The pre-action protocol for debt claims

From the 1 October 2017 businesses and public bodies pursuing debt claims against individuals will need to follow a Pre-action Protocol before commencing court proceedings.

Although there is no strict pre-action protocol for debt claims currently in place, there is in instead a practice direction inviting parties to follow common sense pre-action steps. The new protocol places a far greater burden on Creditors seeking to recover their debts

The Protocol applies to any business dealing with individuals, (including debtors who are sole traders). It does not apply to other business to business debts.

Debt claims against individuals constitute a very large proportion of all civil claims, under which almost 95% of County Court claims are not even defended. The imposition of this new protocol is likely to adversely impact on any businesses cash flow. The protocol is controversial because creditors believe the new obligations will provide debtors with the opportunity to delay payment, notwithstanding their contractual obligation to discharge an outstanding debt promptly.

It is no longer possible to simply send a 7 day letter before action, followed by Court action. If the Protocol is not followed a Claimant may sanctions applied against it, such as its legal costs and fees disallowed, or an adverse costs order made against it.

Letter of Claim

The creditor should send a 30 day letter of claim to the debtor by post before commencing Court action. (Email can only be used, if the debtor has expressly agreed previously that they are happy to be contacted in that manner).

The Letter of Claim must contain the following:

• Full details of the debt, including the sum due, any interest or charges raised and how the debt originally arose.
• An up-to date Statement of Account
• If the debt has been assigned from another party, details of the original debt and the creditor from whom the debt was assigned. (A formal Notice of Assignment should be served, if not done previously).
• If regular instalments were currently being paid by the debtor, but are no longer acceptable, an indication should be given as to why Court action is being considered.
• The debtor must be provided with details of how the debt can be discharged what they can do should they wish to consider repayment options.
• The address to which the (compulsory) Reply Form should be sent.
• It should provide any copy documents substantiating their contractual obligation, or in the alternative, confirm that the debtor can ask for a copy of such documentation.

New forms

When releasing the letter of claim creditors are expected to include:

• An Information Sheet and Reply form as attached. (It is expected/anticipated that debtors will use the reply form to respond to the letter of claim).
• A Financial Statement enabling a creditor to examine the debtor's financial circumstances.
• It will be noted that the Information Sheet and Reply Form are almost inviting the debtor to seek to elongate the repayment process unfairly. (Why should a “debt", be treated as if it were a genuinely disputed contract)?

Timeframe

Under the protocol, a creditor should not issue proceedings until at least 30 days from the date of the original letter before claim has elapsed. (Or from 30 days of the date the debtor has received copies of any material requested documents). This is to allow a debtor sufficient time to seek legal advice, (or that from an alternative agency), before completing and returning the reply form. Thereafter they may seek to engage in a repayment dialogue.

If the debtor seeks further time to secure advice, the creditor should provide “reasonable time” to do so.

Proceedings can be issued if the debtor fails to reply to the claim form, or returns the reply only partially completed. If the debtor admits liability, but fails to make payment proposals - proceedings could be issued.

If the debtor replies to the claim form indicating an intention to enter into discussions a creditor must again give any debtor a further 14 days notice period of their intention to issue proceedings, in the absence of receiving payment or acceptable proposals. However in exceptional circumstances, such as the expiry of any limitation period, a creditor may proceed with court action.

In the event parties cannot reach an agreement as regards the discharge of the debt parties are still encouraged to consider alternative dispute resolution rather than proceeding straight to court action. Court action appears to be the forum of last resort, rather than first.

Conclusions

Objections raised by businesses of all sizes during the consultation stage, appear to have been completely ignored. The protocol may have an adverse impact on their cash flow and continuing viability. The pendulum may have swung too far towards providing protections for benefit of (unscrupulous) debtors, who may seek to manipulate the protocol to delay payment.

Businesses will have to carefully consider how they can minimise the impact of the protocol. For example consideration should be given to incorporating the protocol terms within their initial contractual paperwork, or indeed very early on within any credit control phases before litigation.

Should you've have any wish issues wish to discuss matters, please contact a member of our debt recovery team.

graeme.weir@thackraywilliams.com
sam.shoesmith@thackraywilliams.com
james.head@thackraywilliams.com