New Pre-Action Protocol for debt claims

On 1st October 2017 a new Pre-Action Protocol (“Protocol”) for debt claims will come into effect. The protocol will apply to all debts where the creditor is a business and seeks to recover a debt from an individual, including a sole trader. It will also apply where a creditor seeks to recover a debt due from an individual under a guarantee.

The protocol does not apply to business to business debts where the debtor is a company or LLP, or to debts already covered by another pre-action protocol.

The introduction of the new protocol means that a creditor may have to wait more than 60 days before it can bring proceedings to recover an outstanding debt. Inevitably, this will have an impact on the cash flow of a business.

The Aim

The aim of the new protocol is to:

  • 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;
  • 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;
  • 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);
  • Support the efficient management of proceedings that cannot be avoided.
    Many of these aims reflect the Practice Direction on Pre-Action conduct but the protocol goes much further in stipulating what information must be provided to the debtor and the procedure a creditor should follow where there is a response.

The Process

The most significant change resulting from the new protocol is the information that must be contained in the Letter of Claim (“LOC”) and the period in which the debtor has to respond to the letter.
The letter must give the following information;

  • 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 letter must be sent by post unless the debtor has made an explicit request that it is served by other means.
    In addition to this information the letter should attach;
  • Up-to-date statement of account including interest and charges; or
  • Most recent statement (the LOC must state the interest and charges since the statement was issued to bring it up to date); or
  • Where no statements have been provided, the LOC must state the amount of interest and charges imposed since the debt was incurred

An early draft of the protocol suggested the agreement must be included with the LOC but this was discarded. Nevertheless, the documentation should be to hand in order to avoid any delay if it is requested by the debtor.

Timescales

The debtor will have 30 days in which to respond to the LOC. If there is no response court proceedings can be issued.
Where there is a response;

  • If the debtor indicates that they are seeking debt advice, the creditor must allow the debtor a reasonable period for the advice to be obtained. In any event, the creditor should not start 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.
  • If the debtor indicates in the Reply Form that they are seeking debt advice that cannot be obtained within 30 days of their reply, the debtor must provide details to the creditor as specified in the Reply Form. The creditor should allow reasonable extra time for the debtor to obtain that advice where it would be reasonable to do so in the circumstances.
  • Where a debtor indicates in the Reply Form that they require time to pay, the creditor should try to reach agreement for the debt to be paid by instalments, based on the debtor’s income and expenditure. In trying to agree affordable sums for repayment, the creditor should have regard where appropriate to the provisions of the Standard Financial Statement or equivalent guidance. If the creditor does not agree to a debtor’s proposal for repayment of the debt, they should give the debtor reasons in writing.
  • A partially completed Reply Form should be taken by the creditor as an attempt by the debtor to engage with the matter. The creditor should attempt to contact the debtor to discuss the Reply Form and obtain any further information needed to understand the debtor’s position.
  • If, following discussions, no agreement is reached, the creditor may give the debtor at least 14 days’ notice of their intention to start proceedings, unless there are exceptional circumstances (like the expiry of a limitation period) which means the creditor cannot wait

Compliance with the protocol will be essential if court proceedings are issued. Where a party does not comply, the sanctions available to the court are as follows:

  • A stay in proceedings to allow parties a further opportunity to engage and seek to resolve matters
  • An order that the party at fault pays the costs of the proceedings or part of the costs of the other party or parties;
  • An order that the party at fault pay those costs on an indemnity basis;
  • If the party at fault is a claimant who has been awarded a sum of money, an order depriving that party of interest on that sum for a specified period, and/or awarding interest at a lower rate than would otherwise have been awarded;
  • If the party at fault is a defendant, and the claimant has been awarded a sum of money, an order awarding interest on that sum for a specified period at a higher rate, (not exceeding 10% above base rate), than the rate which would otherwise have been awarded.

Summary

The protocol offers an increased level of protection to the individual and puts the onus firmly on the creditor to provide information at an early stage.

The additional time afforded to a debtor by the protocol means that creditors who regularly trade with individuals may need to adapt their collection procedures to allow for the changes and to decide at an early stage which debts might require court proceedings.

For suitable debts and where time is of the essence, further consideration may be given to bankruptcy proceedings as an alternative debt collection tool but in the main, creditors will need to allow more time to collect overdue accounts.

The Dispute Resolution team at rhw are happy to assist you with any concerns arising from these changes and offer guidance on the collection of overdue accounts. Please contact rhw for legal advice on this area or any other debt recovery matter.

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