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Sep 20 2017

New Pre-Action Protocol For Debt Claims

Adrian Jeremiah

The Pre-action Protocol for debt claims (“the Protocol”) comes into force on 1 October 2017 and may well have a severe impact on a business if it has outstanding debts due from individuals.

The Protocol will apply to any business (Limited/PLC, partnerships/LLP’s, sole traders and public bodies) when claiming payment of a debt from an individual (this includes a sole trader). The Protocol does not apply if the matter is covered by another pre-action protocol such as the protocol for mortgage arrears.

The Protocol does not apply to business-to-business debts (unless the debtor is a sole trader) and the Protocol sets out the conduct the court will normally expect of parties prior to Court proceedings being commenced.

The aims of the Protocol are to:

(a) encourage early engagement and communication between the parties, including early exchange of sufficient information about the matter to help clarify whether there are any issues in dispute
(b) enable the parties to resolve the matter without the need to start court proceedings, including agreeing a reasonable repayment plan or considering using an Alternative Dispute Resolution (ADR) procedure
(c) encourage the parties to act in a reasonable and proportionate manner in all dealings with one another (for example, avoiding running up costs which do not bear a reasonable relationship to the sums in issue) and
(d) support the efficient management of proceedings that cannot be avoided.

The Protocol spends the end of days when a letter of claim could be sent threatening payment within 7 days and then starting off proceedings. The Protocol requires that a creditor will have to include with its letter of claim a template information sheet and a reply form in all cases. The letter of claim should contain:

  • the amount of the debt
  • whether interest or other charges are continuing
  • where the debt arises from an oral agreement, who made the agreement, what was agreed (including, as far as possible, what words were used) and when and where it was agreed
  • where the debt arises from a written agreement, the date of the agreement, the parties to it and the fact that a copy of the written agreement can be requested from the creditor
  • where the debt has been assigned, the details of the original debt and creditor, when it was assigned and to whom
  • if regular instalments are currently being offered by or on behalf of the debtor, or are being paid, an explanation of why the offer is not acceptable and why a court claim is still being considered
  • details of how the debt can be paid (for example, the method of and address for payment) and details of how to proceed if the debtor wishes to discuss payment options and
  • the address to which the completed reply form should be sent.

The creditor should also:

  • enclose an up-to-date statement of account for the debt, which should include details of any interest and administrative or other charges added: or
  • enclose the most recent statement of account for the debt and state in the letter of claim the amount of interest incurred and any administrative or other charges imposed since that statement of account was issued, sufficient to bring it up to date: or
  • where no statements have been provided for the debt, state in the letter of claim the amount of interest incurred and any administrative or other charges imposed since the debt was incurred:
  • enclose a copy of the information sheet and the reply form in the form annexed to the protocol: and
  • enclose a financial statement form as annexed to the protocol.

If the debtor does not reply to the letter of claim within 30 days, the creditor may commence court proceedings.

The Protocol states that the debtor should use the reply form for its response. The debtor should request copies of any documents it wishes to see and enclose copies of any documents it considers relevant, such as details of payments made but not taken into account in the letter of claim.

If the debtor indicates that it is seeking debt advice, the creditor has to allow the debtor a reasonable period for the advice to be obtained and should not commence court proceedings less than 30 days from receipt of the completed reply form or 30 days from the creditor providing any documents requested by the debtor, whichever is the later. The creditor should also allow reasonable extra time for the debtor to obtain that advice where it would be reasonable to do so in the circumstances.

If the debtor requires time to pay, the Protocol requires the creditor and debtor to try and reach an agreement for the debt to be paid by instalments, based on the debtor’s income and expenditure. If the creditor does not agree to a proposal for repayment of the debt, it should say why not in writing.

If the debtor fails to fully complete a reply form the onus is on the creditor to contact the debtor to discuss and obtain any further information needed to properly understand the debtor’s position.

If the debt is disputed the parties should exchange information and disclose documents sufficient to enable them to understand each other’s position and the creditor must provide any document or information requested or explain why the document or information is unavailable within 30 days of receipt of the request.

If settlement still cannot be reached the parties are obliged to take appropriate steps to resolve the dispute without commencing court proceedings and, in particular, should consider the use of Alternative Dispute Resolution (ADR).

If an agreement still cannot be reached, the creditor should give the debtor a minimum of 14 days’ notice of its intention to commence court proceedings (unless, for example, the limitation period is about to expire).

What does this mean for creditors?

The process for recovering debts will be more onerous for those owed money as:

  • Creditors are required to provide more documentation to debtors in specific formats
  • There is increased scope for delaying payment by “difficult” debtors who can delay payment by up to 90 days
  • Creditors will need to be more pro-active when engaging with debtors to ensure information is properly exchanged and time periods met
  • Additional costs and delays will be incurred particularly if ADR is utilised
  • A review of existing recovery processes and changes will probably be necessary

What if a creditor doesn’t comply with the Protocol?

Failure to comply with the Protocol may result in:

  • Further delay in collection of debts if any legal proceedings are stayed to remedy failures to comply with the Protocol
  • Additional costs sanctions in terms of payment of the debtor’s legal costs or a failure to recover costs and
  • Inability to recover interest from a debtor or recovery at a reduced rate.

These are in addition to the fact that many debt recovery cases will fall into the Small Claims Track where the normal rule is that legal costs are not recoverable from the losing party.

Summary

For businesses dealing predominantly with consumers or sole traders and providing credit, the Protocol requires a lot more effort and patience when collecting outstanding debts. Businesses should review who credit is given to, detailed records of the transaction will have to be kept and prompt action is needed when debts arise.

For expert advice on debt recovery, contact Adrian Jeremiah on 01792 450010 or email advice@plandp.co.uk