WHAT ARE THE CHANGES TO RECOVERING DEBT?
Introduction to the long awaited Pre-action Protocol for Debt Claims.
The Pre-action Protocol for Debt Claims (the “Protocol”) came into force on 1st October 2017 and brought with it drastic changes to the way in which business debts can be pursued from private individuals.
From the 1st October the Protocol applies to any creditor business (whether they are a limited company, a partnership, sole trader or public body) that seeks to recover monies from an individual (which also includes a sole trader).
The Protocol does not apply to what is known as business-to-business debt, unless the debtor is a sole trader and it provides within it a framework which the parties are expected to have followed before the commencement of any court proceedings. The Protocol will not however apply though in situations where the subject matter of the dispute is covered by one of the other pre-action protocols, for example, such as a construction and engineering dispute or in relation to claims being pursued by HMRC.
As with many of the protocols the aim of the new the Protocol is intended to:
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.
The process will start with the creditor providing a letter of claim (also known as letter before action and letter before claim) which provides sufficient information to enable to debtor to ascertain what the claim is about. The letter of claim should include the following:
- the amount of the debt
- whether interest or other charges are continuing
- 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
- 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
- where the debt has been assigned, the details of the original debt and creditor, when it 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 (for example, the method of and address for payment) and details of how to proceed if the debtor wishes to discuss payment options and
- the address to which the completed reply form should be sent.
The letter of claim should also provide the Information Sheet and Reply Form which are annexed to the Protocol as well as the Financial Statement (which is also annexed).
The protocol also states that the creditor should also include:
- an up-to-date statement of account for the debt, which should include details of any interest and administrative or other charges added; or
- 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
- where no statements have been provided for the debt, the letter should state the amount of interest incurred and any administrative or other charges imposed since the debt was incurred
The letter of claim should be dated at the top of the page and posted the same day or the day after at the latest. It should also be sent to any alternative address, email address etc. which the debtor has confirmed that it should be sent to.
Once the letter is received the debtor then has 30 days to respond. Previously a ‘reasonable period’ was required (minimum 14 days) so this has now more than doubled the timeframe in most situations. If the debtor does not respond within the 30 days, the creditor may then commence court proceedings to recover what they are owed.
If the debtor does respond then they should use the Reply Form to provide their response. The debtor should also with this response request copies of any documents that it wishes to see or provide copies of any documents that it considers are of relevance, such as details of any payments made but which have not been taken into account in the creditor’s letter of claim.
If in the Reply Form the debtor should indicate that they are seeking debt management advice, then the creditor has to allow the debtor a ‘reasonable period’ for the advice to be obtained. This means that the creditor should not under the Protocol commence court proceedings within a period which is 30 days from receipt of the completed Reply Form or 30 days from the creditor providing any documents requested by the debtor, whichever is the later. This means that if the Reply Form is returned on the 30th day for example indicating that they are obtaining advice then this would extend the period before which proceedings are issued to 60 days.
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. This extra time if requested means that payment could be delayed by a further 30 days (total 90 days) in some circumstances.
If the debtor indicates in the Reply Form that they require time to pay, the Protocol also 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. 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 put on the creditor to then contact the debtor to discuss and obtain any further information needed to properly understand the debtor’s position. This means that the creditor is put to the position of contacting the debtor when it is they who have failed to provide all of the required information.
If the debt is disputed the parties are expected to exchange information and disclose documents which sufficiently enable them to understand each other’s position and it is the creditor who is expected to provide any document or information requested or explain why the document or information is unavailable within 30 days of receipt of any such request for it.
If settlement still cannot be reached then under the Protocol, before proceedings are commenced, then the parties are obliged to take appropriate steps to resolve the dispute without commencing court proceedings and. In particular they are encouraged to consider the use of alternative dispute resolution (ADR).
If, after all of these steps are followed, an agreement still cannot be reached, then if the debtor has responded to the claim then the creditor has to give them at least a further 14 days’ notice of its intention to issue court proceedings (unless, for example, the limitation period for the debt is about to expire).
What does all this mean for creditors?
Without doubt, the introduction of the Protocol makes the recovery of debts from individuals more cumbersome for creditors. In particular:
- Creditors are required to provide more documentation to debtors in specific formats
- There is a significantly increased period for allowing the debtor to respond which means that debtors who know the system can delay payment of the debt by up to an additional 90 days
- Creditors will also need to be more pro-active when engaging with debtors to ensure information is properly exchanged and time periods met. They also need to engage in negotiations regarding repayment when otherwise previously they would have used enforcement of a judgment to recover what they are owed.
- Additional costs and delays are likely to be incurred, particularly if the debtor requests ADR and
- The introduction of the Protocol will mean that creditors will have to undertake a complete review and re-organisation of their existing debt recovery processes and bring in any changes which are likely to be necessary
What happens if a creditor should fail to comply with the Protocol?
Should a creditor fail to comply with the Protocol they may also face:
- Delays in the collection of debts as proceedings are likely to be stayed to remedy failures to comply with the Protocol;
- Additional sanctions in terms of payment of the debtor’s legal costs or a failure to recover their legal costs as part of the claim;
- Inability to recover interest from the debtor or recovery if permitted then at a reduced rate below that to which they ought be entitled
The changes brought in by the Protocol mean that Creditors are being put in a position where recovery is more difficult and cumbersome than before. They have to exercise a greater degree of patience when dealing with debtors and are no longer in a position of strength when negotiating, as whilst the issuing of proceedings can still be mentioned, such proceedings can only be issued when all other avenues of negotiation have been exhausted.
It is anticipated that the introduction of the Protocol will have a greater impact on small and medium sized businesses as well as those that already have cash flow problems. Going forward, all creditors will have to have tighter control over their credit management and will have to give more serious consideration to which individuals they are prepared to offer credit.
Our Taylor Rose TTKW experts have been fully trained in implication of the new Protocol and have systems in place to ensure the smooth progression of any debt recovery claim. If you require any further information about reviewing your credit control processes in light of the above changes or you should require assistance with collection of company debts, then please contact the Taylor Rose TTKW Civil Litigation Department at Taylor Rose TTKW on 01733 333333.
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