New Pre-Action Protocol for Debt Claims

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Creditors and debtors will need to get ready for the changes following the implementation of the new Pre-Action Protocol for debt claims which will come into force on 1 October 2017.

The full Pre-Action Protocol can be read here

This Protocol is wide reaching and will apply to any business including sole traders and public bodies claiming payment of a debt from an individual including a sole trader.

This Protocol does not apply to business-to-business debts or if another protocol is applicable, as that will take precedence.

The aim of the Protocol is to encourage communication, settlement, an exchange of information between the parties all with a view to ensuring the issuing of court proceedings is the last resort. The Protocol extends the time before creditors will be able to issue proceedings and revised credit control practices will need to be implemented accordingly.  

The Letter Before Action

As in the current situation a letter before action needs to be sent before proceedings are issued however the information that has to be included is a lot more onerous than creditors are currently used to.

The letter needs to:

Be clearly dated and ideally sent that day;

Include the amount being claimed, if interest is accruing and if any charges have been added to the debt;

Confirm details of the contract the claim is based on (oral or written) and stipulate that a copy of the written agreement can be supplied if requested if the agreement is based on the same;

Advise of details of any assignment if applicable;

State why a repayment arrangement is no longer acceptable if one has been entered into previously;

Confirm the address a response should be sent to;

Supply an up-to-date statement of account inclusive of all interest and charges together with a copy of the recommended Information Sheet, Reply Form and an income and expenditure form; and

Be sent by the preferred method stipulated by the debtor and in the absence of that by post.

Following the above being carried out and only if the debtor does not reply within 30 days of the date of the letter can court action be taken.

As you will note the additional cost in the preparation time and paper alone in sending these letters will make this a more costly exercise for creditors however the result will hopefully be for a more positive response from the debtors and one which will encourage them to communicate more freely with creditors. This could also lead to costs being saved in the long run with more cases settling prior to proceedings ordinarily having been issued due to the front loading of the litigation in respect of supplied documentation and understanding of each others positions.

The Response by the Debtor

The debtor should use the Reply Form sent with the letter before action, can request copies of salient documents and should include copies of anything relevant that should be taken into account in their response. Even if it is only completed in part the creditor should deem that to be an attempt on their behalf and should continue to engage with them accordingly. If documents are requested the creditor will need to supply them within 30 days or confirm why this is not possible.

If the debtor states they are seeking advice, a reasonable period for the advice to be obtained should be given and creditors should not start court proceedings less than 30 days from receiving a completed Reply Form or 30 days from sending documents requested by the debtor, whichever is the latest. Further time should be given if the debtor justifies why advice cannot be sought within that 30 day period.

Agreement should be attempted to be met where instalments are offered and if this cannot be agreed written justification will need to be provided to the debtor accordingly. Any disputed aspect of the debt will need to be attempted to be resolved to enable the parties to narrow the issues.

If a response has been received from the debtor a further 14 days notice of the creditor’s intention to issue proceedings will need to be given, extending the time prior to proceedings being issued extensively from a creditor’s point of view.

In the worse case scenarios creditors could have to wait months before being able to issue proceedings to ensure they meet the new recommendations. Failure to adhere to the protocol could result in cost sanctions, the delay of proceedings despite already being issued whilst the parties are ordered to retrospectively meet the criteria, damage to reputation and adverse publicity and ultimately the reduction of cash flow while creditors are involuntarily extending credit terms for dodgy debtors.  

It remains to be seen how this will pad out in practice and what impact this will have in the long run with regard to tactics taken by creditors and debtors alike in respect of anticipated litigation. What is clear however is that the advice currently given to creditors that action should be taken as soon as possible to recover their debts remains of paramount importance especially considering the additional time and money that is on the horizon for the future.