Pre-Action Protocol For Debt Claims - Insolvency/Bankruptcy

Pre-action Protocol for Debt Claims: are you complying with the protocol's requirements?

The Ministry of Justice has published the Pre-Action Protocol for Debt Claims (the "Protocol"), which came into force on 1 October 2017.

Introduction to the Protocol

The Protocol applies to all businesses (including sole traders and public bodies) which are trying to recover a debt from an individual (including a sole trader).
It does not apply to business-to-business debts, where a creditor is seeking to recover liabilities from a company or a Limited Liability Partnership (LLP), or the matter is covered by another pre-action Protocol, such as construction, engineering, or mortgage arrears.

The Protocol aims to:

Encourage early communication between the parties;
Enable the creditor and debtor to resolve the matter to avoid court proceedings, including 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 in all dealings with one another (for example, avoiding running up costs which do not bear a reasonable relationship to the sums in issue);
Support the efficient management of proceedings that cannot be avoided.

The Protocol's requirements

The Protocol requires the creditor to send a letter of claim by post (unless the debtor has specifically indicated otherwise). The letter must include a prescribed list of information as follows:-

A breakdown of the outstanding debt together with interest and any other charges which have accrued,
Details of the agreement under which the debt arises. Where the debt arises from an oral agreement, the date of the agreement, what was agreed (including, as far as possible, what words were used) and when and where it was agreed;
The date of any written agreement, details of the parties, and confirmation that a copy of the agreement can be provided if requested by the debtor. (If it cannot be provided, the creditor must provide as much information as possible to prove that the debt is due and owing, and the terms and conditions that apply);
Details of any assignment of the original debt, when it was assigned and to whom;
An up to date statement of the account. Where regular instalments are being offered / paid, an explanation of why they are not acceptable, and why a court claim is still being considered;
Details of how the debt can be paid (for example, the payment method, account information, or an address to which the payment should be sent); together with details of how to proceed should the debtor wish to discuss payment options and;
The address to which the completed reply form and completed financial statement should be sent.

The Protocol sets out that further information should be attached to the letter of claim to include an information sheet, reply form and financial statement. The documentation can be viewed under the full Pre-Action Protocol for debt claims at: Pre-Action Protocol for Debt Claims

The debtor's response and disclosure of information

The debtor should complete the reply form and the financial statement and return it to the creditor within 30 days from the date of letter of claim.
If the debtor indicates that they are seeking debt advice, the creditor should not commence court proceedings less than 30 days from receipt of the completed reply form, or 30 days from them providing additional documentation to the debtor, whichever is later. (If the creditor is unable to do so, they must explain why the documentation and / or information is not available).
If the debtor requires more than 30 days to obtain debt advice, they must explain why, who is providing the advice, and when it is likely to be received. In this instance, the Protocol states that the creditor must allow the debtor a reasonable period of time to obtain appropriate advice. (There are several free independent advice organisations, such as Citizens Advice, National Debtline and Step Change Debt Charity).
Where the debtor indicates that they need more time to pay, the creditor should consider the debtor's financial circumstances with a view to entering into a payment arrangement based on the debtor's ability to pay. If the creditor rejects the payment proposal they must advise the debtor in writing.
If the creditor receives a partially completed reply form they should be proactive and try to obtain additional information from the debtor in order to understand the debtor's financial position.

Settlement / Alternative Dispute Resolution (ADR)

The Protocol encourages the parties to consider ADR if they cannot resolve the dispute. However, the parties are warned to take into account the potential cost of any ADR versus the amount of the debt. Details of registered mediation providers are listed on the Civil Mediation Provider Directory at civilmediation.justice.gov.uk
If a payment agreement is reached, the creditor should not commence court proceedings while the debtor complies with the terms of the agreement. Should the debtor subsequently breach the agreement, the creditor must send an updated letter of claim and restart the Protocol procedure. (If documentation was sent with a letter of claim in the preceding six months, it does not need to be resent unless it requires updating).
If the debtor responds to the letter of claim but the parties are unable to reach a payment arrangement, the creditor must give the debtor at least 14 days' notice of their intention to start court proceedings (unless for example the limitation period is imminent).

Complying with the Protocol:-

If it is necessary to start court proceedings, the court will take into account non-compliance; but it is not likely to be concerned with minor or technical infringements. The court does however have the power to consider breaches of the Protocol and impose potential sanctions. These could include court Orders relating to payment, or the rate of interest claimed.

Conclusion

First and foremost don't panic! Now is the time for you to consider what changes you need to make, if any, to your internal debt recovery processes and procedures in order to accommodate the Protocol requirements.

As the introduction of the Protocol will make the debt recovery process more cumbersome for many businesses, you may well have to change your approach to collecting debt. So, think about where you can condense the time limits in your current credit control cycle to avoid delays in collecting your debts; train your employees to be fully compliant with the Protocol requirements; and make any necessary changes to your systems to keep your business's cash flow on track.

The suggestions above can only serve to help in the smooth running of your business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

UK: Pre-Action Protocol For Debt Claims