Third Party Debt Order: What If You’Re Out Of Pocket Because Your Client’S Client Won’t Pay?

A third party debt order is a method of enforcing a judgment against a debtor where the creditor gets the money from a third party instead of getting it from the debtor.

Usually a third party debt order is made by the court against the debtor’s bank. In a case where the court is satisfied, for example, that the debtor owes the creditor £1,000 and that the debtor has a bank account with a sufficient balance to pay the debt, the court can order the bank to pay the creditor the debt directly. It’s most straightforward where an institution is holding money for the debtor and it is clear that the institution would have to pay it to the debtor on demand.

But imagine a situation where a client engages a contractor to complete a project and that contractor farms out some of the work to a sub-contractor. The sub-contractor completes the work and invoices the contractor but the contractor says it cannot settle the invoice because it has a cash flow problem caused by its client’s non-payment. Can the sub-contractor use a third party debt order to force the client to pay?

The answer is yes, possibly. But it has to clearly establish who owes what and to whom.

The process

• First the creditor will need to obtain a county court judgment against the debtor after issuing a claim in the usual way.
• The creditor’s application, supported by the judgment and evidence of the third party’s indebtedness to the Judgment debtor, is made to the debtor’s home court without the third party knowing about it.
• The judge can consider the application with or without a hearing. If satisfied there is good reason to do so, the judge will make an Interim Third Party Debt Order for the total of the judgment due plus fixed costs. The Interim Order is usually sent to the creditor and it is the creditor’s responsibility to serve it on the third party and debtor.
• The Interim Order, application and supporting documents must be served on the third party at least 21 days before the final hearing and served on the debtor within seven days of the date when the third party is served, but at least seven days before the date of the final hearing.
• Once the Interim Third Party Debt Order is served on the third party, it is binding and the sum sought is effectively ‘off limits’ to the third party.
• The third party must respond to the court and the creditor within seven days of being served if it disputes owing the money, and must file and serve evidence as soon as possible, but at least three days, before the hearing.
• The hearing to determine whether the Interim Order should be made final must be within 28 days of when the Interim Order is made. The third party is given notice of the hearing and can attend.

Key to a successful application

At the final hearing, the court needs to be satisfied that the third party does in fact owe the judgment debtor money and this may be difficult to establish. Other evidence may suffice – such as accounting records, correspondence and witness statements – but the bar is set quite high and these may not be obtainable without the cooperation of the debtor and the third party, so there is an obvious practical obstacle. If the debtor is unwilling to cooperate, it is possible to apply to the court for an order for the judgment debtor to attend court so it can be questioned before the application for the third party debt order is made. The court is unlikely to accept a debtor’s word that the third party owes it money because of the obvious motivation the debtor would have to have the third party pay its debts. If this high bar is not met, the judge will dismiss the application and discharge the order. The applicant may also be ordered to pay the other parties’ costs.

Operative Date

• Now

Recommendation

• Because of the evidentiary difficulties, third party debt orders against businesses and individuals should only be sought where there is good evidence of the third party debt and where other methods are not as attractive. Where commercially proportionate, creditors should consider applying for an order for the debtor to attend for questioning to seek additional evidence as to the third party’s liability.