CreditFILE April 2009

All Change for Debt Recovery!
New Pre-Action Protocol Commencing 6th April 2009

A special Report By Jackie Ray Head Of Commercial Collections- Brethertons LLP:

The Ministry of Justice has issued their 49th Practice Direction which comes into force on 6th April 2009.  There are some minor changes to the procedures that we follow for your debt recovery cases, for example the limit for Fast Track Cases has now been increased from £15,000.00 to £25,000.00 and some other major changes, see below!

The most significant change is the introduction of a ‘pre-action protocol’ which applies to all claims brought before the Court (with a few limited exceptions) where there is currently not a pre-action protocol and this could extend to apply to debt claims.

There is however provision within the protocol to say that it does not apply to debt claims that are undisputed and where the Claimant follows a statutory or other formal pre-action procedure. This is an interesting point and we have raised an enquiry with the Ministry of Justice regarding this as firstly most Claimants may believe that their claim is undisputed right up until a defence is filed and then will find that they have a compliance issue with the protocol. Secondly there is no other protocol that applies to the debt recovery process and therefore currently we would recommend that before proceedings are issued that the requirements of the pre-action protocol are followed.

We still envisage the use of a Solicitors Letter Before Action as this does generate a response from debtors at quite a minimal cost and can lead to the resolution of a claim without the need to commence proceedings. However should there not be a response then prior to issue we would recommend a letter before claim in accordance with the pre-action protocol is sent, to ensure that our clients are not subject to the penalties for non-compliance. There are further obligations within the protocol where a Claimant is a business and the Defendant is an individual set out below.

The principles behind the pre-action protocol are to ensure that before proceedings are commenced that sufficient information is exchanged for the parties to understand the basis of the claim and to make appropriate attempts to resolve the matter without the need for Court proceedings whilst acting in a reasonable and proportionate manner.

The Protocol itself

The pre-action protocol provides that a letter before claim must be sent allowing fourteen days for a response. The letter before claim must include the Claimant’s full name and address, details of the amounts claimed and list the documents that make up the claim ie invoices/statement of account/dishonoured cheques etc. The pre-action protocol also includes a requirement to provide a form of Alternative Dispute Resolution and invite the debtor to agree to this together with a request for the debtor to provide copies of any documents that they believe to be material to the claim.

The letter of claim should also include details of how payment can be made and contact details in the event that the debtor requires a payment plan to be considered.

If the debtor is an individual and is known not to be legally represented then there is a further obligation within the pre-action protocol to refer the debtor to the following paragraph:-

“The Civil Procedures Rules enable the Court to take into account the extent of the parties’ compliance with the relevant pre-action protocols when giving directions and when making orders about who should pay costs.”

If the debtor is an individual then the letter of claim should direct the debtor to seek assistance from their local Citizen’s Advice Bureau or the following organisations:-

The National Debtline, Tricorn House, 51-53 Hagley road, Edgbaston, Birmingham, B16 8TP or by telephone on freephone 0808 808 4000  or www.nationaldebtline.co.uk

Consumer Credit Counselling Service by telephone on freephone 0800 138 1111 or www.cccs.co.uk

Community Legal by telephone on 0845 345 4345 or www.clsdirect.org.uk

The letter of claim should also include details that in the event that the debtor should ignore the letter then the Claimant may commence proceedings and include a claim for fees, costs and interest which will increase the Defendant’s liability.

Non-compliance?

As mentioned above, there is a note within the protocol that states that it is not intended to apply to debt claims where it is not disputed that the money is owed and where the Claimant follows a statutory or other formal pre-action procedure. However there are penalties for non-compliance and our current advice is that it may be best practice to comply pending further interpretative guidance.

There are penalties for failing to comply with the pre-action protocol and examples of lack of compliance include:-

a) not providing sufficient information to enable the other party to understand the issues
b) not acting within the time limit specified within the protocol or within a reasonable period (this seems to be 14 days in most instances)
c) unreasonably refused to consider Alternative Dispute Resolution
d) without good reason not disclosed documents requested to be disclosed.

