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18 October 2017

All Change… further hurdles in place to recover your debt

New Pre-action Protocol for Debt Claims

On 1 October 2017 a new pre-action protocol for debt claims came into force. The Protocol will apply to any business creditor (including sole traders and public bodies) seeking to recover debt from an individual. The Protocol does not apply to business-to-business debts unless the debtor is a sole trader.

The Protocol drastically changes how businesses seek to recover debts from its individual debtors. Whilst the aims of the Protocol are to encourage early communication between the parties and avoid court proceedings, it will arguably increase the time it takes to recover a debt and increase the costs a creditor has to incur.

Whilst it is in its early days, creditors should be mindful that courts will scrutinise the extent to which they comply with the Protocol and engage in pre-action behaviour. Compliance with the Protocol will be essential if the dispute is litigated and either party seeks to recover a proportion of their costs from the other side. In the event of non-compliance it is likely that the court will impose sanctions on the breaching party, which for a creditor may mean reducing or removing the right to recover costs and interest.

The key steps

A fundamental change in the debt claim process is that the Protocol introduces the need to provide detailed information in a Letter of Claim, with additional disclosures, prior to commencing proceedings.

Letter of Claim

The letter should contain full particulars of the debt (including any interest or charges incurred), how it arose, if a re-payment plan is not accepted by the creditor, an explanation as to why not, and detail how the debt could be paid.

In addition, the creditor must include new enclosures with the Letter of Claim. Firstly, where the debt has arisen from a written agreement, the Letter of Claim should also say the debtor can ask for a copy of that agreement. Secondly, the creditor must include a Reply Form, an Information Sheet and a Financial Statement. All of these documents are annexed to the Protocol.

This may be obvious, but the creditor should post the letter on the day it is dated (as the date of the letter triggers the response time for the debtor). The Protocol also states that the letter should be sent by post, unless the debtor has made an explicit request that it should not be sent by post and has provided an alternative means of contact (such as email).

Response by the debtor

The debtor should use the Reply Form to respond. The Reply Form could prove to be a useful tool for the creditor because, if fully completed, it will detail if the debt is disputed, whether the debtor is seeking advice, and what documents the debtor is relying on. The Reply Form may well be the creditor’s first insight into the debtor’s defence.

Part of the response process is that parties are encouraged to enter into a form of pre-action disclosure. If a debtor asks for a document, the creditor should, within 30 days of such a request, either provide the document, or explain why it is unavailable. The Protocol has yet to be tested in this manner, but it is notable that it does not state that the creditor has the opportunity to say why a requested document is irrelevant. This may well be tested in the near future.

Timescales for a response

Creditors have historically imposed their own, often short, deadlines for a response but this is no longer possible with the Protocol because it specifies that the creditor must not issue a claim until 30 days after the date of the Letter of Claim. The knock on effect of this is that creditors may start to prepare and send formal Letters of Claim to kick start the claim process far sooner than they had previously done.

If the debtor returns a Reply Form, the creditor should not start court proceedings less than 30 days from receipt, or 30 days from the creditor providing any documents requested by the debtor, whichever is later. In effect this may mean that canny debtors wait for almost 30 days in which to return the Reply Form, which triggers a further 30 days that the creditor must wait before commencing proceedings. This is likely to frustrate creditors seeking a swift resolution to their debt claim.

Consider alternative dispute resolution

If the parties cannot come to an agreement about the repayment of the debt (such as accepting a payment plan), they should take appropriate steps to resolve the dispute through alternative dispute resolution mechanisms, without starting court proceedings. This can include mediation, or an informal meeting, or taking matters through a relevant Ombudsman.

Taking stock

After all of this, the parties are urged by the Protocol to “take stock” of their positions. In taking stock, the parties will need to reflect on the disclosure which has taken place, and the arguments on both sides.

If (following disclosure, complying with the requisite timescales, engaging in ADR if appropriate), the parties do not reach agreement, the creditor should still wait and give the debtor at least 14 days’ notice of its intention to start court proceedings. There are exceptional circumstances where the creditor does not need to wait, such as where limitation is an issue, but these will need to be carefully thought through first.

Many will see the Protocol as placing a much heavier burden on parties to try and resolve their dispute before a claim is issued. Creditors should take care to ensure compliance with the Protocol and be alive to the risks of any failure to follow it. Given the clear procedural steps imposed by the Protocol, creditors may need to review existing recovery processes to ensure that the necessary changes are made to ensure compliance.

For more information please contact Neil Emerson.

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