From 1 October 2017 onwards, the new Pre-Action Protocol for Debt Claims will come into force. It will apply to most types of debt pursued by a business (including sole traders and public bodies) against a private individual. The courts will expect creditors to comply with the protocol before suing debtors. Costs sanctions may be imposed if the Protocol is not complied with and the Protocol states that courts will take any non-compliance into account when giving directions for the management of proceedings, which could potentially mean that a claim could be struck out if the court feels it was brought prematurely and the Protocol wasn’t complied with.

The new Protocol only applies in situations where no other pre-action protocol applies. Here's our summary guide to the changes introduced by the new Protocol, though the full Protocol can be accessed here.

1. Aims of the Protocol

The aims of the new pre-action process are to:-

  • encourage parties in dispute to engage early, communicate, exchange information and narrow the issues;
  • equip parties in dispute to resolve their differences without having to resort to court action where possible;
  • reduce the number of debt claims that end up in court; and
  • allow the claims that do end up in court to be dealt with quickly and efficiently.

One of the Protocol's clear objectives is to reduce the number of debt claims being issued against private individuals and to give them a degree of protection against unscrupulous creditors. In line with that objective, the Protocol imposes an obligation on both parties to consider Alternative Dispute Resolution such as mediation (although the Protocol recognises that there will be cases where ADR would be appropriate).

2. New letter of claim

The pre-action process should begin with the creditor sending a Letter of Claim to the debtor. The Protocol sets out the information that should be included in the Letter, which includes an up to date statement of the amount of the debt. It should be clearly dated on the first page and be sent to the debtor by post unless the debtor has specifically requested another mode of communication such as email.

Importantly, the Letter must also enclose a copy of the Information Sheet, Reply Form and Financial Statement form. These documents are annexed to the Protocol.

The creditor must then wait a minimum of 30 days to allow the debtor time to respond to the Letter of Claim.

Whereas currently it is sufficient to send a brief letter before action to a debtor, the new Protocol requires a fairly significant front-loading of information to encourage early engagement and to ensure a debtor is given a clear opportunity to set out his/her position in relation to the debt and his/her financial means to pay.

3. Creditor can issue if debtor doesn’t respond

If the debtor fails to respond to the Letter of Claim within 30 days, the creditor has complied with the Protocol and can move to issuing court proceedings subject to any other regulatory obligations that might apply.

4. Creditor to consider any response to the Letter of Claim

The debtor can reply to the Letter of Claim in a number of ways, each of which could require further time to elapse before proceedings could be issued:-

  • If the debtor completes and returns the Reply Form, the creditor must not start court proceedings until 30 days after the Reply is received. A partially completed Reply should be taken as an attempt to engage and in such circumstances the creditor should try to contact the debtor to discuss the Reply and obtain further information;
  • If the debtor requests relevant documents or information from the creditor, it should be provided and the creditor is expected to wait 30 days from the date when the information is provided to the debtor before issuing proceedings;
  • If the debtor states that he/she is seeking debt advice and such advice cannot be obtained within the 30 days after their Reply is received, the creditor should wait and allow the debtor a reasonable period of extra time in order to obtain that advice; or
  • If the debtor is willing to pay but requires time to pay, both parties will be expected to try to reach agreement on a repayment plan, based on the debtor's ability to pay. If the debtor's repayment proposal is unacceptable, the creditor should go back to the debtor giving reasons why that is the case.

5. Agreement reached – mission accomplished

If the Protocol process results in the parties reaching agreement in relation to the debt, its mission will have been accomplished.

A number of cases are likely to be resolved with the parties agreeing a payment plan to enable the individual to clear the debt.

Whilst the debtor complies with the payment plan, no proceedings should be issued. Where the debtor defaults on a payment plan more than 6 months after it was agreed, the creditor is expected to restart the Protocol process and follow it again.

Where the debtor defaults within the first 6 months of a payment plan having been agreed, the position is not completely clear. The Protocol states that the creditor does not have to send a new Letter of Claim in this situation "unless it requires updating". If the debtor has made some payments, the amount of the outstanding debt will have changed (and interest may have accrued) which arguably means that the Letter of Claim needs updating and so the Protocol process must be gone through again.

In our view, this seems unduly burdensome on the creditor, and creditors will need to take a view on their position on a case by case basis until we get clarity from the courts on what is expected of a creditor in this scenario. Beyond 1 October, creditors would be wise to agree regular (e.g. weekly or monthly) repayment instalments, so that if a debtor is going to default on the arrangement this will become evident at an early stage.

6. No agreement reached - "taking stock"

Where the parties engage in the Protocol process but fail to reach an agreement regarding the debt, both parties are required to take stock of their respective positions before proceedings are issued.

In practical terms, this means that the creditor must give the debtor a further period of notice of at least 14 days of its intention to start proceedings. This period can be reduced in exceptional cases, e.g. where the limitation period is about to expire, and it remains to be seen what other circumstances the courts will be willing to treat as exceptional. If it looks as though a debtor is in serious financial difficulties and bankruptcy is a risk, would that be enough?

7. Comment

It is the clear intention that if the Protocol is followed properly, a large number of claims will be resolved one way or another without claims having to be issued through the courts. It should also help to rein in unduly aggressive behaviour by creditors. Objectively, that has to be good news.

For reasonable creditors who have generally tried to engage with debtors, however, the new pre-action process is likely to be a source of frustration. The pre-action process is now going to be longer and more onerous, and the Protocol gives a debtor the opportunity to 'play for time' by using the time periods set out in the Protocol to frustrate the process for as long as possible.

For businesses with large books of debts to collect, they will need to review their pre-action processes to ensure that from 1 October onwards, they achieve compliance with the Protocol whilst avoiding the process becoming overly protracted. This will involve incorporating the Letter of Claim into their process at a suitable early stage so that for Protocol purposes the clock starts to run at the appropriate time.

If you'd like to discuss the contents of this article, please get in touch with Steven Eccles.

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