The new ‘Pre-Action Protocol for Debt Claims’ came into force on Sunday 1 October 2017. It applies where your business is seeking to recover a debt from an individual or sole trader. It does not apply where you are owed a debt by a company or a partnership.
The protocol appears to have been introduced primarily:
1. To ensure that debtors have sufficient information to take advice and respond properly to a claim before court proceedings are issued, and
2. To try and reduce the number of debt claims – in particular, poorly prepared debt claims – with which the Court is having to deal.
A broad overview of the provisions of the Protocol
Your business will need to send a letter of claim to the debtor, which contains the information set out in the protocol. In broad terms, it should include full details of the debt and the agreement under which the debt arose. The letter of claim should also enclose an up-to-date statement of account for the debt, including details of any interest and charges which you are seeking to recover, as well as the standard ‘Reply’, ‘Information Sheet’ and ‘Financial Statement’ forms (copies of these standard forms can be found in the annexes to the protocol).
Once you have sent the letter of claim, you need to give the debtor at least 30 days to respond to it before you can issue any court proceedings to recover the debt. In practice, it would be wise to allow a couple of working days beyond the 30 day period for a response. The protocol requires you to take into account the possibility that a debtor may post their reply towards the end of the 30 day period but you may not receive that response until slightly after the end of that period.
The protocol requires the debtor to use the standard reply form in any response to a letter of claim. That form, if properly completed, will provide you with details of:
1. Whether the debtor admits the debt, or part of it, and any proposals which they may be willing to make to repay it (the protocol encourages the debtor to provide details of their current income and expenditure, by completing the standard Financial Statement form, if he is asking for time to pay the debt)
2. Whether the debtor intends to seek advice (i.e. financial advice regarding how to pay the debt or legal advice on whether he can dispute it), and
3. If the debtor has already obtained advice or does not intend to obtain advice, the grounds on which the debtor is disputing the debt, and details of any documents with which they would like you to provide them.
Once you have received a reply form from the debtor, you have to wait at least a further 30 days before you can issue any court proceedings.
If the debtor has requested that you provide them with documents in the reply form, that period is extended to 30 days from the date on which you provide those documents to the debtor. You must provide documents to the debtor within 30 days (assuming they are available and they are relevant to the issues in dispute).
If the debtor intends to seek advice on the debt, they should indicate from whom, and when, they will be getting that advice in the reply form. The protocol obliges you to give the debtor a reasonable time to obtain the advice. It assumes that the debtor will be able to do so within 30 days of him replying to the letter of claim. In practice, it may be difficult for you to argue that it is unreasonable for the debtor to take up to 30 days to obtain that advice. If the debtor needs longer than 30 days to obtain advice, they need to explain why in the reply form and you are only required to provide them with additional time if it is reasonable to do so in the circumstances.
Once the reply form has been received, and you have dealt with any requests for documents within it, the provisions of the protocol are very similar to those which previously applied.
The parties are encouraged to exchange information and documents “sufficient to enable them to understand each other’s position”. You must deal with any such requests for information and documents by the debtor within 30 days of receipt.
The parties are also encouraged to take appropriate steps to try and resolve the dispute without the need for Court proceedings, including considering whether any form of Alternative Dispute Resolution may be appropriate. The protocol specifically refers to mediation as a process which may be appropriate where the debt is large.
Finally, the parties are required to take stock of their positions if the procedure set out in the protocol has not resulted in a resolution to the dispute. In those circumstances, you must give the debtor at least 14 days’ notice of your intention to commence proceedings.
It is important that you comply with the provisions of the protocol as the Court can impose sanctions on your business if you do not do so. Those sanctions could include not allowing your business to recover some, or all, of the legal costs which it would otherwise have been entitled to recover from the debtor if your business’s claim is successful.
A useful mechanism to resolve debt claims without Court proceedings or a time-wasters’ charter?
There certainly appears to be a benefit in introducing the standard reply form and financial statement form for debtors to complete.
Those standard forms should result in more structured responses to letters of claim from individuals and sole traders, who may not have any knowledge of the litigation process. This, in turn, ought to assist in flushing out the reasons for non-payment of a debt at an early stage of a dispute.
Unscrupulous debtors may, however, use the provisions of the protocol to delay matters substantially.
You may find yourself in a position where you have to wait around three months before you can issue court proceedings even in circumstances where the debtor may not have a genuine reason for disputing the debt (e.g. if the debtor replies to the letter of claim at the last possible moment, then says that he is seeking advice on the debt, and then disputes the debt for spurious reasons making various requests for documents). You may want to consider shortening your credit control processes before you instruct your in-house legal team, or external lawyers, to prepare letters of claim given the longer pre-action process under the protocol.
We will have to wait and see whether the protocol turns out to be a sledgehammer to crack a nut. One queries whether its aims could have been achieved merely by supplementing the existing rules slightly rather than introducing a new set of rules which may provide an unscrupulous debtor with ample opportunity to delay matters.
At any rate, it is important that you are aware of the provisions of the protocol if your business is pursuing debts against individuals and sole traders. You should amend any precedent letters of claim to make them compliant with the protocol and should ensure that you comply with the protocol’s other provisions to avoid possible subsequent sanctions by the Court.
Robert Parks – Senior Associate
Published: 23 March 2018
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