousins, Business Lawyer
Blog by Nigel Musgrove
Nigel has been providing dispute resolution advice as a solicitor for over 35 years. As well as advising SMEs and business owners on disputes he also offers a specialist licensing law service. View profile
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