UK-wide companies should beware Scottish debt recovery limits

It is a common misconception that the limitation period for debts is the same in Scotland as it is in England. In fact, it is five years as opposed to six. Lack of awareness of the difference 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).

When does the debt fall due?

The date on which the debt is due for payment will depend on a number of factors:

The wording of the agreement: this may be straightforward – for example, 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 in any way.

Each interest payment will also have its own five-year recovery period.

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.

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 the position in England. Theoretically, it is still possible to argue that secured debts prescribe after 20 years but the latest case law suggests that this is wrong. Creditors need to think carefully about the nature of the obligation being enforced.

Interrupting the five-year period

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 are:

• where the debtor provides a 'relevant acknowledgement' of the debt. This must be a clear and unequivocal written acknowledgement, e.g. "I accept the debt", or "how do I pay?";
• performance – some form of payment. Even payment of interest will suffice;
• if the creditor makes a 'relevant claim'.

Examples of relevant claims include the start of court proceedings against the debtor; the sequestration of an individual debtor; a claim in a liquidation (but not an administration at present); and certain types of enforcement. Note that in Scotland, merely issuing court proceedings is insufficient to interrupt the limitation period – service of the proceedings on the debtor is required.

What should creditors be alert to?

Some of the things that creditors should 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 - this could be insolvency of the primary borrower, non-payment or lack of engagement;
• lengthy negotiations with, or no engagement from, the borrower;
• lengthy complaints process period;
• frequent staff changes in the creditor's debt recovery team.

As with many legal issues, there are various exceptions and unusual individual rules so each case must be considered carefully.

Audrey Ferrie and David Crossan are Scottish-based financial litigation and recovery experts at Pinsent Masons, the law firm behind Out-Law.