Dealing with unpaid fees — what are your debt recovery options?

I recall, when acting for a private sector client managing a large book of debt, advising that a particular piece of litigation was going to be a waste of time, as we knew that the debtor had no assets or money against which we could take meaningful enforcement action. He told me that it did not matter as the legal spend was coming out of his “marketing budget”. I asked what he meant, and he told me that he had an element of his legal budget that was set aside purely to make examples of people; in taking aggressive action against defaulting debtors, he and his company were giving a robust message to the market and that was more important to them than the actual recovery.

I tell this anecdote primarily to distinguish the aggressive approach of some business to business clients from the approach of a school; the above approach would not be recommended in circumstances where a parent has failed to pay fees, and as a result, has had to remove their child from school (or indeed where a school has refused to let a child back on account of repeated non-payment). In these circumstances, such aggressive action against the debtor in default is hardly ever likely to be appropriate; taking an aggressive approach could have significant potential public relations consequences for the school; having removed a child, would the school then want to make the parents bankrupt, with the consequences that process would inevitably bring to bear on the parents, the pupil and the rest of the family?

It is therefore very important to tailor an appropriate and proportionate approach to litigating against defaulting parents. That pretty much rules out bankruptcy, the most aggressive form of enforcement action a creditor can take against a debtor. In some ways, the most effective form of debt recovery in this sector is to engage with the defaulting parent as soon as possible and find out what has happened. It may be that a parent has lost their job, or their financial circumstances have changed in other ways. The situation will need to be handled sensitively, and most parents will be keen to try and do something to accommodate the school. In that context, consider:

• Time to pay arrangements — can the parent afford to pay if the debt is spread? For example, can they afford to pay monthly rather than on a per-term basis?
• Security — will the parent be prepared to offer up an asset voluntarily over which you can take security?
• Secondary liability — is there someone else who is prepared to underwrite the pupil’s fees? If there is, does this arrangement need to be recorded formally (by way of a personal guarantee for example)?;
• If the issue is resolved, should the parent be made to pay on a pro forma basis (i.e. a term’s fees upfront rather than in arrears)?

Most disputes over fees will be resolved, but inevitably, the school will have to litigate to recover some of its debts. The stance needs to be robust (in that you have provided a service and need to be paid) but nonetheless, be mindful of the sensitivities of suing a parent.

It is therefore important that the school and the solicitor come up with a plan of action at the outset. Within that plan, the solicitor ought to identify what assets the parent has and how best to enforce over those assets. Does the parent work? Are they a homeowner? Do you know anything about moveable assets (cars, boats, caravans, motorhomes etc.)?

Once you have identified the assets to take action against, then you can come up with an informed enforcement strategy. In this context, the best methods of enforcement will be:

• High Court Enforcement: The debt is transferred to the High Court and a writ of control is issued and allocated to the High Court Enforcement Officer, who then attends on the debtor in order to seize goods to the value of the judgment. This is an effective method of debt recovery, as it is perhaps the first time that there is a physical manifestation of the problem (as the Officer will attend the debtor in person).
• Charging Order: Effectively a court-imposed charge on the debtor’s interest in a property. Like a mortgage, the creditor acquires a right of sale, exercisable with the permission of the court. In my experience, getting a charging order is relatively straightforward but getting an order for sale is less so. It is therefore effective in circumstances where you are prepared to sit on the charge until the property is either sold or re-financed;
• Attachment of Earnings: Effective against people who are employed (as opposed to the self-employed, sole traders, consultants and business partners). The court imposes a direct deduction from the debtor’s salary, payable directly by their employer.

The creditor can go for one of the above methods of enforcement, or a range of them.

I am yet to meet a school with a “marketing budget” for litigation; nonetheless, you must spend your money on debt recovery in a way that ensures that you get paid but also taking care that you give the right message.