The penalties are:-

i) staying proceedings until steps are taken which ought to have been taken
ii) the party at fault to pay the costs or part of the costs and this may extend to claims within the Small Claims Track where costs are not normally awarded.
iii) An order that the party at fault pays those costs on an indemnity ie full basis
iv) If the party at fault is the Claimant in whose favour an order for the payment of a sum of money is subsequently made, an order that the Claimant is deprived of interest on all or part of that sum and/or interest is awarded at a lower rate than would otherwise have been awarded
v) If the party at fault is the Defendant and an order for the payment of a sum of money is subsequently made in favour of the Claimant, an order that the Defendant pay interest on all or part of that sum at a higher rate, not exceeding 10% above the base rate, than would otherwise have been awarded.

The Court will take account of a relevant pre-action protocol if the proceedings were started after the relevant pre-action protocol came into force (6th April 2009).

If the debtor responds to the Letter of Claim

There is a further provision within protocol if the debtor should respond to the letter of claim then they must either provide a full written response within the fourteen day period or acknowledge receipt of the letter within the fourteen day period and request a further time period during which they will be able to provide a response or request further details.

The debtor is not able to request longer than thirty days without giving an explanation.

The debtors’ response should either accept the claim in whole or in part. If not then reasons must be given why the claim is not accepted; details of any counterclaim must be supplied; state whether the Claimant was to blame in whole or in part; state whether Alternative Dispute Resolution is accepted; supply documents which the debtor intends to rely or request copy documents.

The Claimant must respond

The Claimant must respond by providing the documents in a short time and if not explaining why the documents requested cannot be provided.

If the debtor has indicated that a counterclaim is likely then the Claimant should provide the documents requested by the Defendant if any, and provide information that the counterclaim is not accepted; state whether the debtor was to blame in whole or in part; state whether Alternative Dispute Resolution is accepted; supply documents on which the Claimant intends to rely or request copy documents.

Debtor seeking debt advice

If the debtor replies that they are seeking advice from the debt counselling services then details of whom the advice is being sought; the expected time when this advice will be obtained and when the debtor will be in a position to provide a full response should be provided. 

The Claimant must allow a further reasonable time period to allow such advice to be sought (fourteen days is considered reasonable). However if the debtor is known to have received debt advice in the past and their circumstances have not changed or the debtor has asked for time to seek advice in the past and not done so then no further time need be allowed.

Brethertons Advice:

Letters only

If you are a volume user and rarely issue Court proceedings then we shall adapt our process to send a letter before action but bear in mind a formal letter of claim will have to be sent if you subsequently intend to issue Court proceedings.

Letters of Claim with a view to legal proceedings

If you currently use us to prepare your letter before actions then these need to be adapted to comply with the protocol if you intend to instruct us to commence legal proceedings. We shall require as a minimum a statement of account and copies of any other supporting documents ie dishonoured cheques, admissions.

If proceedings are required to be issued on or after 6th April 2009 and a standard letter before action has already been sent then we would recommend that a further letter of claim should be sent allowing fourteen days for a response before proceedings are issued.

Immediate proceedings

If you use us for issuing legal proceedings having sent your own letters before action then you will need to either instruct us to prepare a letter of claim or amend your letters before action to comply with the protocol and forward a copy to this office when you instruct us to commence proceedings as we will have to certify on the Claim Form that the pre-action protocol has been complied with.

If you  have concerns about how these regulations may affect your business  please contact:- Jackie Ray  01295 270999   jackieray@brethertons.co.uk

Debt Relief Orders (“DROs”)

DROs are new form of bankruptcy in the UK, coming into effect on 9 April 2009.

A DRO is a more simplified, quicker and cheaper alternative to bankruptcy and is targeted at those individuals who would not be able to ‘afford’ bankruptcy.

An individual can only apply for a DRO through an intermediary who is a skilled debt advisor  (6 organisations have been appointed as competent authorities with the skills to be able to advise on DROs – one example is the Citizens Advice Bureau, the insolvency service website details all organisations:

http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/DRO Interim CAs.doc ).

