New Debt Recovery Pre-Action Protocol

From 1 October 2017, a new Debt Recovery Pre-Action Protocol will be in place.  This sets out the steps which must be taken when pursuing a debt against an individual or sole trader (it does not apply to business to business transactions).  The aim of the Protocol is to encourage early engagement and communication between the parties, whilst also trying to encourage the parties to resolve the dispute without the need for Court proceedings.

What does the existing law say?

Currently if you want to pursue a debt against an individual you would normally send a Letter before Claim to them.  The Letter before Claim will generally state the amount of the debt, provide details of any debt organisations that can help and give the debtor a minimum of 7 days to respond.  If they do not respond after that point, the creditor is free to issue Court proceedings if they wish to.  In practice, usually more time is allowed.  However, there is no requirement for this.

What are the main changes?

After 1 October 2017, the following changes will apply:

• The Letter of Claim now has certain requirements for information to be included regarding the contract between the parties; Who made the contract? When and where was the contract formed? If it is in writing, that a copy of the contract can be obtained on request;
• The Letter should also state if the creditor is willing to accept payment by instalments and, if not, why not.
• The Letter of Claim must enclose:
  • An up to date statement of account, showing any interest applied;
  • A prescribed Information Sheet;
  • A prescribed  Reply Form;
  • A Financial Statement Form;
• The debtor will have 30 days to respond to the Letter of Claim;
• They can also ask for a further 30 days to take legal advice, have more time to pay or request further information;
• The early disclosure of documents is recommended so that each party can understand the other parties’ position at the earliest opportunity.  If the debtor asks for a particular document, then the creditor must provide it to them or explain why it is not available within 30 days of the request.
• If no response is received after 30 days, or a response is received but no agreement is reached, then the creditor must give a further 14 days’ notice of their intention to commence legal proceedings.
• Parties are strongly encouraged to engage in an appropriate form of Alternative Dispute Resolution rather than issuing Court proceedings;
• If an agreement is reached regarding the debt, the creditor should not issue Court proceedings while the agreement is being adhered to. If the debtor later defaults, an updated Letter before Claim should be sent and the process restarted.
• Failure to Comply
  • If a party fails to comply with the Protocol then there may be costs sanctions awarded against them for wasted costs.  Alternatively the Court may stay the Court proceedings while the parties engage in the Protocol.

What does that mean for me?

The answer will depend on whether you are owed money or you owe someone money.

Anyone that is owed money and has been in that situation before will undoubtedly feel that the law already allows debtors too much leeway.  This Protocol will unfortunately only make that situation worse.  Debtors can now in theory get 74 days from when they first receive the Letter before Claim before a creditor can issue Court proceedings against them, which is a long time for any person or business to be without the money that they are owed.  It may also be wishful thinking to believe that a debtor will engage fully and complete the various forms that are sent to them rather than simply throwing them in the bin.

The Protocol will assist debtors who are not paying because they are unable to and not because they are unwilling to, by affording them more time before the creditor can take Court action.  Sadly these people are usually the minority, rather than the majority who either do not want to pay or are burying their heads in the sand.

Only time will tell whether the new Protocol will help either side.

If you have a debt that has not been repaid, or alternatively a debt is being claimed against you that you do not believe you owe, then contact Claire Darby or Sarah Houston in our Dispute Resolution team on 0208 949 9500 who would be happy to help you.

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