Following a lengthy consultation period, the Ministry of Justice has now published the new Pre-Action Protocol for Debt Claims (‘the Protocol’). This will be of general interest to everyone, but perhaps particularly to landlords with individual tenants.
The Protocol will come into effect from 1 October 2017. It sets out a blueprint for the conduct that the Court expects the parties to have complied with before proceedings are issued. It introduces more prescriptive rules on the Letter of Claim and increases the administrative burden on the creditor. In turn, the Protocol is more accommodating for individual debtors, providing them with up to 30 days to respond to the Letter of Claim.
Overall, the Protocol places a much heavier burden on the parties to try and resolve the dispute before a claim is issued.
What are the aims of the Protocol?
The Protocol aims to encourage early communication between the parties and to facilitate the exchange of information during the pre-litigation stage to assist in identifying issues in the dispute. The principal focus of the Protocol is on reducing the need for Court proceedings. The parties are therefore encouraged to act reasonably and proportionately, and particularly to bear in mind the size of the debt.
Who does the Protocol apply to?
The Protocol applies to any business, including sole traders and public bodies, claiming payment of a debt from an individual debtor. The Protocol will not apply to business-to-business debts, unless the debtor is a sole trader.
What changes will the Protocol make?
The Protocol will formalise the pre-action process and increase the amount of work that must be done before a debt claim is issued. There will be a heavier administrative burden on creditors in order to comply with the additional requirements that the new Protocol introduces.
By way of summary, the main changes that the Protocol introduces are as follows:
- debtors have 30 days to respond to a letter before claim – note that the period previously was usually 14 days unless the case was particularly complex;
- debtors may request extra time, in order to seek financial advice, pay, or request further documentation;
- creditors must give at least 14 days’ prior notice of their intention to start court proceedings; and
- the parties must ‘take stock’ of their positions where following the Protocol has not resolved the dispute before continuing with the claim.
Additionally, the Protocol introduces much more prescriptive rules about what the Letter of Claim must include and the initial information to be provided by the creditor. For example, the Letter of Claim must contain standard form enclosures in a prescribed form; a Reply Form in the form attached to the Protocol; and documents to confirm the debtor’s financial status.
Full details of the basis of the agreement must also be included in the letter of claim, along with an explanation that a copy of the agreement is available from the creditor upon request. Clearly it will be necessary for creditors to ensure that they are able to meet these requirements before sending out Letters of Claim or issuing proceedings.
Failure to Comply with the Protocol
Failure to comply with the Protocol may have detrimental cost consequences, including costs sanctions, and may be considered by the Court during case management directions. It is likely that the Court will look to penalise substantial creditors
The rationale behind the Protocol is clear: protecting individual debtors and reducing the need for litigation. However, the Protocol plainly makes the process of debt claims more time-consuming and costly for creditors.
We recommend that creditors take the following steps:
- Creditors should maintain good documentary records from the outset about who they are contracting with, due to the differences between the debt claims process for individuals and businesses;
- Creditors should aim to start the 30 day period as soon as possible;
- Creditors should update any internal systems or debt collection procedures to accommodate for the Protocol’s new requirements. For example, the Protocol requires the Letter of Claim to be posted on the day it is dated, or ‘if that is not reasonably possible, the next day’. Additionally, creditors should be prepared for an increase in requests for documentation from debtors;
- Creditors should seek to recover debts as soon as they become overdue and ultimately reduce the length of time debts are kept within internal processes, passing the debts over for legal collection sooner; and
- Creditors should also note that the Protocol may have an adverse effect on their businesses as payment can be delayed for a longer period of time than previously due to the extra accommodations set out for debtors.
Meanwhile, individuals who are aware that there may be a genuine dispute over a sum owed may wish to consider:
- Being aware of the requirements so that creditors can be referred to them if they fail to comply; and
- Keeping careful records of all agreements with creditors
It remains to be seen how the Protocol will work in practice, but we do consider it likely that the Courts will be rigorous in applying it.