While not particularly glamourous or exciting, debt recovery is an important part of many businesses. While some choose to deal with certain elements of debt recovery in-house, some outsource it to legal services providers such as solicitors. Prior to issuing any proceedings at Court, parties are expected to engage and comply with the guidance on pre-action conduct.
On 1 October 2017, a new Pre-Action Protocol for debt claims (“the Protocol”) comes into force and will impact businesses with debts due from individuals.
The Pre-Action Protocol for debt claims
The Protocol applies to debts owed by an individual and applies to business debts where the business debtor is a sole trader. If the matter is covered by another, specialist Pre-Action Protocol, that other protocol will take precedence. For example, if you are owed a debt in a construction dispute, the Construction and Engineering Pre-Action Protocol will apply rather than the debt recovery Protocol.
Letter of claim
In most cases, a claimant is expected to write to the defendant before issuing proceedings. The new Protocol sets out specific rules about what this letter of claim should include. With the letter of claim, the creditor must include a template information sheet and a reply form, with the aim of making it easier for debtors to reply to the letter of claim. The letter of claim should now contain:
- The amount of the debt;
- Whether any interest or other charges are continuing to accrue;
- Where the debt arises from an oral agreement; who made that agreement, what the parties agreed and when/where they made the agreement;
- When 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 (if it is not already enclosed with the Letter of Claim);
- If 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 as to why the offer isn’t acceptable and why the creditor is still considering a court claim;
- Details of how the debt can be paid; and
- The address to which the completed reply form should be sent by the debtor.
Creditors are also expected to enclose an up to date statement of account (detailing any interest and administrative/other charges). Forms for the debtor to complete setting out his or her financial position must be enclosed with the letter.
In debt claims, if a debtor doesn’t reply to a Letter of Claim within 30 days, the creditor can then issue court proceedings.
The Protocol allows for debtors, via the reply forms, to indicate that he is seeking debt advice and whether the creditor has allowed a reasonable period for seeking that advice (this will vary from case to case). Extra time shall also be allowed when reasonable for this advice to be taken in the circumstances.
Where debtors fail to fully complete a reply form, it is for the creditor to contact the debtor to discuss and obtain any further information needed to properly understand the debtor’s position. Where debts are disputed by the parties, information should be exchanged and documents disclosed such as sufficient to enable them to understand each other’s positions. A reasonable period for the provision of this information would be 30 days following the receipt of a request.
If the parties still cannot reach a settlement, they are obliged to take steps to resolve the dispute without court proceedings and should consider ADR. Finally, if an agreement still cannot be reached, the creditor should give the debtor a minimum of 14 days’ notice prior to commencing County Court proceedings. There are exceptions where, for example, limitation is upon the claimant and he needs to issue a claim to prevent it from expiring.
Failure to comply
Where a creditor fails to comply with the Protocol may lead to legal proceedings being stayed by the Courts and costs sanctions being ordered against creditors.
How will it work?
On the face of it, creditors may be concerned that it will become more difficult to recover debts. There will be more work required at the outset; proactively engaging with the debtor and providing much more documents to the debtor up front. This comes with the risk that the debtor could delay the issue of proceedings for up to 90 days if all deadlines are pushed and time periods used to their maximum.
The idea, however, is to front-end work that would have to be done later down the line. All the same documentation would have to be provided before a hearing. The hope is that creditors will be able to avoid reaching a trial in the end.
Ultimately the new Protocol will lead to creditors having to have much greater patience with their debtors. However, where creditors are small and medium sized businesses this could lead to cash flow issues.
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