What is a third party debt order?

As business rescue experts we are often on the frontline in relation to debt collection techniques employed by creditors. We are currently witnessing a rising trend in the use of the third party debt order (sometimes known by its historic name – garnishee order), being used to recover debts from businesses. This article will cover the function of a third party debt order and how to respond if you receive notice one has been made.


What is a third party debt order?

The term garnishee order arises from the old legal term garnishee, which is defined as a third party who is holding money on behalf of a debtor who has been instructed to release the money to a creditor to settle a debt. Businesses do not generally hold money themselves, but will place the funds in a bank account.

If a creditor has obtained a County Court Judgement (CCJ) against the debtor, they may ask the court to compel the bank to pay funds directly to them, making the bank the garnishee, giving rise to the term garnishee order, more modernly known as a third party debt order.

Whilst a bank has been used as an example here, being that it is the most common use of the third party debt order, debtor payments due to your company can also be redirected in this fashion, however the debt must be properly falling due for payment at the time the order is served. For example, if 30 day credit terms are provided, but the order is served on day 20, the order will not take effect. Where cash flow is already tight, a third party debt order, particularly where the amount due to the creditor is large, can be devastating for your business.

 

What is the third party debt order procedure?

Before a third party debt order can be obtained against your cash assets, the creditor must first obtain a county court judgement against your business. Once the CCJ is registered the creditor can then file a further form with the court, nominating the garnishee to be subject to the garnishee order. Creditors are likely to be strategic with these orders, planning to serve the order at the time when the largest level of funds will be available. 

Rather than serving the paperwork on your company, it is instead served on the garnishee. Therefore the first notification you will receive that an order has been made is the third party writing to you to advise the funds have been set aside. The first stage of the third party debt order is to provide an interim order. Once the interim third party debt order has taken effect, the court will list a date for the order to be made final. The funds are held strictly to order of the court by the third party until otherwise directed.

If the third party debt order is made final at the hearing, the third party will be directed to pay the funds directly to the creditor holding the CCJ in settlement of their debt.

 

How to respond to a third party debt order

There are various alternatives on how to respond to receiving notice that your funds have been set aside by a third party debt order.

The debt is disputed

Where the debt is disputed you can apply for the third party debt order to be set aside, by requesting the county court judgement be set aside. This is done by making an application to court using form N244. You will need to provide a witness statement setting out why you believe the debt is not due along with evidence to support the application.

If the court is satisfied that there is a prima facie case to set aside the judgement, they will also set aside the interim third party debt order, requiring the garnishee to release the funds back to you. This should not be used as a routine means to circumvent the third party debt order. If there is no clear case to set the judgement aside then the court will not consider the same.

 

The company is insolvent

If the company has not been able to pay its debts as they fall due, then the company is likely to be insolvent, if there is no clear route out of the situation. Upon making the realisation that your business is insolvent you should seek professional advice on the next steps. Whilst the third party debt order may prevent you from having access to the necessary funds to commence formal insolvency proceedings, certain proceedings will prevent the order from being made final.

Placing the company into administration activates a moratorium, preventing any legal actions from proceeding any further. Consequently the funds set aside under the interim order will be returned to the administration, allowing them to cover the costs of the procedure. Alongside recovering the funds for the benefit of the estate, administration can also be used as a means to rescue the business, seeking a buyer for the same, whilst providing breathing space from legal actions

If your business has been crippled by a third party debt order it is important to act quickly in either circumstance. Delays could result in the funds being lost permanently. Our business rescue experts can help you take swift and decisive action to deal with a third party debt order.

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