Bad Debt

Posted on May 12, 2017

Unpaid Invoices? What the new Pre-Action Protocol for Debt Claims means for your business

Duncan Bennington, Associate Solicitor in our Dispute Resolution Department discusses the new rules for debt claims and how this can affect your business.

BACKGROUND

Pre-Action Protocols explain the conduct and set out the steps the Court would normally expect parties to take before commencing Court proceedings. The principle aim being to reduce the number of claims coming before the Court, by encouraging parties to interact with a view to resolving the dispute between themselves.

There are now numerous Pre-Action Protocols covering, for example, construction and engineering disputes or personal injury claims. Where there is no specific Protocol applicable to a dispute, the parties are expected to comply with the ‘Pre-Action Conduct’ Practice Direction.

Parties that fail to comply with the Protocols may face sanctions by the Court, including a reduction or increase in the amount of costs or interest payable to the other side.

There has never been any particular Protocol for debt claims, but the final version of the Pre-Action Protocol for debt claims has now been released and it will come into force on 1st October 2017. You can view the latest version, by clicking this link: Pre-action protocol for debt claims (PDF).

WHO DOES THE PROTOCOL APPLY TO?

The Protocol applies to businesses (including sole traders and public bodies) claiming payment of a debt from an individual (including a sole trader).
Importantly, the Protocol does not apply to business to business debt claims, unless the debtor is a sole trader.

However, when pursing a debt owed by a business, a creditor will still be expected to comply with the ‘Pre-Action Conduct’ Practice Direction, and may wish to consider implementing some of the steps required by the Debt Claim Protocol, in order to maximise protection against sanctions (mentioned above) being imposed by the Court.

WHAT ARE THE AIMS OF THE PROTOCOL?

As mentioned above, the principle aim is to reduce the number of claims before the Court by encouraging and enabling parties to:

  • engage and communicate early on;
  • exchange sufficient information about the matter to help clarify whether there are any issues in dispute;
  • resolve the matter without the need to start court proceedings;
  • attempt to agree a reasonable repayment plan or consider using an Alternative Dispute Resolution procedure;
  • act in a reasonable and proportionate manner in all dealings with one another (for example, avoiding running up costs which are close to, or exceed, the sums in issue);

HOW DO YOU COMPLY?

In summary, the steps are as follows:

  1. A creditor must send a Letter of Claim to the debtor, which must include the following information:
    • The amount of the debt, interest and any charges;
    • Details of the contract or agreement, including the date and parties to it;
    • Where the debt has been assigned (that is, transferred to a different creditor) details of the original debt and creditor and details of the assignment;
    • If the debtor has made an offer to pay, or is paying the debt, an explanation why the offer or payments are not acceptable to the creditor;
    • An up to date statement of account (including any interest and charges claimed), an Information Sheet, Reply Form and Financial Statement Form, which are annexed to the Protocol.
  2. The debtor then has 30 days from the date of the Letter of Claim to reply, failing which the Creditor may start Court proceedings.
  3. If the debtor replies, they should use the Reply Form and request any documents they require and enclose relevant documents.
  4. If the debtor indicates that they are seeking debt advice, the creditor must allow the debtor a reasonable period for the advice to be obtained. In any event, the creditor should not start court proceedings less than 30 days from receipt of the completed Reply Form.
  5. If the debtor indicates in the Reply Form that they are seeking debt advice that cannot be obtained within 30 days of their reply, the debtor must provide details to the creditor as specified in the Reply Form. The creditor should allow reasonable extra time for the debtor to obtain that advice.
  6. Where a debtor indicates in the Reply Form that they require time to pay, the creditor and debtor should try to reach agreement for the debt to be paid by instalments, based on the debtor’s income and expenditure (as set out in the Financial Statement Form).
  7. If the parties still cannot agree about the existence, enforceability, amount or any other aspect of the debt, they should both take appropriate steps to resolve the dispute without starting court proceedings and, in particular, should consider the use of an appropriate form of Alternative Dispute Resolution (such as discussion and negotiation or mediation).
  8. Onerously, if a deal is reached, but the debtor defaults, it appears that the entire process must be started again.

COMMENT

Whilst the new Protocol increases the amount of work (and therefore cost) required for a business creditor at the start of claim, it may avoid the need for costly litigation where a debtor is genuinely prepared to engage in the process, and reach an agreement for repayment.

However, an obstructive or deceptive debtor may seek to use the, fairly generous, time allowances to delay a claim for an undisputed debt. For example, it seems that a debtor could stall Court proceedings by, for example:

  • simply completing the Reply Form and indicating that they are seeking debt advice, leading to a possible delay of over 2 months; or
  • reaching an agreement to pay by instalments and then defaulting – where it would seem that you are back to square one, and the Letter of Claim process has to be restarted.

Businesses will therefore need to weigh carefully the need to comply with the Protocol against the need to move quickly, particularly where it is anticipated that money or assets may be dissipated.

If you require advice or assistance in relation to a debt recovery claim, or if you have any questions and would like to discuss the above procedure with us, please contact a member of our Dispute Resolution Team. Call 01702 332 311 or e-mail info@jefferieslaw.co.uk for more information.

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