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New Pre-action Protocol for Debt Claims
The Ministry of Justice has now released the final version of the new pre-action protocol for debt claims. It will come into force on 1 October 2017 and business creditors will need to revise their pre-action processes to ensure that they are compliant with the new procedure.
To see the new protocol, click here: https://www.justice.gov.uk/courts/procedure-rules/civil/pdf/protocols/pre-action-protocol-for-debt-claims.pdf
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, including a sole trader. It does not cover correspondence already covered by another protocol (e.g. mortgage arrears).
Aims of the Protocol
The aims of the Protocol are to:
‘(a) 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
(b) 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
(c) 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) and
(d) support the efficient management of proceedings that cannot be avoided.’
Letter of Claim
The initial step is for the creditor to send a letter of claim to the debtor before proceedings are started, which must include:
• information about the debt and any interest or other charges
• details of the agreement under which the debt arises
• details of any assignment of the debt
• details of any installments that are currently being offered/ paid and an explanation of why the offer is not acceptable and why a claim is still being considered
• details of how the debt can be paid and how to proceed if the debtor wishes to discuss payment options
• the address to which the completed reply form should be sent
Creditors must include the following documents in that letter:
• an up-to-date statement of account;
• an Information Sheet (annexed to the Protocol)
• a Reply Form (annexed to the Protocol), and
• a Financial Statement form (annexed to the Protocol).
The letter of claim must be dated and posted on the same day or following day.
Reply
A debtor will have 30 days to reply to the Letter of Claim (though a creditor should account for ‘the possibility that a reply was posted towards the end of that period’) and they may:
• agree with / deny the debt or say that they simply ‘don’t know’;
• make payment or seek time to pay;
• take the opportunity to seek debt advice; or
• request further documents/information from the creditor.
If the debt is disputed the parties should exchange information and disclose documents sufficient to enable them to understand each other’s position and 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.
A creditor should not issue proceedings until 30 days after the date on which requested documents are provided to the debtor. A creditor must also allow a reasonable period of time for a debtor to seek legal advice.
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 (eg. the expiry of a limitation period).
Taking stock
The protocol includes a ‘taking stock’ provision which requires the parties, following compliance with the protocol, to undertake a review of their respective positions to see if proceedings can be avoided and to, at the very least, narrow the issues between them.
Pre-Action Penalties
Failure to comply with the Protocol may result in a claim being “stayed” (i.e. put on hold) to allow a period for compliance or, alternatively, sanctions being imposed. Such sanctions may be substantial and can include:
• an order that the party at fault pays the costs of the proceedings, or part of the costs of the other(s);
• an order that they pay those costs on an indemnity basis;
• an order depriving the party at fault of interest, or awarding at a reduced rate; and
• an order awarding a higher rate of interest (up to 10% above base rate).
Commentary
What is clear is that the Protocol is designed to further protect the rights of debtors by encouraging the sharing of information and promoting settlement wherever possible.
You should consider taking the following steps to align your internal procedures with the Protocol:
• revise standard form letters of demand to assess whether these could be expanded to comply with the Protocol;
• update debt collection policies and provide internal training on the same;
• tailor litigation strategies to include a more conciliatory approach to the preliminary phases of handling debt actions; and
• particularly for businesses which enter into agreements supported by personal guarantees, note that actions to recover under the guarantee should be handled in accordance with the Protocol.
If you require further information on anything covered in this briefing please contact Rehka Chelvendra by email or on 020 8731 3080 where Rehka will be happy to answer your queries.