The Pre-action Protocol for Debt Claims came into force on 1 October 2017, introducing important changes to the steps businesses are required to take when seeking to recover debts from individuals and sole traders going forward.
When Will the Protocol Apply?
The protocol will apply to any business when claiming payment of a debt from an individual or a sole trader.
It will not apply to the recovery of debts from other companies or partnerships; this type of debt recovery will continue to be governed by the Practice Direction on Pre-Action Conduct and Protocols.
How Will This Impact My Business?
Under the protocol, businesses are now under a duty to provide a lot more information and documentation to debtors before taking steps to commence court proceedings and are encouraged to engage in alternative forms of dispute resolution (ADR) and to consider reasonable instalment payment proposals wherever possible.
The time scale for the pre-action phase has been extended to 30 days and, in cases of disputed debts, 74 days or more which will undoubtedly have a significant impact on cash flow for businesses with a predominantly individual client base.
What are the Changes?
The protocol sets out the procedures which must be followed and consists of the following stages:
- Letter of Claim:
The protocol places a heavier burden on the creditor to provide full particulars of the debt including how the debt arose, the basis of the contractual relationship between the parties and details of any interest and administrative charges incurred.
The following documents must be provided with the letter:- An up to date statement of account
- Copies of certain prescribed documents known as an ‘Information Sheet’, ‘Reply Form’ and ‘Financial Statement Form’ which can be found in the Annex to the Protocol
- No Response from Debtor:
The debtor has 30 days from the date of the Letter of Claim to respond. If the debtor fails to respond, court proceedings can be issued at expiry of the 30 day period. - Response from Debtor
If the debtor responds they should respond using the Reply Form provided and are entitled to request copies of documentation.
If the debtor disputes the debt, the creditor should send their full and detailed response within 30 days of receipt of the reply and must provide any information and/or copies of documents requested within 30 days of the request or explain why the document is not available.
Consideration should be given to offers to pay by reasonable instalments. If these are not acceptable in light of the financial information provided by the debtor, written reasons should be provided to the debtor as to why the proposals are rejected.
Court proceedings should always be seen as a last resort and consideration should be given to ADR, including mediation if appropriate.
If the debt is disputed and an agreement cannot be reached, the creditor must provide the debtor with at least a further 14 days’ notice of their intention to issue a claim. - Sanctions for Failure to Comply
The court can impose sanctions for failure to comply with the protocol including staying proceedings to allow the parties to comply or in exceptional circumstances making costs awards.