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New Pre-Action Protocol for Debt Claims - Is your Business ready?

On 1 October the new Pre-Action Protocol (“the Protocol”) for debt claims is due to come into force which will provide a Debtor with a full 30 days to respond to a Letter of Claim before a Creditor is able to issue proceedings with the Court.  Whilst this will not affect business to business debts, it will apply to any debt being claimed by any business, including sole traders, from any individual. 

What is the purpose of the new Protocol?

The Protocol has been introduced to encourage early and clear communication between the parties in the hope that matters will be resolved without the need to issue Court Proceedings. The aim is that by following the Protocol, parties will agree to a repayment plan suitable for both parties or failing that, use an appropriate form of Alternative Dispute Resolution (“ADR”) to settle the claim. The benefit of this is that parties should be discouraged from running up costs disproportionate to the claim and subsequently, a solution could be reached sooner than if Court proceedings were to be issued.   

The Protocol will ensure that all information regarding the debt is provided to each party at the outset of the claim, which will allow Debtors with the opportunity to raise any queries or disputes in good time. 

Stages of the new Protocol

1. Letter of Claim

The Creditor should first send a Letter of Claim to the debtor which must provide them with at least 30 days to respond. Enclosed with the Letter of Claim should be; a template Information Sheet, a Reply Form, a Financial Statement Form and any relevant statements of account. 

The following information should also be contained within the Letter:

  • The amount of debt and details of any accruing interest.
  • Details as to how the indebtedness has arisen.
  • Details of any written agreement relating to the debt, including the date of such agreement, names of the parties to the agreement and confirmation that a copy of the same can be requested from the Creditor.
  • If the debt has been assigned, details of the original debt and Creditor and confirmation as to when it was assigned and to whom. 
  • If regular instalments are being paid or offered by the Debtor, an explanation as to why the Creditor is still considering issuing a Court claim.
  • Details of how the debt can be paid and how to proceed should the Debtor need to discuss payment options.
  • The address to which the completed Reply Form should be sent by the Debtor. 

If no response is received, the Creditor may start Court proceedings.

2. Response

The Debtor should use the Reply Form enclosed with the Letter of Claim and complete and return the same within the 30 day period. The Response should include the following:

  • A request for any documentation or information relevant to the claim that the Debtor wishes to see.
  • Confirmation of the intention to seek any debt advice if applicable. If the Debtor is in the process of obtaining or intends to seek debt advice, the Creditor is obliged to allow a ‘reasonable period’ for the Debtor to obtain such advice, even if the Debtor has indicated that this cannot be obtained within 30 days of their reply.
  • Confirmation as to whether or not the Debtor requires time to pay. If time is required, both parties should attempt to agree a suitable repayment plan which the Debtor can reasonably afford. 
  • The Financial Statement Form enclosed with the Creditor’s Letter of Claim should also be completed and returned by the Debtor to provide the Creditor with information as to the Debtors current financial position. 

Under the Protocol, the Creditor should not commence Court proceedings less than 30 days from receipt of the completed Reply Form or 30 days from providing the Debtor with any documentation/information requested by them (whichever is the later date). 

3.    Making attempts to Settle or try ADR

If it has not been possible for the parties to reach an agreement or solution at this stage, the parties should consider the use of ADR. Appropriate ADR may just take the form of negotiation and discussion for general debts, however the more formal mediation process may be more appropriate for large debts. 

4.    Agreement

Both parties should make all reasonable attempts to reach an agreement without the need to issue Court proceedings. When an agreement has not been reached but the Debtor has provided a response to the Letter of Claim, the Creditor should allow them with at least 14 days’ notice before commencing Court Proceedings. If an agreement is reached, the Creditor must not issue Court proceedings whilst the agreement is being complied with by the Debtor. If the Creditor has reason to issue Court proceedings in the future, a new Letter of Claim must be sent to the Debtor and the new Protocol must be repeated.

What should businesses to avoid penalisation for non-compliance?

Currently many businesses tend to allow Debtors with 3 – 7 days to respond to a Letter before Action. Consequently the 30 day timescale provided by the Letter of Claim is likely to have a big impact on how debt recovery matters are dealt with at the outset. 

Non-Compliance with the new Protocol may result in the Court imposing a stay on litigation proceedings to allow for the Procedure to be followed or even sanctions on costs being imposed to penalise a non-compliant party. It is therefore important that all internal procedures and precedents relating to debt recovery are reviewed and amended to ensure that they are compliant and to allow the appropriate length of time for the Debtor to respond at each stage. 

We would therefore advise that all businesses do the following prior to 1 October 2017:

  1.  Review your Credit Control Procedures;
  2. Consider Reducing your ‘accepted’ Debtor days;
  3. Amend any chaser letters to reflect the changes.

Should you have any queries or require any advice or assistance with regards to the new Procedure please do not hesitate to contact the Litigation Team here at Franklins on 01604 828282 or litigation@franklins-sols.co.uk who will be more than happy to guide you further.