Pre-Action Protocol

The courts expect litigation to be used as a last resort to settle disputes. Parties are therefore expected to comply with the Practice Direction on Pre-Action Conduct and Protocols, which sets out the steps a creditor should take before issuing court proceedings.

Below is a brief guide on the steps that a creditor should be taking when commencing legal action to recover an unpaid invoice.

Companies

If the debtor is a limited company, PLC or LLP you will need to comply with the Practice Direction (“PD”) mentioned above.

The objectives of the PD are for parties to have exchanged sufficient information so that they:

  • understand each other’s position
  • can make decisions about how to proceed
  • can try to settle the issues without issuing court proceedings
  • can consider a form of Alternative Dispute Resolution (“ADR”) to assist with settlement
  • support the efficient management of any proceedings that are issued; and
  • reduce the costs of resolving the dispute.

The first step a creditor should take is to issue a Letter Before Action (“LBA”). This letter should have the aim of meeting the above objectives. In debt recovery claims, a creditor would usually be expected to include the following in the LBA:

  • The amount of the debt being claimed;
  • The basis of the claim e.g. based on a written contract;
  • A summary of the facts to date;
  • Details of any interest or other charges that are being added to the invoice debt;
  • Copies of any relevant documents e.g. invoice and contract;
  • Details of how and when the debtor needs to pay by.

Individuals

On the 1st October 2017 the Pre- Action Protocol for Debt Claims (“PAP”) came into force. It applies to any business (including sole traders and public bodies) who are claiming payment of a debt from an individual, which includes a sole trader.

The main aims of the PAP are to:-

  • encourage early engagement and communication between the parties
  • enable the parties to resolve the matter without the need to start court proceedings, including agreeing a reasonable repayment plan or considering using ADR
  • encourage the parties to act in a reasonable and proportionate manner in all dealings with one another (for example, avoiding running up costs which do not bear a reasonable relationship to the sums in issue)
  • support the efficient management of proceedings that cannot be avoided.

As with the PD for claims against companies, the first step that a creditor should take under the PAP is to send a LBA to the debtor.

The LBA should include the following information: –

  • the amount of the debt
  • whether interest or other charges are continuing
  • where the debt arises from an oral agreement: details about who made the agreement, what was agreed (and if possible the words used) and when and where it was agreed
  • where the debt arises from a written agreement: the date of the agreement, the parties to it and the fact that a copy of the written agreement can be requested
  • where the debt has been assigned, the details of the original debt and creditor, when it was assigned and to whom
  • if regular instalments are being offered, or being paid, an explanation of why the offer is not acceptable and why a court claim is still being considered
  • details of how the debt can be paid, i.e. the payment method and address for payment
  • the address the reply form should be sent to

The creditor should also enclose an up-to-date statement of account for the debt, which should include details of any interest and administrative or other charges added, or a copy of the unpaid invoices, along with a Reply Form, Financial Statement Form and Information Sheet (templates are provided within the PAP).

The Letter Before Action should be clearly dated toward the top of the first page. It should be posted either on the day it is dated or, if that is not reasonably possible, the following day. If the creditor has additional contact details for the debtor, such as an email address, they may also send a copy of the LBA using those details.

If the debtor has made an explicit request that correspondence should not be sent by post, and has provided alternative contact details, the creditor should use those details when sending the LBA.

If the debtor does not reply to the LBA within 30 days of the date at the top of the letter, the creditor may start court proceedings. The creditor should, however, consider the possibility that a reply has been posted towards the end of the 30-day period.

If the parties still cannot agree about the existence, enforceability, amount or any other aspect of the debt, they should both take appropriate steps to resolve the dispute without starting court proceedings and should consider the use of an appropriate form of Alternative Dispute Resolution. This may simply be a discussion and negotiation, or it may involve a more formal process such as a complaint to the Financial Ombudsman Service if the debt is regulated under the Consumer Credit Act 1974.

Non-compliance

The courts have powers to sanction a party for non-compliance with the PD or PAP.

Action that may be taken against a creditor that has failed to comply can include:

  • staying any claim issued until the creditor has complied;
  • not awarding any interest claimed;
  • not awarding any costs claimed;
  • ordering that the creditor pay costs to the debtor on an indemnity basis

Given the potential consequences for issuing a claim too soon, creditors should always seek expert advice from debt recovery solicitors before embarking on legal action to recover a debt.

Our Debt Recovery Department can be reached at 0800 2800 421 or through submitting an online enquiry form.

Meet the team

Louise Boyle

Associate and Head of Debt Recovery

Helen O’Hare

Debt Recovery Paralegal

Olivia Muscat

Debt Recovery Assistant

Fran Clothier

Debt Recovery Assistant