DRO will work by:-

a) application via an intermediary
b) Official Receiver will make the order (if appropriate)
c) Creditors are then informed by the OR and order put on the Insolvency Register
d) (unlike bankruptcy, there are no investigations unless a valid objection is received by a creditor)

Who is eligible for a DRO?

Only debtors that:-

• have total liabilities not exceeding £15,000 (not including un-liquidated or excluded debts – such as student loans, fines and maintenance payments)
• have gross assets less than £300.00
• are not home owners
• have surplus income less than £50.00 per month
• have not had a DRO in the last 6 years
• are not an un-discharged bankrupt or have a current IVA/subject to a bankruptcy restrictions order or debt relief restrictions order
• are unable to pay their debts
• are domiciled in England and Wales or resident or carried on business there in the last 3 years

will be eligible. Motor vehicles under £1000 in value will not be included in the calculation of total assets.

How much will it cost?

DROs will cost £90.00 and this must be paid prior to submitting their application for the DRO. It is possible to pay this amount by way of instalments over a maximum period of 6 months. If the full sum is not paid by the end of 6 months since the start of your application, then you will be refunded the sums paid over the course of the 6 months.

Debtor is provided with a bar-coded letter to enable them to make payment over the counter at post-office.

The whole procedure is online, which is why the costs are kept to a minimal. DROs will be dealt with solely by the OR in Plymouth.

Applying for a DRO

A DRO is a form of insolvency and will be subject to public listing through the IS website.

DROs can only be completed by an approved intermediary. The Intermediary will review the persons circumstances (including all payslips, debts etc) and make a determination if they are eligible and appropriate for a DRO.

DROs will only be filed online and no fee will be charged by an intermediary offering this service.

Once received by the Official Receiver, the OR may make a DRO. It is not necessary for the Court to be involved if the applicant meets the requirements above. [This keeps costs low].

If the OR becomes aware of information which means the debtor does not qualify for a DRO, for example that their debts exceed £15,000, then the OR may revoke the DRO without reference to the court.

If the DRO is revoked, the debtor will be open to actions by his creditors and the debtor cannot apply for another one within 6 years.

Effects and Implications of  DRO

If granted, a DRO is active for 1 year. Effect on Debtor:-

• one year moratorium preventing creditors from taking enforcement action to recover the debt (usually 12 months). This only applies to creditors and sums contained in the DRO application. Creditors outside this application are still free to take action against the debtor to recover sums due to them, or sums outside the order. (i.e. “new debts” incurred by the debtor)
• Debtor is free from those debts at the end of the moratorium
• Debtor MUST provide information and co-operate with the OR i.e. notify OR of a change in circumstances (such as a windfall). If circumstances change, OR can revoke the Order
• Debtor is expected to make arrangements to repay their creditors should their financial circumstances improve (i.e. they no longer fit the criteria)
• Joint debts will not be protected i.e. debts of a partner or guarantor will not be written off
• Unlike bankruptcy, assets do not vest in the OR (as there are virtually no assets).

Certain activities by debtors subject to a DRO may result in an application to the Court for a Debt Relief Restrictions Order. These include:

• Failing to keep records which account for a loss of property by the debtor, or by a business carried on by him, where the loss occurred in the period beginning two years before the application date for the debt relief order and ending with the date of the application for the debt relief restrictions order
• Failing to produce records of that kind on demand by the official receiver
• Entering into a transaction at an undervalue in the period beginning two years before the application date for the debt relief order and ending with the date of the determination of that application
• Giving a preference in the period beginning two years before the application date for the debt relief order and ending with the date of the determination of that application
• Making an excessive pension contribution
• A failure to supply goods or services that were wholly or partly paid for
• Trading at a time, before the date of the determination of the application for the debt relief order, when the debtor knew or ought to have known that he was himself to be unable to pay his debts
• Incurring, before the date of the determination of the application for the debt relief order, a debt which the debtor had no reasonable expectation of being able to pay
• Failing to account satisfactorily to the court or the official receiver for a loss of property or for an insufficiency of property to meet his debts
• Carrying on any gambling, rash and hazardous speculation or unreasonable extravagance which may have materially contributed to or increased the extent of his inability to pay his debts before the application date for the debt relief order or which took place between that date and the date of the determination of the application for the debt relief order
• Neglect of business affairs of a kind which may have materially contributed to or increased the extent of his inability to pay his debts
• Fraud or fraudulent breach of trust
• Failing to co-operate with the official receiver.

