Kerry Underwood

THE NEW PRE-ACTION PROTOCOL FOR DEBT CLAIMS

with 8 comments


By Anna Patsalides, Solicitor, Underwoods Solicitors

On 1 October 2017, a new pre-action protocol for debt claims came in to force which can be found here.

The Protocol describes how the court expects parties to act before legal proceedings are commenced.

This will apply to business creditors seeking to recover debt from an individual or a sole trader.

The new protocol increases the amount of work which a creditor must do, even in a simple debt claim.

The changes in the protocol will mean that the court will be able to look at both parties behaviour before a case is issued at court.

The purpose of the new pre-action protocol is to encourage parties to communicate and for information to be exchanged at an early stage to avoid the need for court proceedings.

The aim of the new changes is to keep costs down so that they are reasonable and proportionate to the debt in question.

The New Procedure

Before this protocol came in to force there was no specific procedure outlined for debt claims and they would fall under the general pre-action protocol.

The protocol provides that a creditor must now issue a letter of claim to the debtor before any legal proceedings are commenced and that the creditor must provide mandatory information. This should include:

  • The amount of debt due as well as any interest and any charges applied.

 

  • Full details of the written or oral agreement which was entered into by the debtor and creditor.

 

  • The option for the debtor to request a copy of any written agreement.

 

  • In the event that the debt has been assigned the letter of claim must provide the details of that assignment.

 

  • If instalments are being paid against the debt but the creditor believes that the current arrangement is unacceptable, an explanation for this should be provided.

 

  • An information sheet and reply form.

 

There is also now a new requirement that the letter of claim must be posted on the day on which it is dated and signed or if that is not reasonably possible, posted the following day.

Response to claim

The debtor should respond to the claim within 30 days. This is in contrast to the previous guidance which provided for a response within 14 days or at the very most 21 days.

There is a prescribed form set out in Annex 1 to the protocol which should be used. There are some tick box options to which the debtor can either agree or disagree to all or part of the claim and state whether they are in a position to make a payment.

If a debtor indicates that they are seeking advice, creditors must then allow a reasonable period of time for that advice to be obtained.

Under the new protocol, the creditor must not commence legal proceedings within 30 days following receipt of the completed reply form.

Where the debtor admits the debt but requires time to pay, the parties should try and reach an agreement for the debt to be settled based on the debtor’s income and expenditure. If the creditor refuses a debtor’s proposals then they must provide reasons for this.

The parties are now also under an obligation to take steps to try and resolve matters without court proceedings and should consider alternative dispute resolution.

Where parties have been unable to reach an agreement, the creditor should give the debtor at least 14 days’ notice of their intention to issue court proceedings.

Sanctions for failure to comply

If a party fails to comply with the protocol and proceedings are issued, the court can take this into consideration when giving directions. This could result in a stay of proceedings to allow for parties to enter into communications.

In exceptional cases, the court may also impose cost sanctions against non-complying parties.

What does this mean for creditors?

Creditors need to adapt their own debt collection procedures.

Their letter of claim is likely to have to be longer and include more detailed information than before.

The letter of claim should be sent by post even if the creditor has additional contact details for the debtor, such as an email address.

The only time in which a creditor is not required to do this is if the debtor has specifically asked that correspondence should not be sent by post and has provided an alternative method.

Compared to the existing practice, from the time the letter of claim is sent until the commencement of court proceedings, it is likely to increase from an average of 2 weeks to 30 days and this could even increase up to 74 days where legal advice is sought or discussions are entered into.

The protocol does state that courts will not be unduly concerned with minor or technical breaches, especially if the matter is urgent but they will have the power to consider breaches of the protocol and impose sanctions.

Comment

At first glance it might appear that the changes will significantly weaken the position of a business claiming a debt, as the guidance puts a greater burden on creditors to provide historical information.

My view is that creditors will be more determined to issue court proceedings and the changes to the protocol will simply result in businesses seeking legal advice at an earlier stage.

Creditors will no doubt tighten up their internal processes so that it becomes harder for an individual to borrow money or get credit.

Whilst the aim of the Protocol may have been to reduce litigation and provide extra protection for consumers I think the reality is more bureaucracy, more costs and more litigation.

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Written by kerryunderwood

October 10, 2017 at 1:47 pm

Posted in Uncategorized

8 Responses

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  1. Professional debtors, of whom there are many, will be rubbing their hands in glee. They can now spin out the process interminably, causing the creditor to run up irrecoverable costs and forcing them into accepting a low settlement just to get rid of the claim.

    Why is it that every single change made to the conduct of civil litigation has managed to make a bad situation worse?

    Pro Bono

    October 10, 2017 at 2:22 pm

  2. I could not agree more with the above comments. Businesses survive on cash flow and the consequences for creditors and their employees can be disastrous.

    Who is the buffoon who thought of preventing of a litigating a legitimate debt is a good idea? If the debt is over £5k send a stat demand that will shake the money tree!

    Richard Gray

    October 10, 2017 at 8:26 pm

  3. Reblogged this on | truthaholics and commented:
    “At first glance it might appear that the changes will significantly weaken the position of a business claiming a debt, as the guidance puts a greater burden on creditors to provide historical information.

    My view is that creditors will be more determined to issue court proceedings and the changes to the protocol will simply result in businesses seeking legal advice at an earlier stage.

    Creditors will no doubt tighten up their internal processes so that it becomes harder for an individual to borrow money or get credit.

    Whilst the aim of the Protocol may have been to reduce litigation and provide extra protection for consumers I think the reality is more bureaucracy, more costs and more litigation.”

    truthaholics

    October 11, 2017 at 4:10 am

  4. daveyone1

    October 11, 2017 at 7:48 pm

  5. It’s terrible news, particularly for small law firms like mine where cash flow is king. One practical response is to remove all credit by requiring payment up front from individuals before doing any work.

    UKEmpLawyer

    October 15, 2017 at 12:14 pm

    • I agree- and I also agree with your solution. This is bound to make it much harder for those of limited means to get legal advice.

      Kerry

      kerryunderwood

      October 15, 2017 at 12:57 pm


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