Pre-action Protocol for debt claims
- AuthorClaire Richardson
Pre- action Protocol for Debt Claims
The Pre-action Protocol for debt claims ('The Protocol') comes into force on 1 October 2017 and will potentially have a significant impact on a business if it has outstanding debts due from individuals. The Protocol will apply to any business (including sole traders and public bodies) claiming payment of a debt from an individual (including a sole trader). The Protocol does not apply if the debt is covered by another type of protocol (such as construction or engineering, or mortgage arrears, or claims issued by a government organisation such as HMRC).
The Protocol describes the conduct the court will normally expect of those parties prior to the start of proceedings and is intended to encourage early engagement and communication between the parties to enable them to resolve the matter without the need to start court proceedings.
The Creditor's Starting Point
The Protocol requires the creditor to send a Letter of Claim to the debtor containing various items of prescribed information outlined in the protocol. A creditor will have to include with its Letter of Claim a template information sheet and a reply form in all cases. The creditor should also:
enclose an up-to-date statement of account for the debt, which should include details of any interest and administrative or other charges added;
enclose the most recent statement of account for the debt and state in the Letter of Claim the amount of interest incurred and any administrative or other charges imposed since that statement of account was issued, sufficient to bring it up to date; or
where no statements have been provided for the debt, state in the Letter of Claim the amount of interest incurred and any administrative or other charges imposed since the debt was incurred; (a) enclose a copy of the Information Sheet and the Reply Form annexed to the Protocol; and (b) enclose a Financial Statement form as annexed to the Protocol.
If the debtor does not reply to the Letter of Claim within 30 days of the date at the top of the letter, the creditor may start court proceedings.
The Debtor's Response
The debtor should use the Reply Form for their response. The debtor should request copies of any documents they wish to see and enclose copies of any documents they consider relevant, such as details of payments made but not taken into account in the creditor’s Letter of Claim. If the debtor indicates that they are seeking advice, the creditor must allow the debtor a reasonable period for the advice to be obtained and in any event should not start court proceedings less than 30 days from receipt of the completed Reply Form or 30 days from the creditor providing any documents requested by the debtor, whichever is the later. The creditor should also allow the debtor reasonable extra time to obtain that advice where it would be reasonable to do so in the circumstances.
Where a debtor indicates in the Reply Form that they require time to pay, the creditor and debtor should try to reach agreement for the debt to be paid by instalments, based on the debtor’s income and expenditure. If the creditor does not agree to a proposal for repayment of the debt, it should say why in writing.
If the debtor fails to complete a Reply Form fully the onus is on the creditor to contact the debtor to discuss and obtain any further information needed to properly understand the debtor’s position.
Where any aspect of the debt is disputed the parties should exchange information and disclose documents sufficient to enable them to understand each other’s position.
If the parties still cannot agree about the existence, enforceability, amount or any other aspect of the debt, they should both take appropriate steps to resolve the dispute without starting court proceedings and, in particular, should consider the use of an appropriate form of Alternative Dispute Resolution (ADR).
So what does this mean for me and my business?
The Protocol puts an increased burden on creditors to provide more information about their debt in a specific format. The Protocol also allows scope for debtors to delay payment for up to 90 days. This is likely to have a serious effect on sole traders and small businesses and cash flow in particular. Terms of business are now a must for businesses of any size to ensure you can recover any unpaid monies. The importance of a contract for works for individuals cannot also be overstated. We can, as a full legal service asist with all matters covered in this blog.