What is the Pre-Action Protocol for Debt Claims?

Things are changing for businesses that are owed money by individuals or sole traders.

Previously there wasn't a set pre court action protocol for recovering debts, but this all changed on 1 October 2017 when 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 proceedings should always be a last resort and both parties need to ideally try and settle their dispute without having to involve the court. There are already Pre-action Protocols for other types of civil claims such as personal injury, professional negligence and possession claims, but from October 2017 certain business debts will also 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 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 applies such as in construction and engineering or mortgage arrears.

The business to consumer debt recovery protocol.

​According to Part 2.1 of the Pre-Action Protocol, it aims to:

• Encourage early engagement and communication between the parties, including early exchange of sufficient information about the matter to help clarify whether there are any issues in dispute;
• Enable the parties to resolve the matter without the need to start court proceedings, including agreeing a reasonable repayment plan or considering using an Alternative Dispute Resolution procedure;
• Encourage the parties to act in a reasonable and proportionate manner in all dealings with one another (for example, avoiding running up costs which do not bear a reasonable relationship to the sums in issue);
• Support the efficient management of proceedings that cannot be avoided.

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What happens if you don't follow the debt protocol?

​To quote the Protocol:

"If a matter proceeds to litigation, the court will expect the parties to have complied with this Protocol."

Failure to comply with the Protocol prior to commencing court proceedings may result in the court imposing sanctions against the creditor. The sanctions imposed are likely to be in relation to costs.

Debt collection under the pre-action protocol.

​The current internal procedures will vary from business to business as to how they deal with securing payment of outstanding debts. However, for many it involves several chaser telephone calls, emails and letters prior to taking any formal legal action to recover the debt. The final step is the debt is passed to a debt collection agency or solicitor to take formal court action. This is usually the point a Letter before Action is sent with a relatively short payment deadline because the debt is already long overdue.

Under the new Protocol the Letter before Action is referred to as a Letter of Claim. The Protocol now stipulates the information that must be included in every Letter of Claim and so a lot more detail is required than is currently included in most Letters before Action.

The business owed the money (known as the creditor) will have to include an Information Sheet, a Reply Form and a Financial Statement along with the Letter of Claim to assist the debtor. All these documents also need to be sent by post.

Then the debtor has 30 days to reply. If no reply is received then the creditor can commence court proceedings.
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Key Points on the new Debt Pre-Action Protocol

• Applies to any business claiming debt from an individual or a sole trader
• Additional documentation needs to be provided to the debtor with a letter of claim
• Debtor has 30 days to reply
• Debtor may request more time to seek debt advice or to pay in instalments
• New procedure likely to be slower and increase the costs involved in recovering debts
• Failure to comply with the protocol will likely result in court cost sanctions against the creditor

What happens when the debtor responds?

​If the debtor states that they are seeking debt advice, the creditor has to allow the debtor a reasonable period for this advice to be obtained, at least a further 30 days. This may be longer if the debtor can provide a reasonable explanation as to why it will take time to obtain the debt advice.

If the debtor indicates in the Reply Form that time is needed to pay, the creditor and debtor should try to reach agreement for the debt 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 proposal.

If a partially completed Reply Form is received the creditor is expected to contact the debtor to discuss 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 dispute about the debt being owed then the parties should consider ADR 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.

If agreement is still not reached, then the creditor should give the debtor notice of at least 14 days of the intention to commence court proceedings.
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Debt collection pre action protocol.

​The new Protocol creates a more formal and paper heavy procedure for your business to collect money owed as it includes the need to provide additional documentation to the debtor.

​There is then the potential for debtors to use the Protocol to delay payment, but even if they don't the new procedure is likely to be slower and increase costs compared to a pre-October 2017 time frame and Letter Before Action.

So it is time to review your credit control procedures and assess at which stage the new Letter of Claim should be sent. You should also review the current position of any outstanding debts and if you have given the debtor plenty of opportunity to pay/raise issue with the debt. If nothing is forthcoming a decision may need to be made to take more formal legal steps to recover the debt as soon as possible.