What is the Pre-Action Protocol for Debt Claims?

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:
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• Promote early engagement and communication between the creditor and the debtor, ensuring the timely sharing of information on the amount owed to ascertain if any points are disputed;
• Encouraging the parties to settle the matter without court proceedings by considering paying by instalments or using alternative dispute resolution;
• Ensure both parties act reasonably and in a proportionate manner;
• If court action is unable to be avoided, support efficient management of court proceedings.

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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.

Your business is pursing a debt from	Debtor name example	Does the Pre-Action Protocol for Debt Claims apply?
A Limited Company	Widgets Limited / Widgets LLP	No
A Partnership	​​The Widgets Partnership	No
A Sole Trader	Isaac Fuller trading as Widgets 4U	Yes
A Consumer	Isaac Fuller	Yes

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.

​Informal debt chasing procedures will vary from business to business. But for many it involves several chaser telephone calls and emails prior to considering legal action.

If these informal steps fail, the debt is usually referred to a solicitor to start formal court action. At this point a Letter Before Action is sent to the debtor with a relatively short deadline, requesting payment or face court proceedings being commenced.

Under the new Protocol the Letter Before Action is referred to as a 'Letter of Claim' and the Protocol stipulates what information must be included.

​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 in responding. 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
• The new procedure is slower and more 'paper heavy'
• Failure to comply with the protocol will likely result in court cost sanctions against the creditor

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.
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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 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.