New procedure for recovering debts and what this means for your business

Until now the procedure for commencing debt recovery has been fairly quick and straightforward. The norm is for a standard letter before action to be sent requesting payment within 7 or 14 days and if payment is not received court proceedings are issued.

The Civil Procedure Rules Committee has released a draft pre-action protocol for debt. The aim of the protocol is to provide debtors with more information to enable them to seek advice before court proceedings are issued. The overall objective is to encourage the use of Alternative Dispute Resolution and to only issue court proceedings when parties have exhausted all possible solutions to resolve the matter.

The protocol applies to any business, including a sole trader, claiming payment of a debt from an individual. It does not apply to business to business debts unless both parties are sole traders. The proposal states that the debtor needs to be provided with the following information:

• A letter before action containing a standard notice prescribed by the protocol, highlighting the importance of obtaining legal advice;

• Specific details of the debt and the agreement it arises out of, including a copy of the contract or agreement;

• A copy of the protocol;

• A full statement of account including all interest and charges and payments already made by the debtor; and

• A reply form for the debtor, together with a self-addressed envelope.

The creditor will be required to allow the debtor sufficient time to seek independent debt advice and in any event wait at least 28 days. If the debtor requires more time to obtain specialist advice they must notify the creditor who must allow them reasonable additional time to obtain that advice. If any aspect of the debt is disputed, the protocol encourages parities to exchange sufficient information and disclose documents to enable them to understand each other's position.

In addition to the above, the protocol requires parties to take stock before the creditor issues court proceedings and try to agree what remains in dispute that the court will be asked to decide. Following this, the creditor should give the debtor 14 days notice of their intention to issue court proceedings.

While there is no specific sanction for non compliance of a pre action protocol and inevitably there will be debtors who are unwilling to cooperate, the Court will take into account the extent of parties' compliance with the protocol when giving directions for the management of claims and when deciding who should pay costs. In some cases, the Court may suspend court proceedings and order a party to take steps which they think ought to have been taken under the protocol.

The new proposals are highly onerous for creditors and will only be effective with cooperation from debtors. The procedure will ultimately slow down the process of recovering their debts and may cause business' cash flow problems. Once the protocol has been implemented our advice to businesses will be to tighten their credit control procedures and send debts to their solicitors without delay, providing as much information as possible to allow a letter before action to be sent that complies with the pre-action protocol.

A copy of the consultation can be found here:

https://www.gov.uk/government/consultations/consultation-on-the-pre-action-protocol-for-debt.

The closing date for responses to the consultation was 30 September 2014 and we are therefore waiting for an update.