More serious misconduct may result in criminal prosecution, although this is expected to be rare.

If the debtor carries out any of the above, the DRO may be revoked and creditors can seek to recover all sums due to them by the debtor.

The OR will rely on the creditor’s confirming the debtor’s statements within their application are correct in terms of the amount they owe.

If a creditor advises the OR that the sum claimed to be owed by the debtor is less than the amount claimed, and this will bring the debtor over the £15,000 threshold, the OR will revoke the order and the creditor is free to pursue the debtor for the full sums due. If a creditor is excluded from the DRO, then they are not party to it and can therefore use usual methods to recover the debt.

If the debt owed is subject to further charges, interest etc (for example, on a credit card) then it is at the discretion/protocol of the bank/card supplier whether these charges are pursued, accumulate until the end of the 12 month period or are written off.

B-Sec for Company Secretarial Services

Brethertons LLP has launched a new commercial service called B-Sec, which is aimed at company directors / secretaries, business owners and managers who carry out a company secretary role.

B-Sec is a service to help manage the paperwork and processing of official company documentation with ease.  The Brethertons system, B-Sec, allows automatic filing of documents at Companies House, electronic recording and reviewing of statutory books and commercial documents and helps keep you on top of company secretarial administration.
 
Team Commercial partner, Brian Auld, said of the launch:

“We are all extremely excited to launch the B-Sec service which is available from our Rugby and Banbury offices.  This is a further addition to our supply of on-line legal services and it will help save a lot of time and effort for anybody carrying out company secretary duties as they often struggle to keep up-to-date with their documentation and overall business compliance. The costs are very modest in comparison to the quality of the service and its benefit to the proper running of a business.  As with our other web-based services the ability for clients to view their own records and documents on-line is extremely helpful and you don’t have to be an existing client of Brethertons to use the B-Sec service.”

If you would like to find out more about B-Sec, please contact  Brian Auld on 01295 270999   brianauld@brethertons.co.uk

Bankruptcy and the Family Home

With the economy in poor shape and personal debt still at high levels, the outlook is less than rosy for people who are facing insolvency. Even after the changes made by the Enterprise Act 2002, bankruptcy is still a difficult experience for most bankrupts. This is especially true where the family home is the main asset of the bankrupt’s estate.

The trustee in bankruptcy will normally seek a possession order over the property so that it can be sold to satisfy the claims of creditors.

When deciding whether the possession order is to be granted, the court is obliged to consider:

• the interests of the creditors
• the conduct of any spouse or civil partner (current or past) in contributing to the bankruptcy
• the needs and financial resources (if any) of the current or former spouse or civil partner and any children; and
• the other applicable circumstances of the case.

Where an application for a possession order is made more than a year after the property has vested in the trustee in bankruptcy, the court will normally regard the interests of the creditors as paramount. The 12 month delay between the bankruptcy and the application may give a false sense of security, but does at least allow time for alternative living arrangements to be made if a sale is probable.

An application to resist the possession and sale can be made if there are exceptional circumstances, but consequences for the family arising from the bankruptcy will only very rarely be considered as exceptional circumstances.

Where a delay in paying creditors is unlikely to cause them any prejudice, a case may be able to be made out that the circumstances are exceptional enough to justify the defeat of an application for possession. An example might be when there is a great deal of equity in the property, such that the debts plus interest thereon are likely to be paid in full on an eventual sale. Such an argument might apply where the creditor is HM Revenue and Customs, for example.

Serious illness in the family (not that of the bankrupt personally, except where this creates a need for a family member to remain in the house to look after the bankrupt) may also be regarded as an exceptional factor.

