The Pre-action Protocol for debt claims comes into force on 1 October 2017. This must be followed. The new protocol will directly affect the recovery of debts from individuals and sole traders.
The Protocol will apply to any business (in limited form, partnerships, sole traders and public bodies) when claiming payment of a debt from an individual, which includes sole traders.
At present, no specific protocol for debt claims exists. Therefore, this will have a big impact on businesses wanting to recover monies from individuals or sole traders.
Business-to-business debts are not covered by the Protocol unless the debtor is a sole trader. The Protocol does not apply if another pre-action protocol such as construction and engineering covers the matter.
The aims of the Protocol
- encourage early engagement and communication between the parties. This needs to include an exchange of sufficient information regarding the matter to help clarify whether any issues are in dispute
- enable the parties to resolve the matter without the need to start court proceedings, including agreeing to a reasonable repayment plan or considering using an Alternative Dispute Resolution (ADR) procedure
- encourage the parties to act in a reasonable and proportionate manner in all dealings with one another (for example, avoiding costs that do not bear a reasonable relationship to the sums in issue) and
- support the efficient management of unavoidable proceedings.’
A creditor will have to include with its letter prior to claim a template information sheet and a reply form in all cases. The letter should contain:
The letter should contain:
- the amount of the debt
- whether interest or other charges continue
- If 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
- If 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 offered or paid by or on behalf of the debtor, an explanation of why the offer is not acceptable and why a court claim is still a consideration.
- 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 send the completed reply form.
The creditor should also:
- enclose an up-to-date statement of account for the debt. This should include details of any interest and administrative or other charges added or
- enclose the most recent statement of account for the debt. State in the letter of claim the amount of interest incurred and any administrative or other charges imposed since the issue of that statement of account, sufficient to bring it up to date or
- if 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 incurrence of the debt.
(a) enclose a copy of the information sheet and the reply form in the form annexed to the protocol and
(b) enclose a financial statement form as annexed to the protocol
If the debtor does not reply to the letter prior to claim within 30 days, the creditor may commence court proceedings.
The debtor should use the reply form for its response. If the debtor indicates that it seeks debt advice, the creditor has to allow the debtor a reasonable period to obtain the advice 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 to pay the debt 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 give the reasons in writing.
If the debtor fails to complete a reply form the onus is on the creditor to contact the debtor to discuss and obtain any further information needed to understand the debtor’s position.
If the debt is in dispute the parties should exchange information and disclose documents sufficient to enable them to understand each other’s position. 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 the parties cannot agree on settlement it is obligatory for the parties to take appropriate steps to resolve the dispute without commencing court proceedings. 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).
How will this affect your business recovering debts?
Without a doubt, the process of recovery of debts will be more time-consuming for creditors:
- Creditors need to provide further documentation to debtors in specific formats
- There is opportunity for delaying collection by 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 could be incurred particularly if triggering ADR and
- A review of existing recovery processes and changes may be necessary
What happens if you fail to 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.