The Pre-Action Protocol for Debt Claims

The Pre-Action Protocol for Debt Claims – in Force from 1 October 2017

The Protocol for Debt Claims has now been approved and is due to come into effect as from the 1 October 2017. Below we set out the main points of the Protocol, how this will affect you as creditors and to offer advice as to how we can assist your business in complying with it.  We also give you some handy hints as to how best protect yourselves going forwards in terms of knowing who your customers are and who exactly you are contracting with.

Who does the Protocol Apply to?

This Protocol will apply to any business, (including sole traders and public bodies) claiming payment of a debt from an individual (including a sole trader).  The Protocol sets out the conduct the court will normally expect of those parties prior to the start of proceedings.  The Protocol is intended to complement any regulatory regime to which the creditor is subject. Where this Protocol is inconsistent with a specific regulatory obligation, that regulatory obligation will take precedence.

The Protocol does not apply where the debt is subject to another pre-Action Protocol such as Construction and Engineering or Mortgage arrears or claims for the Recovery of Taxes and Duties issued by Her Majesty's Revenue and Customs.

The Aims of the Protocol

The aims are to encourage early engagement and communication between the parties, including the early exchange of sufficient information about the matter to help clarify whether there are any issues in dispute and to enable the parties to resolve the matter without the need to start court proceedings, including agreeing a reasonable repayment plan or considering the use of Alternative Dispute Resolution (ADR) procedures.

In addition the parties are encouraged to act in a reasonable and proportionate way in all dealings with one another.  That includes the avoidance of running up costs which may be unreasonable or disproportionate to the sums in issue with a view to supporting efficient management of proceedings if they cannot be avoided.

The Letter of Claim and initial Information to be Provided to the Debtor

The Letter of Claim should include information about:-

1. The amount of the debt
2. Where interest or other charges have been applied and/or are continuing
3. Details of the contract, (whether that be written or oral). If written, the date of the agreement, the parties to it and the fact a copy of it is either attached or is available upon request.  If the agreement was oral, you need to state, the parties to it, what was agreed, (including as far as possible what words were used), and when and where it was agreed
4. If the debt has been assigned to the party seeking to recovery it, you must include details of the original debt and creditor, either a copy of the Notice of Assignment or confirmation of when it was assigned, by who to whom
5. Should the debtor already be repaying the debt by instalments, it will be necessary to explain why that offer is no longer acceptable and why a claim in the Court is still being considered
6. How the debt can be paid, i.e. method of payment and address to which it should be sent, and/or details of how the debtor should proceed if he/she wishes to discuss payment option
7. The address to which the completed Reply Form (see below) should be sent

Documentation to be Enclosed with the Letter of Claim

1. A copy of any written agreement/contract between the parties (see (3) above)
2. Copy invoices
3. An up-to-date statement of account which should include details of any interest and administrative or other charges claimed
4. A copy of the most recent statement of account detailing the amount of interest already incurred and any administrative or other charges imposed since the statement of account was originally issued, sufficiently detailed to bring it up to date
5. If no statements have been provided as described above, the amount of interest or any administrative or other charges must be explained within the letter itself
6. The standard form Information Sheet and Reply Form. This tells the debtor why they have received the letter, that you intend to take them to Court to recover the debt, what steps they should take next, (including how to avoid court action) and provides details those organisations from whom they can seek advice
7. The standard form Financial Statement, (income and expenditure)

Timeframe for Reply to the Letter of Claim

Where previously under the General Pre-Action Protocol the debtor was usually allowed 14 or at the most 21 days in which to respond to the Letter of Claim, that period has now been extended to 30 Days from the date of the letter. If no response is received from the debtor during that period the creditor is entitled to commence proceedings. However, in consideration of whether or not to issue proceedings immediately, account must be taken of the fact that the debtor may not have posted the response until towards the end of the 30 day period. Essentially therefore, the thought is that proceedings should not be started for at least a couple of days after the expiry of the 30 day limit.

The Debtor’s Response

If the debtor replies, then that reply should be on the Reply Form. In the event documents in support of the debt were not enclosed with the Letter of Claim, the debtor can request copies of any relevant documents they wish to see.  In addition the debtor should enclose with the Reply Form any documents they consider relevant to the matter such as details of payments made but not taken account of.

If the debtor indicates they are seeking advice in relation to the debt, the creditor must allow a reasonable period for such advice to be taken.  In any event the creditor should not start Court proceedings less than 30 days from receipt of the completed Reply Form or 30 days following the provision of documents to the debtor whichever is the later.

If the debtor indicates they are seeking debt advice that cannot be obtained within 30 days of their reply then they must provide details to the creditor as specified in the Reply Form.  As such it will be necessary to allow a reasonable period of additional time for the debtor to obtain that advice where it would be reasonable to do so.

If the debtor indicates that they require time to settle the debt, then the parties should try to reach agreement for the debt to be paid by instalments based on the debtor’s income and expenditure. The creditor should give consideration to the information provided in the Standard Financial Statement when considering terms of repayment by instalment. If the creditor does not agree to the proposals for settlement offered, then it should provide written reasons to the debtor as to why the offer is unacceptable.

