New pre-action protocol for debt claims coming into force on 1 October 2017
What is changing?
From 1 October 2017, the new Pre-Action Protocol for debt claims (“the protocol”) comes into force. The protocol sets out the steps that certain parties should take before commencing Court proceedings in respect of debt recovery.
When does the protocol apply?
The protocol applies to any debt claimed by a business including sole traders and public bodies from an individual (including a sole trader). It does not affect business to business debts (unless the debtor is a sole trader) or where the debt is governed by another pre-action protocol such as in respect of construction or mortgage arrears possession claims.
What are the aims of the protocol?
The aims are to encourage parties to communicate and exchange information to try and identify the issues at an early stage and to try and resolve the matter and avoid litigation where possible. The idea is that from the outset, all relevant information in respect of the debt is in one place and the parties understand each other’s position. The aim is also to keep costs reasonable and proportionate to the amounts involved. It is essentially another level of protection for consumers.
What are the new rules under the protocol?
The steps under the protocol are as follows:
Letter of claim
The creditor sends a letter of claim (to be posted on the day the letter is dated or if not reasonably possible, the day after) to the debtor including the specified information set out in the protocol together with the enclosures set out in the Annexes to the protocol.
The protocol sets out in detail what information should be set out in the letter of claim. This includes: the amount of debt, whether interest or other charges are continuing, the details of the agreement (written or oral and where written, that a copy can be requested from the creditor), details of how the debt can be paid and information if the debtor wishes to discuss payment options as well as the address to which the reply should be sent. The creditor should also include an up to date statement of account for the debt including details of any interest or other charges. A copy of the information sheet, reply form and financial statement (provided in the Annexes to the protocol) should also be included.
The debtor should reply to the creditor using the reply form within 30 days of the date of the letter of claim. The debtor may request further documents and enclose any copies of documents they consider relevant. Any requests for documents/information should be dealt with within 30 days of the receipt of the request.
The debtor can indicate in the reply that they require time to pay and in such case the parties should try to reach an agreement based on the debtor’s income and expenditure.
If no response is received within 30 days, the creditor may commence Court proceedings. It will be sensible to leave extra time as the protocol specifically sets out that account should be taken of the possibility that the reply was posted towards the end of the 30 day period.
Try and agree/settle
The parties are under an obligation to take steps to try and resolve matters without involving the Court. The parties should consider ADR (in the form of negotiation and discussion) or more formal ADR such as mediation (where the sums are large), where appropriate.
If it is not possible to reach agreement, the matter should be reviewed to see if involving the Court can be avoided or at least to narrow the issues. Where the debtor has responded to the letter of claim but agreement has not been reached, the creditor should give the debtor at least 14 days’ notice of their intention to commence Court proceedings.
The creditor may commence proceedings but not within 30 days of the receipt of the reply form or the provision of any documents requested, whichever is the later.
What happens if the new pre-action protocol is not followed?
The Court will expect parties to have adhered to the protocol before commencing proceedings. However, the protocol sets out that the Court is not likely to be concerned with minor or technical infringements. If a party has substantially failed to comply with the protocol, the Court may well take that into consideration in respect of directions for the management of the case. For example, the Court could impose a stay so as to give the parties time to seek to resolve the matter. The Court may also order costs sanctions against the party who has not complied with the protocol.
How will this change debt collection?
The business creditor’s letter of claim will need to include more detail. Both the creditor and the debtor will need to ensure they comply with the protocol to avoid any sanctions being imposed on them by the Court if it is not possible to settle the matter. The timescales set out in the protocol will mean that the process will likely take significantly longer to seek payment of the sums owed.
What do I need to do?
Business creditors need to ensure they are ready for when the changes come into effect on 1 October 2017. In the first instance, they are likely to need to review their letters of claim to ensure they comply with the protocol from the outset.