Who do you think you are dealing with?

Failing to identify the legal entity that you are dealing with at the outset of any relationship not only undermines any effective credit risk assessment but also exposes you to any number of issues in the legal recoveries process.

Each legal entity has capacity to enter into contracts, incur and pay debts, sue or be sued in its own right and be held accountable for its actions.

Failing to identify the legal entity that you are dealing with at the outset not only undermines any effective credit risk assessment but also exposes a creditor to any number of issues in the legal recoveries process.

Issues include:

  • Non-compliance with the appropriate parts of the Practice Direction on Pre-Action, which may result in sanctions against the party found at fault;
  • Defences founded on ‘no cause of action’, which may result in liability for the costs incurred prior to discontinuance;
  • Applications to Set Judgment Aside, which may again result in an adverse costs award;
  • Ineffective enforcement; and
  • Missed opportunities to escalate matters more quickly via appropriate insolvency action.

There is nothing more frustrating than progressing a matter through the full legal process, only to find that the party you thought you were pursuing isn’t the correct legal entity. The inevitable consequence of this is that you not only have to undo all that you have done before but also have to start the process again against the correct legal entity! Beyond the frustration and delay are wasted costs eating into any net return and the possibility of other creditors achieving recovery before you.

Common legal entities

Initially, it’s important to understand that there are many and varied legal entities, from the smallest individual right the way through to the largest Plc. The most common legal entities in commercial arrangements are identified below:

Sole Traders: the quickest and simplest method of setting up a business but the most onerous on the individual, should anything go wrong, as they will have unlimited liability. Such individuals will likely have trade goods to enforce against, as well as the possibility of personal property, increasing the assets you can pursue. It is generally only possible to review the Land Registry for the proprietors of known properties.

Firms / Partnerships: again requiring no formalities or registration [save for Limited Liability Partnerships], this is the association of two or more individuals engaged in business, in which the profits are usually shared proportionally. However, the partners are effectively mutual agents and all have unlimited liability for the obligations incurred to others in the course of the partnership, leaving them liable to actions in both the name of the firm and in their personal capacity. Targeting the partner with the most assets is likely to increase the prospects of successful recovery but care must be taken not to fall foul of conclusive election.

Limited Companies: a legal entity with a separate identity from those who own or run it, a business cannot operate as a limited company unless it has been incorporated at Companies House under the Companies Act 2006. There are in fact four distinct sub-divisions of limited company:

  1. Private company limited by shares;
  2. Private company limited by guarantee;
  3. Private unlimited company; and
  4. Public limited company (Plc)

Each type has different distinguishing features and the formalities of registration (and on-going maintenance of the company) are more onerous than the other business structures but they are the simplest way to protect personal assets (provided that the director(s) follow the relevant rules). Such entities will likely have trade goods to enforce against, as well as the possibility of property, which you are entitled to search against the Index of Proprietors Names.

These are the most common but it is important to be aware that there are numerous other legal entities, from Administrators to Bankrupts, Charities to Friendly Societies, Local Authorities to Peers, Trade Unions to Trustees; each has their own specific Title as a party to any proceedings, may have their own specific protocol to follow, varying degrees of liability and assets as a consequence.

The importance of identifying the correct legal entity cannot, for the reasons highlighted above, be understated. However, this is not always easy, especially for credit controllers strewn a bundle of paperwork (if any) on engagement and a possibly convoluted trading history, then left to piece the jigsaw of engagement and trade together.

Barriers to determining liability

Determining liability becomes less straightforward when you are dealing with an Agent and this is established under the ‘law of agency’; varying degrees of liability apply for all parties (Agent and Principal) depending upon the scenario at the point of engagement, be that:

  • Undisclosed Principal;
  • Partially Disclosed Principal; or
  • Disclosed Principal.

Potentially even more convoluted are arrangements where there has been any Assignment or Novation of the agreement, the former transferring the benefit alone and not the burden, the latter transferring both the benefit and the burden. Regard must be had for the terms of the original contract, what formalities there were for such transfer and whether they have actually been complied with.

What if there is an instance of dissolution or insolvency? What of the potential for a third party to be liable? Is there, perhaps, a potential claim to pursue against the end user, a director or others?

All in all there is a potential legal minefield waiting beyond routine engagements.

Legal support

Our Legal Recoveries Teams are here to provide expert support in determining legal entities, defining their liability and establishing an appropriate strategy for recovery. We forensically analyse matters for our Clients on a daily basis:

  • Collecting and collating the relevant evidence, chronologically;
  • Evaluating and analysing the evidence;
  • Detailing our findings and recommending a strategy for recovery; and
  • Exploring potential alternative avenues for recovery.

Such analysis requires objectivity and procedural protocols, which we are structured to provide; from our Technical Team to our day-to-day team members, we have extensive experience with both the contractual engagement process and internal credit control procedures. Once the correct legal entity has been determined, we have the ability to then issue a compliant Letter Before Claim, commence proceedings with suitable pleadings, deal with any dispute or Defence that arises (potentially expediting a determination by Application to Strike Out / seek Summary Judgment) and then enforce with real expertise. Where appropriate, we may recommend the strategic use of the insolvency process to prioritise the recovery of substantial debts.

Starting to pursue a debt against the correct legal entity and on the correct legal footing is essential to recovering funds in a quick, cost-effective and efficient manner.

For more information on correctly identifying legal entities, or to discuss how our Recoveries Team could help you, please contact Jeffersen Gledhill.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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Jeffersen Gledhill

Legal Recoveries & Operations Manager

I am Legal Recoveries and Operations Manager, working on the recovery of volume and 'niche based' commercial and consumer debts.

David Scottow

Director - National Head of Recoveries

I am a Senior Director and National Head of Recoveries with almost 40 years’ experience in debt litigation, insolvency and credit management..