Debt collection is a process which requires a combination of business and legal leverage to obtain payment from an unwilling debtor. In these FAQs, we provide answers to some of the most common questions from creditors in respect of the debt collection process. If you would like to find out more about how we can help with debt collection, please contact one of our Commercial Litigation and ADR or Fraud and Asset Recovery lawyers.
Q. What is a debt collection agency?
A. A debt collection agency is a firm whose business is to help creditors recover unpaid debts. Debt collection agencies are sometimes known as loan recovery agents or commercial recovery agents.
Q. What is the difference between a debt collection agency and a law firm?
A. Law firms typically have the right to represent creditors in the courts whereas debt collection agencies do not. Though creditors sometimes turn to debt collection agencies, because debt collection agencies have no right to represent creditors and take debtors to court, they typically only offer business leverage in their local jurisdiction.
At its most basic level, business leverage focuses on the debtor's reputation but, in cases where a creditor has a form of security, may include repossession services or services to seize the security. Business leverage tactics may include filing credit notices against a debtor's credit file with a credit reference agency. Such notices may adversely affect the debtor's credit rating, making it more difficult for the debtor to obtain future credit. As future creditors become more reluctant to lend to the debtor, the debtor may feel pressure to repay the debt.
Though debt collection agencies frequently threaten legal proceedings when dealing with creditors, more sophisticated debtors are often aware that such agencies cannot follow through on these threats. As a result, such threats often fail when made by a debt collection agency.
Because debt collection agencies in Hong Kong are only regulated to the extent they are engaged by certain regulated financial institutions, some debt collection agencies engage in unscrupulous tactics. These unscrupulous tactics include the threat of violence and sustained harassment by telephone calls. The use of such tactics can reflect poorly on creditors as debt collection agencies are often regarded as extensions of the creditors whom they represent.
Law firms, in contrast, are regulated and can use not only business leverage but also legal leverage and can often coordinate the use of legal leverage internationally across multiple different jurisdictions. A creditor using a law firm is normally unconcerned with reputational risks. Because law firms can apply legal leverage when business leverage options have been exhausted, they have no need to resort to threats of violence.
Legal leverage generally comes in the form of legal proceedings in which the force of the law is used to seize the debtor's assets.
Timothy Loh LLP is a law firm regulated by the Law Society of Hong Kong and can assist with debt collection.
Q. How can a law firm help with debt collection?
A. In broad terms, a law firm can pursue 4 different but effective options for debt collection.
First, a law firm can demand payment. Debtors receiving demands for payment from a law firm generally takes those demands more seriously than demands from a creditor or from a debt collection agency. This is because debtors know that if a creditor has gone through the effort of retaining a law firm, the creditor is serious about collecting the debt. At the same time, debtors know that because a law firm has been retained, there is a real possibility that if payment is not made, the law firm will commence legal proceedings to enforce the debt.
Secondly, a law firm can pursue bankruptcy or winding-up proceedings. In Hong Kong and in many other common law jurisdictions, it is possible to issue a special type of demand for payment known as a statutory demand. If the debtor fails to satisfy the demand by payment or some other form of compromise, the creditor can petition for the bankruptcy of the debtor if the debtor is an individual person or for the winding-up of the debtor if the debtor is a company. Statutory demands in Hong Kong are particularly effective because if not met, they may result the commencement of bankruptcy or winding-up proceedings which, in turn, may result in the debtor's bank accounts being frozen. Debtors face enormous pressure to pay when their bank accounts are frozen.
Thirdly, a law firm can sue for the recovery of the debt or support the enforcement of any security which the creditor holds. Suing a debtor can, assuming the lawsuit succeeds, result in a court judgment against the debtor. Such a judgment entitles the creditor to take a number of steps to enforce the judgment. These steps would be unavailable without the judgment. Such steps include the ability to garnish the debtor's bank account, meaning to seize funds from the debtor's bank account, and the ability to seize other assets of the debtor, to sell them and to take the proceeds of the sale in satisfaction of the judgment.
A law firm may apply to court throughout the debt collection process for ancillary orders to support the debt collection process. These ancillary orders may help to obtain information about the debtor and his or her assets as well as to freeze assets to ensure that a debtor does not dissipate those assets.
Fourthly, a law firm can enter into a settlement agreement with a debtor which builds-in a degree of self-help enforcement remedy for the creditor. The self-help enforcement remedy may take the form of grant of security or the entry of a consent judgment against the debtor.
Timothy Loh LLP has experience with all 3 types of options for debt collection and pursuing ancillary orders to support debt collection efforts.
Q. What is a statutory demand?
A. A statutory demand is a demand issued under legislation which deems a debtor to be unable to pay its debts if the demand is not satisfied. Where a debtor is deemed to be unable to pay its debts, insolvency proceedings may be begun against the debtor. For Hong Kong companies, statutory demands are made under the Companies (Winding-up and Miscellaneous Provisions) Ordinance ("CWUMPO"). Under CWUMPO, it a debtor company fails to pay or compromise a statutory demand within 21 days, the creditor can petition to wind-up the debtor company.
Q. What is a winding-up? How can a creditor benefit from a winding-up?
A. A winding-up is a process in which a debtor company is put into liquidation and dissolved. A winding-up can be voluntary or compulsory. Often, in the case where a debtor has failed to meets is obligations to its creditors, the winding-up will be a compulsory winding-up as one or more of the creditors will have petitioned the court for a winding-up order, frequently on the basis that the debtor company has failed to meet a statutory demand.
In a compulsory winding, the court appoints a liquidator. The role of the liquidator is to collect up the assets of the debtor company. Unsecured creditors submit claims against the assets. The liquidator adjudicates these claims and, from the assts remaining after claims by secured and preferential creditors, distributes the assets to the unsecured creditors. If the assets are insufficient to meet all the liabilities of the unsecured creditors, the distribution is made pro rata.
An advantage of a winding-up is that once the process has begun, a creditor need not incur time and costs to identify the assets of the debtor company. This is a job undertaken by the liquidator. The creditor need only prove its claim.