There are a number of other factors that may also constitute exceptional circumstances. If you are faced with a possession application, it is important to take legal advice promptly as there may be other solutions (such as a relative purchasing the trustee in bankruptcy’s interest in the property) which can be explored.

However, the best approach is to take advice as soon as you get into financial difficulty. Normally, the earlier such issues are addressed, the greater the likelihood of a satisfactory outcome – possibly avoiding bankruptcy altogether.

Tax – Negligence and the Burden of Proof

When HM Revenue and Customs (HMRC) believe that a taxpayer has understated their income, an assessment is raised to collect the tax which they calculate has been underpaid. Once the tax position is finalised, it is usual for a penalty to be imposed.

A restaurateur, who was assessed to tax on under-declared income for six years, recently faced a penalty for negligent submission of tax returns. The returns themselves were appealed in court without success. The taxpayer then appealed to the General Commissioners of Taxes on the grounds that it had not been shown beyond a reasonable doubt that he had negligently understated his income.

The question at issue was whether the Commissioners should apply the civil (‘balance of probabilities’) or criminal (‘beyond a reasonable doubt’) standard of proof in such cases, the taxpayer arguing that the criminal standard of proof was required and HMRC that the civil standard of proof applied.

The High Court considered that there was no doubt that the proceedings themselves were civil, not criminal, and had nothing of the character of criminal proceedings. The standard of proof required was therefore the civil standard.

The Court also considered whether article 6 of the Human Rights Act 1998 (HRA) applied in that the proceedings for penalties in cases such as this would be considered to be criminal proceedings under the Act. However, the HRA does not deal with the burden of proof and the Court was therefore content to rule that the fact that proceedings were criminal in character, for the purposes of article 6, did not mean that they were criminal under domestic law.

On both counts, therefore, the argument that the criminal burden of proof should apply with regard to the penalties failed.

Accounts Watchdog Gets Tough

The Financial Reporting Review Panel (FRRP) might not strike you as an organisation that is likely ever to cause a company much grief, but its powers do include being able to go to court to seek an order requiring a company to submit accounts that meet the currently required financial reporting standards.

The reason this has become important is that the FRRP has retained a firm of accountants to check for ‘qualified’ accounts (ones where the auditors express reservations about or disagreement with the way accounting information is presented) and is writing to the directors of the companies concerned to warn them that it has the power to require them to resubmit their accounts to the Registrar of Companies in a form that meets the appropriate accounting standards.

If the transgressions continue, the FRRP has indicated that it will not hesitate to use its teeth to require companies to file amended accounts.

Brethertons’ view:

 “This could prove to be expensive – and not just because of the additional accounting and auditing fees. Given that many companies file accounts near to the filing deadline, this could lead to the amended accounts being filed late with the Registrar of Companies and HM Revenue and Customs, which could lead to financial penalties being levied. Furthermore, the auditors will seek audit comfort up to the new date of their report, which may mean in particular that extensive reappraisal of balance sheet values based on actual realised values may be necessary. The days in which a relaxed attitude could be taken to non-compliance with the rules relating to accounting disclosure are over.”
 
In addition, directors of companies that have to file amended accounts in these circumstances can be held personally liable for any court costs and the cost of revising the accounts.

Bank Can’t Change its Mind

Although it involved an individual borrower, the outcome of a recent case will be regarded with relief by anyone who is having trouble with their bank – an increasing problem as the credit crunch continues.

The case involved a man who had negotiated with his bank to have a secured overdraft, which was repayable over 20 years. The overdraft agreement provided that should the agreed borrowing limit be exceeded, the bank had the right to demand repayment of the whole of the overdraft. Failure to meet the demand would trigger the bank’s right to take possession of the property against which the advance was secured. The man failed to keep within the agreed overdraft limit and was contacted by the bank. His bank manager held discussions with him and the man claimed he obtained the bank’s agreement to a three-month moratorium, during which it would not seek a possession order if he brought the account back within the overdraft limit. There was to be a further review at the end of the period. The bank denied that this had been agreed.

