Lindsays: Protect future debt recovery - diligence on the dependence
A person pursuing a debt can, in certain circumstances, put in place protective measures in order to avoid the possibility of the debtor being unable to meet any eventual order granted by the courts, law firm Lindsays has highlighted.
These measures can restrict what the debtor can do with certain assets and are known as ‘diligence on the dependence’.
An action for recovery of a sum of money will typically involve the following steps:
- An action is raised by the pursuer by lodging paperwork with the court.
- The other side (the ‘defender’) submits defences and the action proceeds as defended (move to point 3). No defences are received and the action proceeds as undefended (move straight to point 4).
- The court will set further procedure including for example, assigning a full evidential hearing where witnesses will be called to give evidence etc.
- The court will decide and issue a decree.
- If the pursuer is unsuccessful, they may have to pay the defender’s expenses and any other sums awarded to the defender. If the pursuer is successful, they will then have to take steps to ensure the defender makes payment of the sums awarded by the court, i.e. they will need to ‘enforce’ the decree.
Whilst the above appears a relatively straightforward process, the reality is that getting from point 1 to point 5 in a court action can take a considerable amount of time.
The court can set down various procedures each with their own timeframes, where there can be unavoidable delays out with the parties’ control. There can also be delays in hearings due to the court’s timetable or scheduling conflicts.
This unfortunately means that a successful pursuer could potentially have to wait months or longer before any ruling is made/given and before they can start looking to enforce it.
This can be concerning for a pursuer as a defender’s financial circumstances could change throughout the court action. They could become unemployed, or rack up a lot of debt, or even dispose of assets or property to avoid payment of debts or become insolvent. The potential changes in circumstance are endless- the potential for such changes only increases with the passage of time.
With the above in mind, there is a real risk that a pursuer could raise an action knowing the defender has sufficient means to pay off the sums sought, but by the time the order is granted, the defender’s financial circumstances are such that they are no longer able to do so.
In recognition of the above risk, it is open to a pursuer in an action to apply to the court for certain protective measures to be put in place during the life of the court action and until an order is granted. These measures (where granted by the court) impose restrictions on what the defender can do with certain assets and/or property they own.
These measures are typically known as ‘diligence on the dependence’. The two most common types of diligence on the dependence are;
Arrestment on the dependence: this measure can prevent a third-party who is holding the defender’s money or moveable property from passing it back to the defender without the pursuer’s consent. For example, it could be used to freeze funds in the defender’s bank account so that the bank could not release the funds to the defender whilst the arrestment on the dependence remains in place.
Inhibition on the dependence: this measure can prevent the defender from voluntarily selling property/land they own whilst the action is ongoing.
Diligence on the dependence can be an incredibly effective tool in protecting a pursuer’s position as it can preserve assets/property owned by the defender by preventing them from disposing of the same during the life of the court action. The result being that if the pursuer is eventually successful in their action, there may be sufficient capital within the defender’s estate to settle the sums awarded.
Arrestment/inhibition on the dependence can be applied for at the outset of an action and throughout the life of an action (steps 1-4). This is beneficial as at any time during the court action if a pursuer becomes aware of information which raises concern as to the prospects of recovering the sums sought in the action (such as the defender trying to sell their property) they can apply to the court for diligence on the dependence.
The pursuer can also apply for diligence on the dependence without notifying the defender of the same – though if an arrestment/inhibition on the dependence is granted, a hearing would be subsequently assigned for the defender to have the opportunity to put forward their position. This can be extremely useful, particularly where there is a concern that the defender may try to dispose of assets upon being notified of the application.
If the defender opposes an arrestment/inhibition on the dependence and the court agrees that the measure in place is perhaps excessive – this is not the end of the story. It is open to both parties to offer alternative arrangements that can balance the pursuer’s desire to secure their position with the defender’s desire to ease the restrictions imposed by either type of diligence on the dependence. If an alternative is deemed suitable the court can vary the order.
For example, an arrestment on the dependence which freezes all sums in a defender’s bank account could be varied so that it is only freezes enough funds to cover the sums sought by the pursuer. This flexibility means a defender’s opposition will not always result in a pursuer losing the protection offered by diligence on the dependence.
If successful in applying for either type of diligence on the dependence, a pursuer may be entitled to recover their expenses in relation to the same from the defender.
In applying for either protective measure, you are effectively trying to limit what the defender can do with their own assets/property – before they have been found liable to you for any sum of money. Given the potential implications these measures could have on the defender, the pursuer must satisfy the court that the measures are necessary.
This is not straightforward as the pursuer must demonstrate to the court that;
- The application they send to the court to raise the action (known as the ‘initial writ’) must on the face of it set out a case against the defender
- There is a real or substantial risk that enforcement of a decree would be prejudiced by the defender becoming insolvent or by the defender concealing or disposing of assets
- The use of either protective measure is reasonable in all the circumstances
In recent years, the above test, particularly part b) has been difficult to satisfy. It is not enough that it may be difficult for a pursuer to recover sums from the defender (if they are successful), but that it needs to be shown that it would be practically impossible. It has also often been necessary in a number of cases to show some form of fraud or evasion on the part of the defender, i.e. that they will likely take steps to dispose of assets to evade payment of the debt.
The defender may also look for any diligence on the dependence to be removed ‘recalled’. Where the defender seeks to do so, the responsibility remains with the pursuer to show why it should remain in place. Unless the pursuer has sufficient proof to support the measures remaining in place (or being varied) they could be recalled.
There are also cost implications. It can be costly for arrestment/inhibition on the dependence to be put in place, particularly where the defender seeks to oppose it. Should a pursuer be unsuccessful in convincing the court that diligence on the dependence is necessary, the pursuer could have to pay the other side’s expenses.