Too short by half

Creditors may see the time allowed for chasing debts reduced from six years
to three, under a draft civil law reform bill proposed by the Ministry of
Justice. The ramifications of the change could cause problems for creditors,
insolvency practitioners (IPs) and the courts.

Currently, a creditor can chase a debtor for up to six years from the time it
received the most recent payment. As part of the statute of limitations, the
legal framework surrounding how long debt can be pursued, every time a debtor
makes a payment it restarts the clock. This, in effect kick-starts a new
agreement and so the six years start again.

So, if a company that borrowed money nine years ago made payments for the
first four years, but not for the subsequent five, the creditor would, under the
current law, still legally be entitled to his money. Under the new proposals,
the creditor would lose what remained unpaid as the debt is more than three
years old.

The change cuts in half the time for a clean-up of the books and chasing old
debts and, potentially, creditors may need to start court proceedings early just
to make the three-year deadline. Pat Boyden, personal insolvency partner at
PricewaterhouseCoopers, believes it could force both debtors and creditors into
the court system before they are fully prepared to enter.

“It may force litigation before either side is ready and clog up the courts,”
he says. “There is also the possibility it will put pressure on IPs to get
things moving, perhaps to deliver before they are ready.”

The move also raises the question over what happens to creditors when a
debtor goes bust. Depending on the size of the company, IPs could take months or
even years to go through complex accountancy records in order to understand what
is owed and how many creditors there are.

Louise Brittain, a personal insolvency partner at Baker Tilly, thinks three
years might not be enough time. “Many high-profile cases have international
elements. It could take two years to process the case. If it needs to be sped up
it could be a nightmare for IPs,” she says.

Mark Sands, an insolvency partner at KPMG, agrees, adding: “When IPs are
trying to negotiate a situation, especially complicated investigations, three
years can fly by.”

Consultation will begin later this year with the reform based on
recommendations given to the MoJ in 2001 from the Law Commission.