In October 2017 the debt recovery process for businesses owed money by individuals changed significantly.
Previously there was no specific pre court action process for recovering debts, but on 1 October 2017 the Pre-action Protocol for Debt Claims came into force.
A Pre-action Protocol sets out the various steps that the court expects both sides to take before commencing legal action. Issuing legal proceedings should always be a last resort, and so both parties need to have ideally first tried to settle their dispute without having to involve the court.
Whilst there are already Pre-action Protocols for other types of civil claims such as personal injury, professional negligence and possession claims, certain business debts will also now need to follow a set 'pre legal action' procedure.
The Protocol is designed cover businesses claiming repayment of a debt or unpaid invoices from an individual. However the definition of an individual includes sole traders, so the Protocol also applies to business to business debts when a sole trader is involved.
There are also a few exceptions where the debt protocol doesn't apply, mainly around claims where there currently is another Pre-action Protocol that exists (such as with mortgage arrears or construction and engineering disputes).
The debt recovery protocol.
Part 2.1 of the Pre-Action Protocol outlines its aims, however in summary they are to:
Business to business debt recovery protocol.
While a primary goal of the protocol is to provide additional time and protections to consumers, it actually includes many business to business debts. This is because the protocol considers both consumers and sole traders to be individuals.
What happens if you don't follow the debt protocol?
Failure to comply with the Protocol prior to commencing court proceedings may result in the court imposing sanctions against the creditor or claimant. The sanctions imposed are likely to be in relation to costs.
To quote the Protocol: "If a matter proceeds to litigation, the court will expect the parties to have complied with this Protocol."
Debt collection under the pre-action protocol.
Pre action Protocol Reply Form.
If the debtor states that they are looking to gain professional debt advice, the creditor has to permit the debtor reasonable time for them to obtain this advice, at least a further 30 days. This may be longer if the debtor can provide a reasonable explanation as to why it will take additional time to obtain the advice.
If the debtor states on the Reply Form that they need more time to pay the debt, the parties should attempt to reach an agreement for the amount to be settled by instalments. If a payment schedule or agreement cannot be reached, the creditor must confirm in writing why it does not accept the debtor's instalment proposal.
Should a partially completed Reply Form be received, the creditor is expected to make contact with the debtor to discuss the content and obtain the further information necessary to understand the debtor's position.
A creditor ignoring the debtor's reply and their reasons is not an option.
Use of Alternative Dispute Resolution (ADR) in debt claims.
If there is a disagreement about the debt being owed or the exact amount, then the parties should consider mediation or any other forms of dispute resolution rather than commencing court proceedings. This may be a formal process with an ADR provider or may simply take the format of a documented discussion and negotiations.
After these negotiations if an agreement is still not reached, then the creditor should give the debtor notice of at least 14 days of the intention to now commence court proceedings.
Debt collection pre action protocol.
The new Protocol creates a more formal and paper heavy procedure for your business to collect overdue invoices, as it requires that additional documentation and time is given to the debtor.
Plus there is always the potential for persistent debtors to use the Protocol to further delay payment.
So as a business you need to stay on top of your credit control procedures and issue a Letter of Claim as soon as it is reasonable to do so. Also having a solicitor draft the letter in compliance with the Protocol ensures that you can move quickly to court action should payment not be forthcoming.
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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