The bank sought a possession order, which was granted. The man appealed. The Court of Appeal found that the bank had given an undertaking to the man not to issue proceedings for possession for three months if the terms agreed were adhered to. It had not agreed that it would never apply for a possession order, just to postpone the application. The bank could not change its mind. Accordingly, the original possession order was set aside.

This case illustrates that a bank cannot agree to take one course of action and then take another. If you find yourself in a similar position, it is very important to obtain the strongest evidence you can of what has been agreed by the bank. Taking professional advice so that variations to agreements are properly recorded is a good safeguard. We can advise you if you are having difficulty with your bank or with collecting your debts.

Business Fraud Booms

A study by accountants BDO Stoy Hayward has found that business fraud is up by over 70 per cent compared with last year and they estimate the cost of business fraud is now more than £700 million a year.

Management fraud accounts for nearly half of the total, according to the report. The finance and insurance sectors seem to be the worst hit, with more than 90 per cent of the reported total affecting those sectors. This may, however, just be an indication that these sectors have comparatively well developed internal controls, so are more likely than businesses operating in other sectors to detect fraud.

Recently, ‘Big 4’ accountants KPMG reported that in the first six months of 2008, 128 cases of fraud came to court, involving more than £630 million, an increase of nearly 50 per cent on the previous six months and an amount which was more than the total for any year in the 20 years the firm has been keeping statistics. Over half of the fraud they reported was against the financial sector.

With the impact of the credit crunch and the record level of financial fraud being uncovered, it is unsurprising that the banks are being even more careful in their lending decisions.

No Cover if Notification to Insurer Not Valid

Insurance cover is provided for claims made within the currency of the policy. Accordingly, policies contain clauses which stipulate that the claim must be notified to the insurer within a certain period of time. Typically, the insurer must be notified ‘as soon as practicable’ that circumstances have arisen which might give rise to a claim. Insurers are often a great deal less enthusiastic about accepting liability for claims than their policyholders may think reasonable and a challenge to a claim often involves the details of the policy. In particular, the validity of the notification given by the insured is often contested.

There have been two recent cases in which issues surrounding the validity of the notifications given by the insured were in point. In both cases the court agreed that the insurance cover sought by the insured was correctly denied by the insurer. In one case this was because the notifications were insufficiently clear and comprehensive (as well as in one instance, not prompt enough) and in the second case because the notices given did not relate to the defects in a construction project which were later discovered.

For a notification to be valid, the following requirements must be met:

• The notice must be given in writing and sent to each underwriter or authorised agent for the insurer
• The notice must be given as soon as is practicable after the insured has become aware that a claim might be made
• The claim must be clear and unambiguous, so that there is no reasonable room for doubt by the insurer that the purpose of the communication is to make it aware of the possibility of a claim; and
• The notice must include any circumstance of which the insured is aware that may give rise to a loss.

One of the key points is that the link between the notified circumstances must be ‘causal, not coincidental’. This means that a notice of a claim that is not sufficiently explicit or comprehensive to identify the actual source of the claim may well not be valid. For cover to be available, the claim must have arisen from the event which has been notified to the insurer.

Brethertons view’

“Great care should be taken when preparing a notice to send to your insurers that a claim may be forthcoming. We can assist you to make sure that your legal rights are protected. Failure to give a valid notice normally means that the costs of a successful claim against you will be met by you, not your insurer.”

Business Failures to Reach New Peak

According to accountants BDO Stoy Hayward, the number of business failures in 2009 is expected to be the highest since the dotcom bubble burst, with the restricted availability of finance being the main cause. In stark contrast with the dotcom era, only the technology, media and telecommunications sector is expected not to show an increased failure rate. Nearly 18,000 businesses are expected to go bust in 2008 and business profits are expected to be at their lowest level for nearly 20 years.

Brethertons’ view:

“It is a good time to make sure your credit control, purchasing policy, overheads and gross profit margins are carefully monitored. All will affect your cash-flow. If you are experiencing difficulties with obtaining payment from customers or could benefit from a review of your terms of trade, contact us for advice.”