The new ‘Pre-Action Protocol for Debt Claims’ came into force on 1 October of this year. It applies where a business is seeking to recover a debt from an individual or sole trader. It does not apply where the debt is owed by a business which is not a sole trader or where the claim is subject to another pre-action protocol.

The protocol appears to have been introduced primarily:

(a)        to ensure that debtors have sufficient information to take advice and respond properly to a claim before court proceedings are issued; and

(b)        to try and reduce the number of debt claims (and, in particular, poorly prepared debt claims)  with which the Court is having to deal.

A broad overview of the provisions of the Protocol

The creditor needs to send a letter of claim which contains the information specified at paragraph 3.1 of the protocol (in broad terms, full particulars of the debt and details of the agreement under which it arose). The letter of claim should also enclose an up-to-date statement of account for the debt, including details of interest and charges claimed by the creditor, and the standard ‘Reply’, ‘Information Sheet’ and ‘Financial Statement’ forms, which are annexed to the protocol.

The creditor has to wait at least 30 days for a response to the letter of claim before it can issue court proceedings. In practice, creditors would be wise to wait at least a further couple of working days before doing so given that the protocol requires them to take into account the possibility that a debtor may post his reply towards the end of the 30 day period.

The reply form, if properly completed by the debtor, will provide the creditor with details of:

1.         whether the debtor admits the debt, or part of it, and any repayment proposals which he is willing to make (the protocol encourages the debtor to complete the standard Financial Statement form if he is asking for time to pay the debt, or part of it);

2.         whether the debtor intends to seek advice (i.e. financial advice regarding how to pay the debt or legal advice on whether he can dispute it); and/or

3.         the grounds on which the debtor is disputing the debt and details of any documents with which he would like the creditor to provide him.

Once the creditor has received a reply form from the debtor, it has to wait at least 30 days from the date it receives that reply before it can issue any court proceedings. If the debtor has requested, in the reply form, that the creditor provide him with documents, that period is extended to 30 days after the creditor provides the debtor with those documents. The creditor must provide the documents within 30 days (assuming they are available and their disclosure is relevant in assisting the parties to understand each other’s position).

If the debtor intends to seek advice on the debt, he should indicate from whom, and when, he will be getting advice in the reply form. The protocol obliges the creditor to give the debtor a reasonable time to obtain that advice. It assumes that the debtor will be able to do so within 30 days of him replying to the letter of claim and, in practice, it may be difficult for the creditor to argue that it is unreasonable for the debtor to take up to 30 days to obtain that advice. If the debtor needs longer than 30 days to obtain advice, he needs to explain why in the reply form and the creditor is only required to provide him with additional time if it is reasonable to do so in the circumstances.

Once the reply form has been received, and the creditor has dealt with any requests for documents within it, the provisions of the protocol are very similar to those which previously applied under the Practice Direction- Pre Action Conduct and Protocols. The parties are encouraged to exchange information and documents “sufficient to enable them to understand each other’s position”. The  creditor must deal with any such requests for information and documents by the debtor within 30 days of receipt. The parties are also encouraged to take appropriate steps to try and resolve the dispute without the need for Court proceedings, including considering whether any form of Alternative Dispute Resolution may be appropriate. The protocol specifically refers to mediation as a process which may be appropriate where the debt is large.

Finally, the parties are required to “take stock” of their positions if the procedure set out in the protocol has not resulted in a resolution to the dispute. In those circumstances, the creditor must give the debtor at least 14 days’ notice of its intention to commence proceedings.

The approach that the Court will take when deciding any sanctions to impose on a party who has not complied with the provisions of the protocol is the same as that which currently applies for breaches of the Practice Direction-Pre Action Conduct and Protocols.

A useful mechanism to resolve debt claims without Court proceedings or a time wasters’ charter?

There certainly appears to be a benefit in introducing a standard reply form and financial statement form for debtors to complete. Those standard forms should result in more structured responses to letters of claim from individuals and sole traders, who may not have any knowledge of the litigation process. This, in turn, ought to assist in flushing out all of the reasons for non-payment of a debt at an early stage of a dispute.

Unscrupulous debtors could, however, use the provisions of the protocol to delay matters substantially. A creditor may find itself in a position where it has to wait to around 3 months before it can issue proceedings even in circumstances where the debtor may not have a genuine reason for disputing the debt (e.g. if the debtor replies to the letter of claim at the last possible moment, then says that he is seeking advice on the debt and then disputes the debt for spurious reasons making various requests for documents). Such a period would be analogous to the time which a claimant may have to wait for a letter of response in a far more complex type of claim (e.g. a professional negligence claim) even though the creditor’s claim may be a straightforward debt claim. Creditors may decide to shorten their credit control processes before they pass the matter to their in-house legal team, or external lawyers, to send letters of claim to take account of the longer pre-action process.

We will have to wait and see whether the protocol turns out to be a sledgehammer to crack a nut. One queries whether its aims could have been achieved merely by supplementing the existing provisions of the Practice-Direction-Pre-Action Conduct and Protocols (e.g. incorporating the standard ‘Reply’ and ‘Financial Statement’ forms for debt claims against individuals and sole traders) and retaining the more flexible approach to timescales within that practice direction. It was, after all, already within the powers of the Court to sanction a creditor who either did not provide a debtor with a reasonable period to respond to a letter of claim or refused to disclose key documents to the debtor.

Notwithstanding the above, creditors who are pursuing debts against individuals and sole traders must now be aware of the provisions of the new pre-action protocol for debt claims. They should amend any precedent letters of claim to make them compliant with the protocol and should ensure that they comply with its other provisions to avoid possible subsequent sanctions by the Court.