What is its aim?

The general principle of the protocol makes sense: provide the debtor with all the information in order that they can make an informed decision, and respond regarding payment or any issues they disagree with and try and avoid involving the court where possible. In a genuine dispute where proceedings might otherwise be brought prematurely before the individual debtor had a chance to review and consider all the information, this level of consumer protection is welcomed.

The difficulty is placing all debt claims under the same “one size fits all” criteria, as this protocol does. In a simple debt claim, the time period stipulated is extensive and will cause significant delay to the creditor receiving payment or being able to bring proceedings. The protocol effectively extends the time the debtor has to pay, as the period for responding is 30 days, followed by a further 30 days after the response has been received or the provision of any requested documents (whichever is the later) before the creditor can commence proceedings. An unscrupulous debtor could delay payment to the creditor for 60 days or more without the risk of the creditor being able to bring proceedings under the protocol.

The protocol also places a significant burden on creditors in terms of the information that should be included in a letter before claim. A creditor must decide whether to supply all copies of relevant documents at the outset with the letter of claim. To risk not doing so could prompt the debtor to request copies, which will delay the matter further.

As it affects any debt claimed by a business from an individual, the protocol is wide reaching. There are certain scenarios where the burden on the creditor seems rather unfair, such as with regard to rent arrears. These sums are rightly due under a lease or tenancy agreement. The sums fall due regularly. The debtor is likely to have considerable notice regarding the due date and amount. However a company landlord pursuing an individual tenant for rent arrears will also have to comply with the protocol. Why should the landlord have to wait 60 days? This will increase costs and significantly delay the landlord receiving payment or being able to commence proceedings against the tenant.

If a creditor does not comply with the protocol, they risk sanctions being imposed by the court. For example, the court could order a stay of the proceedings in order for the parties to follow the protocol, or it could impose costs sanctions. From a more general business point of view, there is also the reputation of the business and any adverse publicity to be considered where a creditor does not follow the protocol.

Implementing the protocol will have an impact on businesses from cost and time points of view. It is difficult to anticipate how business creditors will react to the new protocol. However, what is clear is that they need to address their current debt claims procedure to ensure that they comply with the protocol so as to be ready. Otherwise, they could risk sanctions for non-compliance after 1 October this year.

It may well be that certain creditors, particularly landlords, may decide to reduce the number of claims they issue due to these changes and they could possibly view it as a last resort. They may be inclined to look towards other means of debt recovery, at least in the first instance, such as serving a statutory demand or forfeiture. Having said this, where there is compliance with the protocol, given the additional time and costs that will be incurred, creditors may well be more inclined to take the claim all the way once they commit to this option, so as to try and recoup at least some of the costs incurred.

The protocol may result in more cases being settled before getting to the proceedings stage. This may be a result of the extra time allowed, or it may be as the debtor will be able to weigh up all the information from the outset. If so, this should mean that costs are reduced. This, of course, would benefit both parties.

It will be interesting to see whether the court will deal with certain debt claims any differently or whether it will be a “one-size fits all” approach. At present, the concern is that one size most certainly will not be suitable for all.

This article was first published in Practical Law Dispute Resolution Blog.