From 1 October 2017, a new Pre-Action Protocol will apply to creditors pursuing debts owed by an individual. The Protocol sets out a number of steps that creditors are expected to take before seeking to commence court proceedings for recovery of that debt.
When will the Protocol apply?
The Protocol will only apply to circumstances where a business is seeking to bring a claim against an individual. The business can be a sole trader, a limited company, a partnership or a public body.
The definition of ‘individual’ also includes sole traders, therefore the Protocol will apply both to debts with consumers, but also some business debts, for example where the creditor is builders’ merchant and the debtor is a plasterer trading as a sole trader. As a result, the scope of the Protocol is quite wide.
Where there is already another pre-action protocol in place, such as for mortgage possession claims, then that protocol will continue to apply. The Protocol will not apply to claims for outstanding taxes made by HMRC.
What is the purpose of the Protocol?
The Protocol is designed to encourage communication, early engagement and exchange of information between the parties with a view to enabling parties to reach a resolution without issuing court proceedings. It also encourages the parties to take a reasonable and proportionate approach to matters.
What does the Protocol entail?
Under the Protocol, the creditor must send a detailed letter of claim to the debtor before any proceedings are issued. The letter of claim must provide details of the debt, including but not limited to:
- the amount of the debt
- any interest or charges applied
- how the debt arose including dates and terms of any agreement
- details of how the debt can be paid
- the adress to which the completed Reply Form should be sent.
The letter before claim should also enclose an up to date statement of account for the debt, including details of interest incurred or charges imposed, and a copy of the Information Sheet, Reply Form and Financial Statement form annexed to the Protocol.
The letter should be sent to the debtor by post (unless the debtor has specifically requested that it is not, and provided alternative contact details) and the debtor then has 30 days from the date of the letter of claim to respond, using the reply form. If the debtor does not respond within that deadline, then the business can commence court proceedings.
The debtor's response
The debtor should respond using the Reply Form enclosed with the letter of claim. As part of this response the debtor can:
- ask the creditor to provide information and documents relevant to the debt
- indicate that they are seeking debt advice. If this means that they cannot respond by the deadline, then the creditor must allow the debtor a reasonable time to obtain that advice
- indicate that they need time to pay. If this is the case then the creditor should endeavour to reach an agreement for payment of the debt in reasonable instalments.
In any case, if following the debtor’s response the creditor intends to start court proceedings, it should give the debtor at least 14 days’ notice. If the matter does proceed to court, then the court will expect parties to have complied with the Protocol and will take any non-compliance into account in managing the proceedings.
What should my business do?
Businesses will certainly have to follow stricter procedures now in seeking to recover debts from individuals, and ensure that they take the relevant steps under the Protocol to properly prepare a letter of claim, provide the information required and engage with the debtor to resolve the matter.
The Protocol provides the debtor with a generous amount of time to engage with the matter, and businesses should ensure that they engage with debtor following the Protocol at an early stage to allow for the response time and the notice required for commencing court proceedings. If shortcuts are taken, it is clear that the court will manage proceedings accordingly to allow for any failures to be remedied.
If your business is experiencing debt problems with individuals, and you would like to discuss how to pursue recovery in light of the protocol, please contact Alison Antill, a Solicitor in the Dispute Resolution team.