All Change for Debt Recovery

Until now there has not been a specific pre-action protocol that related solely to the recovery of debt. All debt claims have to date been dealt with and governed by the more general “Practice Direction - Pre Action Conduct and Protocols” which apply to disputes where none of the other pre-action protocols apply. That is about to change as, with effect from 1 October 2017, a new pre-action protocol on debt claims comes into force.

What are the objectives of the new protocol?

As with other pre-action protocols the courts will expect the parties to have exchanged information to:

• understand each other’s position
• make decisions about how to proceed
• try to settle the issues without the need for legal proceedings (for example, by agreeing a reasonable repayment plan or considering using an Alternative Dispute Resolution (ADR) procedure)
• encourage the parties to act in a reasonable and proportionate manner
• support the efficient management of those proceedings
• reduce the costs of resolving the dispute

To whom does the new protocol apply?

The new pre-action debt protocol applies to any business claiming payment of a debt from an individual. This includes a claim for payment against any person who operates as a sole trader or partner in a partnership. The protocol does not apply to business to business debts (unless the debtor is a sole trader or partner) so claims against a company, limited liability partnership (LLP) or other body corporate will not be caught by the new protocol.

What changes will the protocol bring to debt claims?

When pursuing a claim for payment of, say, an outstanding invoice, the new protocol is very specific about the information the creditor must give to debtor at the outset. The information that a court will expect a creditor to give to a debtor includes:

• the amount of the debt
• whether interest or other charges are continuing
• the contractual arrangement between the parties
• whether the debt has been assigned
• the details of the original debt and creditor
• when the debt was assigned and to whom
• 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
• details of how the debt can be paid

Given the above it's clear that letters before action in current use will require amendment in order to become compliant with the protocol.

Are there other steps?

In addition to the information that must be given to the debtor the protocol also expects creditors to comply with the following steps:

• The letter of claim must be sent by post unless the debtor has specifically requested another form of service
• The letter must be dated
• The debtor must be given a minimum of 30 days to reply (and worse is to come – see below)

If, following receipt of the letter of claim, the debtor notifies the creditor that he is seeking debt advice (legal or otherwise), the creditor must allow the debtor reasonable time to obtain that advice. The protocol stipulates that the creditor must give the debtor at least another 30 days before starting court proceedings.
If the debtor responds to a letter of claim but agreement cannot be reached between the parties, then the creditor is required to give the debtor a further 14 days notice of an intention to start court proceedings. In these circumstances, court proceedings can't be started any earlier than 44 days from sending the initial letter before action.

What are the sanctions for failing to comply with the protocol?

Where it comes to the attention of the court that either of the parties has failed to comply with the protocol then it has the ability to make the following orders:

• that the proceedings are stayed until it is satisfied that the relevant steps have been taken
• that the party at fault pays the costs of the proceedings
• that a defaulting successful claimant be deprived of interest on any award or interest be awarded at a lower rate
• that a defaulting defendant pay interest on any award made to the claimant at a higher rate

PDT Comment

Whilst this new pre-action protocol has been anticipated for a while now its unlikely to be regarded as a welcome addition to the current pre-action protocols not least because the new steps are likely to significantly elongate the debt recovery process. In our opinion it is too “debtor friendly” and as a result open to abuse. Creditors, including Factors, will need to make sure they act quickly in order to avoid delays and the initial letter before action should be issued as soon as possible after non-payment.

Should you require further information, please contact William Angas, Nigel Davidson or Laura Sutton.