If the debtor returns a partially completed Reply Form, the creditor is obliged to accept this as an attempt by the debtor to engage with the matter. The creditor is required to attempt to contact the debtor to discuss the Reply Form and obtain any further information needed to understand the debtor’s position.

Disclosure of Documentation

In the event the creditor does not provide all documentation it intends to rely upon in support of the claim with the Letter of Claim, (we recommend that all documentation available is enclosed with the Letter of Claim), the parties must exchange information and documentation sufficient to enable each of them to understand the other’s position. If the debtor requests documentation or information within their Reply, (or otherwise) the creditor must provide the documents or information or explain why the document or information is unavailable within 30 days of the debtor’s request.

Settlement Negotiations/Alternative Dispute Resolution (ADR)

Having taken the above steps, if the parties still cannot reach agreement about the existence, enforceability, amount or any other aspect of the debt, they should both seek to resolve the dispute prior to the commencement of proceedings through the use of an appropriate form of ADR.

If agreement is reached the creditor should not commence court action whilst the debtor complies with that agreement.  Should the creditor wish to start proceedings at a later date, then it must firstly send out an up-dated Letter of Claim and comply with the Protocol once more.  If documentation was sent to the creditor with a Letter of Claim in the preceding 6 months, that documentation need not be resent, unless it requires updating.

If agreement cannot be reached as to terms of settlement the creditor must give the debtor 14 days notice of its intention to commence proceedings.

Compliance with the Pre-Action Protocol for Debt Claims

Should a matter proceed through litigation, the Court will expect the parties to have complied with this Protocol.  If there has been non compliance the Court will take this into account when giving directions for the management of the proceedings. The Court is however unlikely to be concerned with minor or technical breaches, particularly where the matter is urgent, i.e. where there are limitation issues.

The Protocol is not compulsory but failure to comply with it without valid reason, could very well prejudice the creditor. Whilst failure to comply does not provide the debtor with any Defence to the Claim, deviating from it for reasons such as costs or time savings, will not provide an acceptable argument if the Court asks why this has not been followed to the letter and the creditor will leave itself exposed in terms of sanctions that can be imposed. Departing from the use of the Standard Reply and Financial Statement will also likely require explanation and the risk of sanctions being imposed.

Our Strong Advice/Recommendations

As your professional advisers, it is of course our advice and recommendation that you comply fully with the requirements of the Protocol.  We are here to protect your business interests and as such would not advise our clients to deviate from the procedure in any way, (unless the reasons are urgent as above). 

Important Message

One important message that comes out of this Protocol is the need for the creditor to ensure that it knows exactly who it is contracting with and for its contractual terms and conditions to be as robust and business protective as possible with a view to avoiding the need to become embroiled in potentially protracted and costly litigation.  Below are some handy hints and tips to help our clients avoid bad debts, irrespective of whether or not you are trading with other commercial entities or businesses and/or with individuals -

Handy Hints/Tips

When considering trading with a new party, protect your business by ensuring that you:-

1. Obtain the full name and address of the party - ensure the business/individual’s name is correctly spelt;
2. Where that party is a business or limited company, ensure you are dealing with an individual who is in a position of authority and who is capable of binding that business or company, i.e. obtain details and ID of those who are considered to be ‘persons with significant control’;
3. Be aware of the type of entity you are dealing with; is it a limited company? Is it a sole trader?  Is it a partnership?
4. Carry out financial checks and if extending credit, obtain trade references, (check these parties out too), set realistic levels of credit;
5. Carry out financial checks at regular intervals to ensure the party you are contracting with remains credit worthy;
6. Carry out a Companies House Search;
7. Ensure that it is your terms & conditions of trading that apply to the contract;
8. Ensure your contractual terms are robust, fair and enable you to proceed as you had expected.  Only too often we come across contracts that do not provide for the recovery of contractual interest, legal costs or enable the return of your good supplied;
9. Obtain bank account details and check that payment made to you are coming from this account;
10. Obtain mobile telephone numbers, e-mail addresses;
11. If contracting with parties situated abroad, ensure the contract is subject to the jurisdiction of the Law of England and Wales.

How Brethertons can assist in further Protecting your Business

Protecting your business interests is paramount to ensuring your continuing growth, profitability and survival in today’s markets.

It is usually the case that businesses come to us for assistance when something goes wrong. However, our TKW, (The Knowledge Within), Audit Tool and Report can provide you with a greater insight into what your business does well and perhaps not quite so well and in highlighting such areas, we are able to assist and advise you as to steps you can take to ensure all areas of the business are supporting your prospects of a long and healthy future.  Think of us as the fence around the top of the cliff, preventing you from falling off rather than the ambulance at the bottom picking you up, having already fallen. If you would like one of our lawyers to conduct an audit, (for which there is no charge), please do let me know and we will be more than happy to carry this out for you and provide you with a full report of our findings. You will be surprised at what the audit can reveal and in relation to the audits we have already carried out, those clients concerned have been extremely pleased with just how informative the report is and the advice/recommendations we have been able to offer in dealing with any areas of potential weakness and/or in demonstrating how a little tweak in one area can benefit the business as a whole.