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New Pre-action Protocol For Debt Claims
The Pre-action Protocol for debt claims comes into force on Sunday 1 October 2017 and will potentially have a severe impact on a business if it has outstanding debts due from individuals and sole traders because of the delays that are built into this protocol.
The Protocol applies to any creditor business (in limited form, partnerships, sole traders and public bodies) when claiming payment of a debt from an individual which includes a sole trader, even if that sole trader is a business. Other business to business debts are not caught by the protocol.
The Protocol describes the conduct the court will normally expect of parties prior to court proceedings being commenced but not HMRC. The Protocol does not apply if the matter is covered by another pre-action protocol such as construction and engineering or mortgage arrears.
The aims of the Protocol are stated to be:
“(a) encourage early engagement and communication between the parties, including early exchange of sufficient information about the matter to help clarify whether there are any issues in dispute
(b) enable the parties to resolve the matter without the need to start court proceedings, including agreeing a reasonable repayment plan or considering using an Alternative Dispute Resolution (ADR) procedure
(c) 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) and
(d) support the efficient management of proceedings that cannot be avoided.”
It requires the creditor to include with its “letter before claim” a template information sheet and a reply form in all cases.
The letter before claim must contain a statement of:
i) the amount of the debt; and
ii) whether interest or other charges are continuing; and
iii) where the debt arises from an oral agreement, who made the agreement, what was agreed (including, as far as possible, what words were used) and when and where it was agreed, alternatively
iv) 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 from the creditor
v) where the debt has been assigned, the details of the original debt and creditor, when it was assigned and to whom
vi) if regular instalments are currently being offered by or on behalf of the debtor, or are being paid, an explanation of why the offer is not acceptable and why a court claim is still being considered
vii) details of how the debt can be paid (for example, the method of and address for payment) and details of how to proceed if the debtor wishes to discuss payment options; and
viii) the address to which the completed reply form should be sent.
The creditor should also do one of the following:
1. 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
2. enclose the most recent statement of account for the debt and state in the letter of claim the amount of interest incurred and any administrative or other charges imposed since that statement of account was issued, sufficient to bring it up to date; or
3. where no statements have been provided for the debt, state in the letter of claim the amount of interest incurred and any administrative or other charges imposed since the debt was incurred
The letter of claim must enclose a copy of
1. the information sheet and the reply form in the form annexed to the protocol; and
2. the financial statement form as annexed to the protocol
If the debtor does not reply to the Letter of Claim within 30 days of the date at the top of the letter of claim, the creditor may start court proceedings.
The Debtor’s Obligations
The debtor should
1. use the reply form for its response.
2. request copies of any documents it wishes to see and enclose copies of any documents it considers relevant, such as details of payments made but not taken into account in the creditor’s letter of claim.
If the debtor indicates that it is seeking debt advice, the creditor has to allow the debtor a reasonable period for the advice to be obtained.
Court proceedings cannot be commenced less than 30 days from
1. receipt of the completed reply form or
2. 30 days from the creditor providing any documents requested by the debtor, whichever is the later.
The creditor should also allow reasonable extra time for the debtor to obtain that advice where it would be reasonable to do so in the circumstances.
If the debtor requires time to pay, the protocol requires the creditor and debtor to try and reach an agreement for the debt to be paid by instalments, based on the debtor’s income and expenditure.
This is an interesting point which appears not to have been taken into consideration that the FCA have ruled that unless you have a credit licence a business cannot accept payment of the debt by more than 4 instalments. In which case it would appear appropriate to issue proceedings so that an instalment plan can be put in place.
If the creditor does not agree to a proposal for repayment of the debt, it should say why in writing.
If the debtor fails to fully complete a reply form the onus is on the creditor to contact the debtor to discuss and obtain any further information needed to properly understand the debtor’s position.
In trying to agree affordable sums for repayment, the creditor should have regard where appropriate to the provisions of the Standard Financial Statement from the Money Advice Service or equivalent guidance. If the creditor does not agree to a debtor’s proposal for repayment of the debt, they should give the debtor reasons in writing.
If the debt is disputed-
The parties should exchange information and disclose documents sufficient to enable them to understand each other’s position and the creditor must provide any document or information requested or explain why the document or information is unavailable within 30 days of receipt of the request.
If settlement still cannot be reached the parties are obliged to take appropriate steps to resolve the dispute without commencing court proceedings and, in particular, should consider the use of alternative dispute resolution (ADR).
Where the procedure set out in the Protocol has not resolved the matter between the debtor and creditor, they should undertake a review of their respective positions to see if proceedings can be avoided and, at the least, to narrow the issues between them.
If an agreement still cannot be reached, the creditor should give the debtor a minimum of 14 days’ notice of its intention to commence court proceedings (unless, for example, the limitation period 6 years from the date of the creation of the debt is about to be passed (expire)).
What does this mean for creditors?
The process of recovery of debts is about to become more cumbersome for debts of individuals and sole traders:
1. Creditors are required to provide more documentation to debtors in specific formats.
2. Creditors have to wait at least 30 days before commencing proceedings if the debtor has not responded to the letter of claim.
3. If the debtor responds to the letter of claim this will further delay the commencement of proceedings by at least a further 74 days. This is because the protocol allows up to 30 days for the reply form, 30 days for discussion of the payment of the debt and then a further 14 days to give them notice of the intention to commence proceedings.
4. If in the Reply Form, the debtor requests information the creditor must wait at least 30 days after it gives that information before issuing the letter giving 14 days’ notice of the intention to commence proceedings. There is plenty of scope for delaying tactics by intransigent debtors to delay payment.
5. Creditors will need to be more pro-active when engaging with debtors to ensure information is properly exchanged and time periods met.
6. Additional costs and delays could be incurred particularly if ADR is triggered.
7. If a creditor come to an instalment agreement with a debtor and it fails the creditor have to start the pre-action protocol all over again by sending a letter of claim and supplying necessary documentation.
8. A review of existing terms of business to cover the costs of the protocol interest payments and recovery processes and changes will be necessary.
What happens if creditors fail to comply with the Protocol?
Failure to comply with the Protocol may result in:
1. Further delay in collection of debts if any legal proceedings are stayed to remedy failures to comply with the Protocol
2. Additional costs sanctions in terms of payment of the debtor’s legal costs or a failure to recover costs and
3. Inability to recover interest from a debtor or recovery at a reduced rate.
None of these options are attractive for creditors. Businesses are now faced with implementing the Protocol and for many a considerable change in process and approach is required.
For businesses dealing predominantly with consumers or sole traders and providing credit, the new Protocol requires a considerable amount of productivity preparation and action when collecting outstanding debts.
Gone are the days when businesses can do a letter of claim requiring payment and issue proceedings within a few weeks.
The amount and payment terms given to individuals and sole traders should be minimized and action should be taken immediately to follow the protocol at the end of the credit.
A creditor no longer be able to threaten commence court proceedings for the purposes of “persuading” a debtor to pay.
Small and medium sized businesses in particular, ought to reflect on when and to whom they give credit and to ensure that they act promptly when debts arise.
If you require any further information about reviewing your credit control processes in the light of these changes or require any assistance with collection of your debts, please contact the team at Curtis Parkinson.
Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.