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The Pre-Action Protocol for Debt Claims

What does it mean for your business?

The Pre-Action Protocol for Debt Claims is due to come into force on 1 October 2017. This Protocol sets out procedures that creditor businesses should follow before commencing court claims against individuals for payment of a debt. In this article Michael Booth, a member of Prettys’ Dispute Resolution and Corporate departments, examines what the Protocol means in practice for businesses intending to issue a claim that is covered by the Protocol.

When does the Protocol apply?

The Protocol applies to “to any business (including sole traders and public bodies) claiming payment of a debt from an individual (including a sole trader)”. As expressly envisaged in the Protocol, this means that it covers not just, for instance, claims businesses bring against consumers, but also certain business-to-business debts where the debtor business is an “individual” (for example, the business is a sole trader).

What does the Protocol say a business should do before commencing proceedings against an individual?

The Protocol states that before court proceedings are started, the business should send a Letter of Claim to the debtor. The Protocol sets out (in paragraph 3.1) the information that should be included in the Letter of Claim to the Debtor:

The Letter of Claim 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”; this may be by way of providing a new statement or by providing a previous statement with information to ensure that it is up to date.

Three additional documents, included on pages 8 to 17 of the Protocol, should be enclosed with the Letter of Claim:

The Letter of Claim should be sent to the debtor by post on the date stated on the letter or “if that is not reasonably possible, the following day”. While the Letter of Claim may additionally be sent to the debtor by other mechanisms (eg via email), an “explicit request” is required for the Letter of Claim to be exclusively sent by alterative methods, which the Protocol indicates must be more than a clause in the business’ standard terms.

What happens if the debtor does not respond to the Letter of Claim?

If the debtor does not respond to the Letter of Claim within 30 days of the date of the letter, the business can take the debtor to court without further warning to the debtor. However, as the Protocol advises that “[a]ccount should be taken of the possibility that a reply [to the Letter of Claim] was posted towards the end of the 30-day period”, it is in practice likely to be prudent to wait at least, say, 32 days before issuing proceedings.

What happens if the debtor responds to the Letter of Claim?

The debtor should respond to the Letter of Claim using the enclosed Reply Form, which asks four sets of questions that the debtor should answer as applicable:

  1. Do you owe the debt?
  2. How will you pay?
  3. Do you intend to get, or are you already getting, debt advice?
  4. What documents are you sending with this form? What information do you need?

If the debtor responds to the Letter of Claim, even if the reply is only a partially completed Reply Form (or perhaps the response is not even on the Reply Form at all), the parties have an additional time period in which to try to resolve the non-payment of the debt. This is set as the later of 30 days from the date on which the business receives the completed Reply Form from the debtor and 30 days from the business providing documents requested by the debtor (or presumably explaining that such documents are not available). (The provision of documents is discussed further below.)

The next three questions set out what action the business should take based on debtor’s possible responses, namely that:

  1. the debtor disputes the debt;
  2. the debtor requests further information about the debt; or
  3. the debtor indicates that they require time to pay or that they are seeking debt advice.

What happens if the debtor disputes the debt?

If the debtor disputes any aspect of the debt, the parties should take “appropriate steps to resolve the dispute without starting court proceedings and, in particular, should consider the use of an appropriate form of Alternative Dispute Resolution (ADR)”. The Protocol specifically encourages the use of informal negotiation, following any applicable formal complaints processes and, for larger debts, mediation.

What happens if the debtor requests further information about the debt?

The Protocol encourages the parties to “exchange information and disclose documents sufficient to enable them to understand each other’s position”. There is also an obligation in paragraph 5.2 of the Protocol for creditor businesses:

If the debtor requests a document or information, the creditor must –

(a) provide the document or information; or

(b) explain why the document or information is unavailable,

within 30 days of receipt of the request.

While not expressly stated in the Protocol, good reasons for refusing to provide documents or information are likely to include that a document has been destroyed; that the document or information is irrelevant to the debt; or that the document or information is legally privileged.

What happens if the debtor requests time in which to pay the debt or explains that they are seeking debt advice?

If the debtor indicates that they are seeking debt advice, the business should allow a reasonable period for the debtor to obtain debt advice; this may be longer than 30 days where the debtor cannot obtain debt advice within the 30 day period.

The process for dealing with a request for more time in which to pay, which presumably may either be a free-standing request or follow a debtor’s appointment with a debt adviser, is set out in paragraph 4.4 of the Protocol:

Where a debtor indicates in the Reply Form that they require time to pay, the creditor and debtor should try to reach agreement for the debt to be paid by instalments, based on the debtor’s income and expenditure. In trying to agree affordable sums for repayment, the creditor should have regard where appropriate to the provisions of the Standard Financial Statement 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.

What happens if an agreement is reached about the payment of the debt?

The Protocol states that a business should not start court proceedings while the debtor complies with any agreement reached for the payment of the debt. If the debtor breaches the agreement and the business intends to commence court proceedings against the debtor, the business should restart the procedure in the Protocol by sending a revised Letter of Claim to the debtor with the relevant supporting documentation. (The documentation need not be re-sent if it was sent with a Letter of Claim in the previous six months and the documentation does not need to be updated.)

If the procedure in the Protocol does not resolve the dispute, what should a business do before issuing a claim?

If the procedure in the Protocol has not resolved matters, the Protocol states that the parties should review their positons and at least try to narrow the issues between them. Except in exceptional circumstances, the business should give the debtor at least 14 days’ notice of its intention to start court proceedings. Following this period, the business may issue proceedings.

There are no further provisions in the Pre-Action Protocol for Debt Claims on the conduct of the proceedings after they have been issued; as its name suggests, the Protocol only covers pre-action conduct.

What happens if a business doesn’t comply with the Protocol?

The Protocol is a procedure that a business should follow before issuing proceedings. Failure to comply with the Protocol is not intrinsically a breach of the law or relevant professional obligations, and may in exceptional circumstances be justifiable (such as because a claim must be issued immediately due to the imminent expiry of the limitation period or the debtor is plainly abusing the Protocol to prevent proceedings from being issued). However, regulators are likely to expect businesses to comply with the Protocol and courts are likely to disapprove of businesses that deviate from the Protocol without good reason. The most probable legal consequence for material deviation from the Protocol is that the courts will “stay” (suspend) proceedings while the parties comply with the Protocol; however, the courts may also decide to reduce or completely exclude the business’ claim for interest or, in higher-value cases, limit the business’ ability to recover its legal costs from the debtor due to its non-compliance with the Protocol.

What should businesses do now to comply with the Protocol?

Businesses should ensure that by the time the Protocol comes into force on 1 October 2017 their Letters of Claim include all the information required by the Protocol and enclose the three required documents. Businesses should also ensure that the relevant members of staff are able to deal with replies to Letters of Claim in accordance with the procedures set out in the Protocol.

If you need further assistance with the Pre-Action Protocol for Debt Claims and its effect on your business, please feel free to visit the Netchaser page of our website or contact us for advice on the matter.

Michael Booth

Solicitor

e mbooth@prettys.co.uk

t 01473 298214

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