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New Pre-Action Protocol for Debt Claims – how will this affect your business?

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New Pre-Action Protocol for Debt Claims – how will this affect your business?

An end for the 7 day ‘letter before action’?

Outstanding debts are harmful to business. If debtors fail or refuse to pay, creditors want to be able to act promptly to secure recovery of the debt, which sometimes means commencing court proceedings.

The new Pre-Action Protocol for debt claims which came into force on 1 October 2017 places the emphasis on communication and achieving settlement, with court proceedings as a last resort. The principal impact of the protocol is an extensive increase in the time prior to a creditor being able to issue proceedings.

For more information or help on this area contact Elaine Howard or any member of our Commercial Disputes Team

Who is affected?

The Protocol applies to all business including sole traders and public bodies claiming payment of a debt from an individual (including a sole trader). It does not apply to business to business debts.

If there is another Pre-Action Protocol that applies (for example, construction and engineering), then that protocol takes precedence and should be followed instead of the Pre-Action Protocol for debt claims.

What is the procedure?

The procedure that still applies to business to business debts and formerly applied to all debts involves a letter of claim containing the concise details of the claim allowing the debtor 14 days to respond (up to 3 months in very complex cases) prior to the issue of the claim.

In the case of individuals and sole traders, the first step under the Protocol is still to send a letter of claim but further details are required. The letter must be sent by post, unless the debtor has requested an alternative method of service and needs to contain the following:

  • The amount of the debt.
  • Whether interest charges are continuing.
  • The date of the letter, towards the top of the first page.
  • If the debt arises from an oral agreement, who made the agreement, what was agreed, and when and where it was agreed.
  • If the debt arises from a written agreement, the date of that agreement, the parties and the fact that a written copy can be requested from the creditor.
  • Statement of account for the debt, including the amount of interest and any other charges imposed since the debt was incurred.
  • Where the debt has been assigned, details of the original debt and creditor, when it was assigned and to whom.
  • If the debt is currently being paid on behalf of or by the debtor, an explanation of why these payments are not acceptable and why proceedings are being considered.
  • Details of how the debt can be paid, and what the debtor can do if it wishes to discuss payment options.
  • The Information Sheet and Reply Form at Annex 1 of the Protocol.
  • A Financial Statement for the Debtor to complete, an example of which can be found at Annex 2 of the Protocol.

The debtor then has 30 days from the date of the letter to reply. The letter must be sent on either the day it is dated, or if that is not reasonably possible, the following day.

If the debtor does not reply

The creditor must give the debtor 14 days’ notice of the intention to issue proceedings.

If the debtor replies

The debtor can request copies of any documents from the creditor. 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 or information requested by the debtor, whichever is later. Any documents or information requested by the debtor must be provided by the creditor within 30 days of the request.

If the debtor indicates they are seeking legal advice, they must be allowed a reasonable period of time to do so. There is no guidance as to what a “reasonable period” might be, although the 30 days they already have before proceedings can be issued is arguably sufficient, unless the debtor can justify why additional time will be needed.

Agreement?

If the parties are unable to reach an agreement regarding repayment of the debt, they should consider using an appropriate form of Alternative Dispute Resolution. If an agreement is reached and the debtor subsequently breaches the agreement, the creditor must send an updated letter before claim and comply with the Protocol afresh.

What about undisputed debts?

If the debt is undisputed then one option is to serve a statutory demand giving the debtor 21 days to pay, failing which bankruptcy proceedings can be commenced. There is no suggestion that the Protocol prevents creditors taking this option. However, if it subsequently becomes apparent that there is in fact a dispute, then businesses will have to follow the Protocol prior to issuing court proceedings, meaning they have already wasted time with the statutory demand. Therefore it will be important to consider whether to take the risk of additional delay by taking the statutory demand route if it there is any doubt as to whether the debt is disputed.

What if I don’t comply with the protocol?

Compliance with the Protocol could mean that businesses will have to wait months before being able to issue proceedings. Some example timelines are set out below. Failure to adhere to the protocol could result in cost sanctions and further delay following issue if the parties are subsequently ordered to comply.

Example timelines

Date Action
1 January Letter of claim
31 January Response due, none received
31 January 14 day notice of issue
14 February Issue proceedings

 

Date Action
1 January Letter of claim
31 January Response received
15 February If agreement not reached, 14 day notice of issue
2 March Issue proceedings

 

Date Action
1 January Letter of claim
31 January Response received – documents/information requested
2 March Documents/information provided (although this is the maximum time allowed, these could be provided at any time after the request)
19 March If agreement not reached, 14 day notice of issue
2 April Issue proceedings

 

These timelines do not take account of any ADR the parties might enter into or requests for additional time to seek legal advice.

Conclusion

The extended period of time afforded to debtors under the Protocol means a reduction in cash flow while businesses are forced to extend credit terms for unreliable debtors. The practical effect of the Protocol and the tactics that businesses may adopt and risks they are prepared to take to reduce delay remains to be seen.

For more information or help on this area contact Elaine Howard or any member of our Commercial Disputes Team

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