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.
Why is a business debt recovery protocol needed?
According to Part 2.1 of the Protocol it aims to:
What happens if a business doesn't comply with 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.
New requirements for businesses under the debt protocol
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.
What does it mean for businesses trying to recover outstanding debts?
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.
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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